Regulator kahta hai..beware of fixed returns schemes

There is a saying in my language - you cannot sweep all thorns on earth; hence, you need to put shoes on. Thus, regulators caution the public to beware of schemes offering fixed rates of return. Be it the Amitabh Bacchan ads from the RBI, or the recent warning by NSE, the regulators seem to be saying that they cannot take care of the masterminds who devise such schemes and run them - therefore, they rather expect the public to put shoes on.

Interesting question - why couldn't the NSE, which goes all the way to name the entities launching the so-called assured returns scheme, stop those entities, instead of expecting the gullible public to be mature enough and not to fall to the lure of high fixed returns? The analogy of sweeping the thorns vs. covering one's feet is not exactly applicable here - because the thorns come from a few limited sources, which are easily identifiable and trackable by the regulators. Have these warnings by regulators been effective? Evidence is that the most profound professionals, including those with years of financial background, find it easy to get lured by various forms of interest assurances - assured returns, expected returns, benchmark returns, etc. They know that unless something drastic happens, the operator of the scheme, even if not legally bound by the assured returns by carefully crafted language, will still live by the implicit assurance, or face a reputational damage.

On the contrary, there is no dearth of regulatory powers to tackle such schemes. In fact, we have one too many. There is a Companies (Acceptance of Deposits) Rules, which easily applies in view of the wide definition of "deposit", if at all the transaction is money-for-money transaction. The RBI has its own Deposit Directions. There is a Banning of Unregulated Deposit Schemes Act (BUDS Act) which is a stand-alone enactment by itself. SEBI has strict regulations on collective investment schemes, and there are several SEBI rulings to say that fixed returns schemes come under this law.

In fact, the multiplicity of regulators seems to be the key issue. RBI wouldn't step in, unless it is a financial entity. SEBI wouldn't step unless it some sort of a "security". The BUDS Act comes under the domain of the States who are completely wrongly placed to understand and stop these transactions. Therefore, each regulator keeps looking at the other, and keeps finding the place to shift the buck.

In the meantime, assured returns continue to flourish - in many ways. From property shares to loan shares, to dealing in shares, to AIFs, and whatever else.