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How do you regulate greed?

Now that we have made our point about not rewarding greedy, reckless investors by protecting their deposits in the CRB Group, let's turn to the regulatory authorities who seem to be contorting themselves into tantric positions -- rather like the Tandav dance that heralds the end of the world -- to deflect the blame on to each other.

The Reserve Bank of India is pointing its finger at the Securities and Exchange Board of India, the SEBI is doing the same to the RBI, both want the Company Law Board to accept a bit of the flak, and the finance ministry is going a little crazy trying to get someone -- anyone -- to take the rap. Thus does the four-dimensional Tandav continue to entertain.

Despite some truly scary reports about the CRB Group appearing in the press at regular intervals, the RBI went ahead and gave the group the licence to start a bank. Amazingly, the licence came ahead of licences for stable and respectable groups like the Ambanis and the Birlas. RBI's action lent a respectability to the CRB Group that was entirely misleading.

None of the regulatory agencies took cognisance of the fact that Chain Roop Bhansali set up a slew of finance-related companies within two days -- just before the norms for setting up such companies were perceptibly tightened. The group's merchant banking licence was renewed even though the merchant banking arm had done little or no business by way of managing public issues.

The reason given was that there is no regulation that denies the renewal of a merchant banking licence just because the company has not managed any issues. The reasoning that a merchant banker is not doing any business possibly because the market does not trust it escaped SEBI altogether. And why would the market not trust an intermediary unless something was not quite right with it?

But the rules as they stand were enforced, and SEBI and RBI believe they are blameless. Too bad for the depositors.

In the entire mess, one segment of the market has come in for scathing criticism -- the so-called investor fora. Most such fora exist in name only -- perhaps even as a means of obtaining favours for the groups that sponsor or set up suck forums. Not one such forum has acquired any teeth or respectability, and they are unlikely to acquire any.

Can we blame such forums? I would not, simply because the investors care little or nothing about acquiring any knowledge of their options and rights.

A vibrant investors' forum would take the lead in conducting seminars and workshops to enlighten members, follow-up their complaints against specific companies and corporate entities, keep scrutinising the financial and project-implementation records of companies so that an alarm can be raised well in time if there are glaring irregularities, and liaise with authorities like the SEBI in reviewing and analysing non-relevant regulations.

I know of no forum that does any of these things. In fact, one such so-called investors' forum is so responsive to investors that when it was inundated with cries for help after C R Bhansali bolted with the money, it stopped accepting calls and switched on an answering machine!

But then, investors too will crowd to an investors' forum only after the horse has bolted. In normal circumstances, no investor will support a forum in any way that is meaningful enough for the forum to carry on its true activities. So who really is to blame?

SEBI had once started a series of investor seminars, but discontinued them due to poor response from the investing public. So who really is to blame?

Instead of looking for laps in which to lay the blame baby, perhaps we should be looking at the loopholes that the CRB scam (if we can call it that) has exposed. The most glaring one is the low entry barrier into the finance segment. Anybody with a few millions to spare can set up a finance company and accept billions in deposits from the public.

If the barriers at the entry level are made at least five times more stringent, less of the fly-by-night variety would find entry. This would also make regulation easier, as there would be fewer entities to police.

Ongoing regulation too needs to be tightened, with harsher penalties levied -- in time and in context -- on defaulters. Instead of dancing the blame Tandav, the finance ministry should seriously consider a stronger department within the RBI, or even a separate organisation that will look into and regulate issues concerning the non-banking finance companies.

There are over 40,000 entities registered as NBFCs -- all with the permission to raise money from the public -- which gives you an idea of how simple it is to set up an NBFC and how difficult the task of regulation. Most of these are little more than chit funds, which do roaring business, especially in south India. Most of these are unstable enough to collapse at any given moment, taking the depositors' money into the grave with them.

It is time for a thorough check into the records of each and every registered NBFC. The idea is to look for the tell-tale signs of impending death, and either avert it, or let the depositors withdraw before their money disappears. It might even make sense to form a special committee to go into this, with a six-month time frame. The committee would have the power to shut down an NBFC, order it to return depositors' money, or make other changes in its operations or finances to be in tune with the regulations.

But ultimately, the initiative lies with the depositors and investors themselves. The principle of caveat emptor applies to depositors in a stronger measure than to any other section of consumers, as depositors invest relatively larger sums in companies than they spend on consumer goods.

I spend several days studying the comparative features and prices of several washing machines before I eventually settle on one and buy it. I even look at the manufacturers' market reputation and future prospects where servicing the machine is concerned. Why shouldn't I do the same for a deposit I am buying from a company? Why this selective blindness?

In fact, investors themselves should take the initiative, band together and set up investor forums -- based on geographical factors or their common deposits/investments in particular companies or industries (like the Pune Investors' Forum, or the Tata Steel Shareholders' Association, or the Cement Share Owners' Caucus, for example).

They should provide the forum with the time and the resources to do the research for them and, in the long term, save them the money and embarrassment of their deposits going west. As things stand today, the individual investor does most of the research he needs before investing. He has still not realised the cost benefits of shared research.

But research itself is the key. After all, if you invest without enough information, you have nothing to lose but your life's savings. Greed may be good, as Gordon Gecko says in the movie Wall Street, but good for whom? My greed is probably good not for me but for the Bhansalis who profit from it. And who is to blame?

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