Yet another CIS scam? Further loss of 100s of crores of rupees by investors?

Yet another CIS scheme is
unearthed, by income-tax authorities who intimates the details to SEBI. SEBI
investigates and passes an Order
asking the Company to repay investors or face prosecution. However, it is
almost certain that investors will lose significant part of their monies,
considering the huge amounts collected and the low assets the company has. The
liabilities in this case are at least Rs. 800 crores, while the stated market
price of the assets are barely half of this amount. And this value too would
not be wholly realised in case of a distress sale. On other hand, it is not
wholly clear whether the amount of liability is all inclusive.

The modus operandi of the company, if one accepts the allegations of SEBI as
fully true, is depressingly familiar and just one of the many variants seen in such
cases. Highly paid agents are employed. In this case, the commission paid to
agents are as high as 30% of the amounts collected in several years. The
amounts are collected on the basis of an assured return which, in this case, is12%
p.a. However, the company claims that this is really a booking amount for land
but has option for refund with assured returns. SEBI rejects this submission as
unacceptable considering various factors such as no land deeds being
registered, the plot of land not even been identified, the almost nil record of
any investor opting to buy land and so on.

Since this Scheme has been operating over several years, the amounts collected
accumulate, far exceeding the assets. If the findings of SEBI are correct, then
this seems to be yet another Ponzi scheme.

SEBI has ordered the company to refund the amounts raised with promised returns
within three months. SEBI has stated that in case of non-compliance, it will
initiate prosecution and refer matter to the State as well as Ministry of
Corporate Afairs.
It is almost certain that the Company will not be able to make such
payments. The book value of the assets, consisting of at least 50% immovable
property, is about 50% of its dues. It is not wholly clear whether even such
dues include the returns promised and if they do not, the shortfall will be
even higher. The shortfall will also almost certainly increase since the land
will realize much lesser value on distress sale. Considering the huge cumulative
shortfall, it that the investors will lose substantial money and will be a long
time before they see any of it.
Another interesting aspect is that the Company seems to have been
operating at least from 1999, the year in which SEBI notified the CIS
Regulations and continued upto 2009 till the income-tax department informed
SEBI of the acts of the Company. Thus, in this case, there was neither
prevention nor detection by SEBI. Remedy, as discussed above, also seems to be
unlikely. At best, the Company and its Promoters will join the long list of
parties against whom SEBI has instituted prosecution.
It is also curious that despite several states, including Maharashtra
where this Company is located, have broadly framed and fairly stringent State
laws for taking action against persons who raise monies in this manner, such Schemes
continue to operate and collect huge amounts of monies. The Supreme Court has
recently upheld these Acts reversing certain earlier decisions that had held
them to be unconstitutional. SEBI too has stated in its Order that it will
refer this matter to the concerned State authorities for taking action. It will
have to be seen whether and how action would be taken under such acts will be.
The Mint also reported recently the fact that such schemes are rampant in West Bengal.
As per this report, SEBI has asked the finance ministry that the task of
overseeing such companies should be to a regulatory watchdog. One wonders how SEBI
could say this, considering the provisions relating to CIS under the Act and
specific Regulations therefor. Reserve Bank of India too, as per this article,
is claiming that the manner in which the monies are raised do not fall under
its jurisdiction.
A thorough review of the law and its implementation seems due not to
ensure that a duly empowered body in a speedy and effective manner prevents,
detects, investigates and remedies such cases and in appropriate cases levies
stringent punishment. 

About the author

CA Jayant Thakur

1 comment

  • Reflecting quickly for a while (but with borrowed thoughts)>

    "Our values today are drastically eroded, because too many men- with no more moral backbone than a chocolate eclair- claim the freedom of… and action which results inevitably in increasing the numbers of violent criminals" –

    in every field of activity ; more strikingly in that of economy.

    For a bird's eye view of the actual but far too familiar fact of life one may read-×8228272

    Particularly, the answer to the intriguing question, –

    "Is The Stock Market A Barometer Of The Nation's Economic Health"

    ANS:"All I can say is I am happy I am not heavily invested. This way I can go broke slowly. This economy sucks."

    May be contd…

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