Didi’s response to the Saradha ponzi crisis was logical to begin with when she said it is the people’s problem to have invested their savings with the chit-fund player. However, with suicides and murky dealings with TMC coming out into the open, she suddenly changed track. Her announcement that the West Bengal government will return investor funds will set a wrong precedent.
The people who invested in Saradha wanted higher returns. The basic rule of finance is that higher returns come by taking higher risks. If you don’t want to takes risks - like my father, you only invest in public provident fund, Post Office saving schemes, government bonds and bank fixed deposits. I am surprised that investors in Kolkata invested in Saradha. I can understand rural Bengal getting cheated but it’s surprising to find residents of Kolkata, who have access to newspapers and banks, getting stifled.
How will the government allot Rs.500 crore to every investor? Will it result in victims of similar scams in other states filing a public interest litigations seeking compensation? In such a case, it is a win-win situation for an investor – capital guaranteed along with higher returns.
The solution is not to return monies but to regulate smarter. We need a unified regulator and not many regulators; a single jurisdiction and not varied state laws which govern chit funds. We need defined regulators for different products. It is important to ensure that products, which do not fall under the purview of a regulator get covered fast. The regulators, even if they are one step behind scamsters, must act promptly and not squabble among themselves. That is why the concept of a unified financial regulator is interesting.
Too much regulation of mutual funds and life insurance companies is deterring the entrance of organised players into the hinterland. This leaves the field open to unregulated fly-by-night operators who ply on gullible investors.
Remember, even the smart and educated get taken in by scams. We have enough examples from Madoff to the Citibank Gurgaon episode where educated smart investors were taken for a ride. Shri Deepak Parekh of HDFC once rightly said, “You come to me for a solution to a problem but never seek my counsel when chasing returns.”
The key to the problem is financial literacy. Through FLAME, we at IIFL have tried to educate the masses through simple and easy to understand cartoons; we have imbibed the traditional ways of teaching. The way Aesop and Panchatantra books taught moral science through stories, the masses too need to be educated on important aspects like risk and returns.
When a scam is busted, strict punishment to the scamsters will act as a huge deterrent. The US is a good example of not showing any motherly love or ‘mamta.’ If you are caught and proven guilty, whether you have the accounts of superstars or whether you raised funds for the powers that be, you are prosecuted and sent to prison. It doesn’t matter if your surname is a Gupta or Madoff.