Scamsters make hay with investors' money in poll season

With polls round the corner, investors are being lured in a big way to put their money into schemes that claim to be linked to the elections and promise 'huge' returns irrespective of the results.

While regulators and other agencies are yet to ascertain size of investments getting into such schemes, top executives at some leading market entities said that thousands of crores could be getting diverted for such "higher assured returns".

One of the schemes that has come under scanner involves a 'collective investment scheme' like structure where funds are being pooled in and the corpus would be used for investments into areas that emerge as high-focus avenues for the next government, a senior official said.

While refusing to disclose the identity of those operating this scheme, he said investors are also being offered 'commissions' for roping in new investors in a typical ponzi- like structure.

Some other schemes are in the form of apparently 'legal' portfolio investment products, while a few appear to be bordering towards plain illegal offerings and include off-market 'dabba' trading, where bets are placed on stocks outside the stock exchange framework, the official said.

In what could be more worrisome for regulatory authorities, operators of such 'legal' and illegal schemes are asking the investors to sell their existing investments in stocks, mutual funds, bonds and other assets to free-up capital for these 'much higher return potential' avenues.

The regulators are keeping a close watch for any suspicious uptick in redemption activities in capital markets, including for mutual funds, hedge funds, insurance and portfolio management products.

Under the regulator scanner are certain 'legal' portfolio schemes where operators are promising the investors that their money would be invested in those sectors and those securities which are likely to benefit from a certain outcome of the upcoming Lok Sabha polls, which begin tomorrow and would continue till May 12.

In the event of the poll results, scheduled to be announced on May 16, being different from the expectations, these portfolio managers are promising to 'safeguard' the investments by various hedging instruments.

Such schemes, while being sold as 'legal' activities, are in clear violation to norms of capital markets watchdog Sebi and other regulators and amount to mis-selling of investment products and defrauding of investors, the official said.

As general elections draw closer, Sebi has already enhanced its surveillance to thwart any attempts by listed companies and others to channelise illicit funds through capital markets or investment schemes for polls.

There are also indications that many entities running illicit money-pooling schemes have lined up huge redemptions from fictitious investor accounts for coming weeks and this money could also find its way into electioneering activities.

Instances of dabba trading, as also other suspicious activities, have come to light in Mumbai, Indore, Rajkot and Delhi along with other cities in states like West Bengal, Punjab and Haryana, as also on various online platforms, sources said.

Capital market regulator Sebi itself has initiated action against more than 500 companies that have allegedly garnered funds from investors through illicit money collection schemes. In many such cases, a large number of fictitious accounts are also created for money laundering purposes.

While robust surveillance and intelligence systems are already in place for detection and prevention of any kinds of money laundering activities in capital markets, regulators are being extra watchful because elections are typically known as periods of increased illicit fund flows.

Foreign funds coming through capital markets is also being monitored closely to check any possible laundering for political purposes, while dealings of various market entities with PEPs (Politically Exposed Persons) are also being placed under greater scrutiny.

Sebi regulations mandate that market entities deploy a "high risk" approach towards their clients who could be PEPs. These include individuals entrusted with prominent public functions, heads of governments, senior politicians, senior
government/judicial/military officers, senior executives of state-owned corporations and important political party officials.

A similar approach needs to be followed for accounts of the family members or close relatives of PEPs.

With regard to listed companies, it is feared that companies may divert funds from their business for funding elections without the knowledge of investors, while unscrupulous entities may also use certain market intermediaries to generate funds illegally for polls.

Through its regular inspections, Sebi is keeping a watch on compliance of norms regarding Anti-money Laundering, settlement of accounts of clients on timely basis, segregation of clients and proprietary funds/securities and KYC norms.

A greater use of technology and communication channels in financial markets has increased the risk of money laundering activities, but the regulatory authorities have also adopted latest and modern surveillance tools to tackle these concerns.

Sebi recently also tightened its norms for countering money laundering and terror financing through the capital markets and asked market entities to conduct detailed risk assessment of their clients, including those linked to countries facing international sanctions.

The market intermediaries have also been told to appoint designated directors to ensure compliance with new norms, who would face penal action for any lapse.