Over the years, there have been many scams that have been reported in the media wherein companies have disappeared/failed to return the hard earned savings made by unsuspecting depositors. In the 70s and early 80s, there was a company called Sanchaita Investments with its origins in Kolkata. In the 90s the story was again repeated by another Kolkata based company called Sanchayani Savings and Investments.
The same story was repeated with depositors. The 90s saw several other companies like JVG Group, whose promoter V.K. Sharma had studied from Kurukshetra University and was a small time supplier who started JVG Finance and built it into a large group of companies before the bubble burst for him. Another company, Delhi based Kuber Finance had to shut down in similar fashion. The company that's currently in the news is Kolkata-based Saradha Group which has been running a Ponzi scheme.
What is a Ponzi scheme?
The companies that run a Ponzi scheme collect funds with promise of high interest. Companies collect small deposits from investors on a daily/weekly/monthly basis by promising the depositors a higher rate of interest than what is offered by the banks. In some cases, insurance is also offered as a further incentive to deposit.
The company then reinvests the collected amount in high risk/high return ventures. Meanwhile, the depositors continue to earn a rate of interest that is paid to them from money collected from newer depositors. Thus building a vicious cycle that only breaks, when the investments made in some venture fails or new depositors stop signing up and earlier depositors begin to claim their maturity amount and interest. In the case of Saradha, the above was true and now the bubble has burst and all the promoters are now under arrest with legal proceedings underway.
So are citizens of Haryana at risk?
The answer is in affirmative. Most of these companies are operating through a pyramid chain of deposit collectors/agents who market the scheme to unsuspecting and gullible investors. They make a hefty commission on the deposit collected. These agents operate from most states in the country and also from Haryana.
In 2013, in Haryana alone, there were 88 NBFCs registered in 2013. As per RBI, there are several Non-Banking Finance Companies (NBFC) that were registered in Chandigarh, Punjab and Himachal Pradesh and were operating in North India. Of these, 269 companies have shut shop and disappeared, as of Dec 2012. The country as a whole saw 1538 companies vanish.
Therefore, it's very important for all citizens of Haryana to understand what an NBFC is and what must one look for and verify before investing their hard earned money.
What is an NBFC?
As per RBI, an NBFC is a company registered under the Companies Act, 1956 and engaged in the business of offering loans and advances of shares/stocks/bonds/debentures/securities issued by government or local authorities or dealing in marketable securities like leasing, hire purchase, chit fund or insurance business but not engaged in any other business of manufacturing/services or buying/selling or construction of immovable property.
One form of NBFC is a Residuary Non-Banking Company (RNBC).
How is an NBFC different from a bank?
NBFCs can lend and make investments similar to what a regular bank does, however, it cannot accept demand deposits. Since the NBFC is not part of the payment and settlement system, it cannot issue cheques. The depositors in an NBFC are not covered under the deposit insurance facility provided by the Deposit Insurance and Credit Guarantee Corporation.
Every depositor in Haryana must keep the following in mind when dealing with an NBFC
NBFCs are allowed to accept/renew deposits for a minimum period of 12 months and cannot exceed more than 60 months. They are barred from accepting deposits that are repayable on demand.
NBFCs cannot offer an interest higher than the ceiling rate offered by the RBI. The current ceiling rate is 12.5%. If any company offers higher interest than this, you must immediately bring this to the notice of the concerned authorities.
NBFCs are barred from offering any gifts, incentives or any other benefits to depositors.
All NBFCs must have minimum investment grade credit rating. All depositors are requested to please ensure and re-confirm the credit rating of the company before investing.
The deposits with NBFCs are not insured and the RBI does NOT guarantee repayment of the deposits.
Depositors must ensure that the companies make the mandatory disclosures, as stipulated by RBI.
All Depositors must ensure that they get a proper receipt of deposits made and bear the depositor's name, amount of deposit, rate of interest, maturity period along with maturity amount, date and receipt number, and ensure that the receipt is duly signed and stamped by the authorized person in the company. Very often it is seen that the depositors hold either fake certificates or incomplete certificates. This leads to their future claims being nullified.
All depositors must reconfirm the collector s/agent's bonafides before handing out any payments.
In case any depositor faces problems with regard to the deposits made or claims for repayment, he or she can approach a Consumer Forum, Civil Court or the Company Law Board.
Deterrent laws against misappropriation and fraud made more stringent in Haryana
In a bid to curb increasing cases of misappropriation of deposits and fraud, the state government belatedly introduced the Haryana Protection of Interest of Depositors (in Financial Establishments) Bill in 2013. The Bill allows for a prison term of a maximum of seven years and a fine up to Rs. two lakh in cases of fraud.
The state is empowered to take action against promoters and management of defaulting companies by attaching their immovable properties along with imprisonment.
Is passing a law good enough for citizens of Haryana?
The Hooda administration may have passed the law to protect the investor but can this administration state what measures it has taken to conduct a due diligence on the companies that have been granted permission to operate? The problem cannot be tackled by creating the law alone.
The fraud must be prevented at the first stage itself when an investor(s) approach for registration of their company. It is at this stage that the companies and their promoters must be thoroughly verified for capability, investor capital, asset back-up and past record and experience in similar field. Unless these are thoroughly verified, the state will continue to be in reactive mode rather than preventive one.
The life earnings of a lot of smaller investors from Haryana could have been saved if the Hooda administration had taken timely action in verifying these companies operating in the state.
The present administration has failed in its responsibility in putting in place adequate checks and balances to protect the small investors. It is time that the investors read the above and guard against cases of fraud by unscrupulous companies. It's time for a Nayi Soch.