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Market watchdog Sebi has asked the government to frame a strong central legislation to tackle the menace of companies collecting large amount of money from the public without requisite regulatory approvals and for dubious investment projects.
Stating the existing legal provisions are weak and allow such companies to benefit from certain loopholes in the regulatory framework, Sebi chairman U K Sinha told PTI that the market regulator takes action against such entities whenever it suspects anything wrong and gets evidence.
"People make all sorts of excuses - in some cases they claim they are under the state government, some cases they are saying they are registered with the Ministry of Corporate Affairs, some cases they are saying they are housing companies and in some cases they claim to be non-banking financial company.
"And in most cases, they say that we are not under the Sebi jurisdiction," Sinha said in an interview in Mumbai.
"But wherever we suspect and we got information and evidence, we take action against them. But the legal provision is relatively weak on this front and I agree that there is need for one strong central legislation because big amount of money is being collected from the citizens of the country," he said.
Giving an example, Sinha said he was recently in Assam and there he was told that all the mutual funds put together have a combined AUM (asset under management) of less than Rs 1,000 crore (Rs 10 billion) in the state.
At the same time, there is one such company that launched one scheme and managed to collect more than Rs 1,000 crore (Rs 10 billion), he said, without naming the company.
"So if you make the comparison, you will see the dimension is quite big. So, we have urged the government to make one strong central legislation to tackle this issue," he said.
Sebi is mandated to protect the interest of investors in securities market and to promote and regulate the various segments and entities in the capital markets, including the public listed companies.
However, raising of funds from public investors numbering 50 or more by unlisted companies also comes under Sebi's jurisdiction - a regulatory position which recently came to light in the high-profile case involving Sahara group.
Asked about the Sahara matter and another case involving alleged violation of Sebi rules in an investment scheme involving Emu birds in Tamil Nadu, Sinha said: "I will not be able to answer anything about any particular company or the examples you are giving, but the fact remains that there are lacunae in the Act..."
"... and in the legislations giving rise to people to claim that they are not under the jurisdiction of Sebi or RBI or other regulators and then raise money".
"But, wherever we suspect that people are raising money from public investors (without approval), for example through collective investment schemes, we do act and take actions," he said.
"For example, we have taken action against certain companies in West Bengal where they have gone to various courts and matter is currently before the courts," Sinha said.
"But, there is a need for one central legislation to regulate collection of money from citizens of this country for the purpose of managing their money," he stressed.
The issues related to the companies raising funds from the public investors without Sebi's approval have come to the light in the recent past after the Supreme Court verdict on Sahara group, whose two companies have been asked to refund about Rs 24,000 crore (Rs 240 billion) to about three crore (30 million) investors within three months with an annual interest of 15 per cent.
The money was raised by the two unlisted Sahara companies through issue of instruments called 'Optionally Fully Convertible Debentures' (OFCDs), which are a kind of bonds.
Although unlisted firms do not come under jurisdiction of Sebi, any issue of securities to 50 or more investors is considered as a public offering and requires Sebi's clearance.
Sinha did not offer any comments on questions regarding Sebi's preparedness in handling cases like Sahara, where it might have to handle large quantity of documents to help the investors get back their money.
However, the market is abuzz with speculations that the regulator is looking to appoint a Registrar and Transfer Agent (RTA) to handle data processing work for this particular case.
Sebi floated tender for appointment of an RTA late last month and held pre-bid meeting with the potential bidders on October 15, but the regulator has not disclosed so far that the concerned data processing work relates to Sahara case.
In the pre-bid meeting, Sebi informed the interested bidders that the work relates to three crore (30 million) application forms pertaining to subscription towards bonds.
As per the tender, RTA would have to process application forms and other records of about three crore beneficiaries and an estimated 30 crore (300 million) documents, consisting of application forms and related papers.
The RTA would need to create and maintain an electronic database of three crore (30 million) beneficiaries, scan documents running into 30 crore (300 million) pages, provide toll-free help line facility and a grievance redressal mechanism for these investors.
After request from the interested bidders, Sebi has extended the last date of submission of tender to October 29, from October 22 earlier. The technical bids would be opened on October 29, after which Sebi would intimate the shortlisted bidders about the opening date of their price bids.