MCA Plans Rules to Curb Fraudulent Pyramidal Schemes

The corporate affairs ministry is proposing a new set of rules and amendments to the Companies Act to curb fraudulent pyramidal schemes that are often disguised as multi-level marketing schemes. The (Disguised) Money Circulation Scheme (Banning) rules,2012 will give the government powers to wind up all pyramid schemes that lure investors through promise of quick gains. The ministry is very serious about such businesses as most target the common man and their lifelong savings are wasted in such schemes, a top Ministry of Corporate Affairs (MCA) official told ET. The ministry is also considering changes in the companies law to make the regulation tighter, as it has been noticed that most of multi-level marketing companies have chosen the company form of structure. The Prize Chits & Money Circulation Schemes (Banning) act,1978,which gives states powers to deal with fraudulent schemes, has largely been toothless in dealing with pyramid schemes that are conceived as multi level marketing schemes. Besides, some states such as Rajasthan and Tripura are yet to even notify the law. We have been in talks with the Finance Ministry as well as the central bank on how to regulate these firms and have decided to introduce new rules, the official added. The decision to tighten rules follows investigations in the high profile.8,000 crore Speak Asia and Gold Quest, a Tamil Nadubased company running a chit fund worth.1,000 crore. The ministry is also looking to amend the Companies Act,1956,to bring in greater clarity on what constitutes a deposit and introduce a list of banned businesses to prevent ponzi schemes and similar pyramidal structures. Further, the ministry is looking to amend the section 68 of the companies act to cover situations in which such companies falsify their accounts in order to fraudulently convince banks to extend disproportionate credit. A need for a fresh set of rules was felt to enable a greater central monitoring of these firms. The scope of the regulation will be extended to cover online marketing firms along with direct sellers, the official confirmed. A number of these firms also position themselves as finance companies to fool investors. We have suggested that RBI give an in principle approval to the promoters before registering the companies with the RoCs. This will bring in transparency in such dealings, another MCA official dealing with forensics explained. Chit funds and money circulation firms operate as informal credit cooperatives where members make regular deposits in order to get a larger sum at the end of a stipulated period.

Economic Times, New Delhi, 02-11-2012