Rewind. The business of scams

Although the Government was ecstatic about its improvement in the World Bank’s Ease of Doing Business ranking to 130 (out of 189 countries), the truth is that India has a long way to go.

Out of the 10 criteria on which the rankings are computed, India ranks in single digit in only one, viz. protection of minority investors, where it ranks at number eight. In all others, barring ‘getting electricity’, India has a poor rank — of over 100.

Whilst we need to improve on all of these parameters, it is most important to protect domestic investors. Why so?

Large kitty Consider this simple fact. In the second quarter of 2015-16, ending September, FIIs were net sellers of Indian equity, off-loading $2.5 billion, the highest sell-off since 2009. But the stock market did not crash.

This was only because the domestic minority, or individual investors, who were net buyers, lapped up $4.1 billion of equity.

The support from domestic investors is important as they are sitting with a lot of savings. India has a high rate of household savings, at around 30 per cent.

This goes mainly into bank deposits and a part of it goes into non-financial assets such as gold and real estate. The Government has been wooing people to invest in financial assets through gold schemes.

To really attract domestic investments in financial assets, the rights of investors must be protected. But this is not happening as seen in the case of recent scams.

Scams galore Take the case of the Sarada chit fund scam. A State-level minister has been placed under house arrest, but the many defrauded depositors still await the protection they expect but don’t get.

A far more sophisticated scandal is the NSEL one where investors still await justice. Investors had at least three reasons to be assured that their money was safe. One, the exchange was authorised by the Government.

But it was not regulated, which was a lapse on the part of the Government. Two, the money was secured by physical commodities, and it turned out there was no stock.

Three, there was supposed to be additional security of ₹839 crore in the form of a settlement guarantee fund as collateral but this vanished.

The Government has its share of blame in the NSEL case. For one, it permitted the exchange — the entity that takes in public money — to operate without being doubly sure about the promoters. Also, it did not properly appoint a regulator to oversee it.

Scams will get more audacious and more complicated, over time, especially if the scamsters feel that the law is impotent and the Government is unwilling to stop them.

There are extremely intelligent agents to help scamsters perpetrate frauds, whether accountants or crooked lawyers (who are willing to assist them for a fee) or even those in the bureaucracy.

Investors, therefore, need to be on their alert against simple and sophisticated frauds.

Last week, the Sensex fell 390 points to close at 26,265.

While election results would determine the early course of market movement, the India story looks good.

Core sector industries are growing at 3.2 per cent, the current account deficit is positively impacted by lower crude oil prices and the public sector is kicking in with infrastructure projects.

All we need is domestic investors to feel that they are protected — and the Government has a long way to go on this metric.

The author is India Head, EuroMoney Conferences

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