Business: Plantation Schemes; Now, a Green Scam

A slow-moving administration and a toothless SEBI have failed to check fraudulent plantation companies.

What good are watchdogs that cannot bite? That is the question in the minds of thousands of investors across the country who put their money in seemingly lucrative plantation schemes in the hope of reaping a bountiful harvest. When the companies defaulted on payments, the investors approached the Securities & Exchange Board of India (SEBI), only to be told that the regulatory body had no jurisdiction over the plantation firms and could do precious little to help them out of their predicament.

True, plantation companies have for long operated in a regulatory vacuum. Consider the legal puzzle: plantation companies are registered under the Companies Act 1956. They raise money and invest in agriculture and related activities. Since they are not non-banking finance companies, they are not under the ambit of the Reserve Bank of India (RBI); since they raise money that is not defined as deposits, they are not regulated by the Department of Company Affairs (DCA); and since the money raised is not invested in securities, they do not come under SEBI's purview. So, there was no government regulatory agency aggrieved investors could turn to in case the companies defaulted.

RISKY VENTURES

Fertile Minefield: A Finance Ministry study shows that operations of most plantation firms are inherently unsafe.

No Experience Needed: Most firms have little experience in the field but have lured the public successfully.

No Disclosures: Since their brochures give only sketchy details, the public can't assess the schemes properly.

Fund Diversion: A major part of the funds raised is loaned to associate/group firms.

No Back-up: In many cases, firms don't own the land.

All that changed when the Finance Ministry clarified late last year that the plantation companies did, in fact, come under SEBI's ambit. Jerked out of its slumber, SEBI still took more than four months to initiate any significant step to check the malaise. In April this year, it barred plantation firms from accepting fresh investments till they had registered with it and obtained a credit rating from a rating agency.

The immediate reaction was a chorus of protests from plantation companies. The Association of Agri Plantation Companies of India -- a hastily formed umbrella outfit of plantation firms -- challenged SEBI's jurisdiction in the matter. Its contention: SEBI can only regulate collective schemes which invest in securities. The case is being heard in the Bombay High Court.

A handful of plantation companies -- 34 of the estimated 3,599 -- did take heed of the SEBI diktat and submitted themselves to an appraisal by rating agencies. But far from boosting their confidence, the results only validate what investors have been fearing. Of the 34 companies which got themselves rated by the country's four major rating agencies, 33 have returned with the same rating: Grade V. In other words, investments in these plantation companies are risky and they are likely to default on their pay-out commitments.

The credit rating results were hardly surprising. A special audit conducted by SEBI of 32 plantation companies, which raised funds from the public by promising fantastic annual returns of more than 30 per cent, has revealed some disturbing facts. The money being raised by these companies was not being deployed for the purpose it was raised. Instead, it was being siphoned off as unsecured loans to directors and other group companies.

Worse, in many cases, money from new investors was being used to repay existing depositors, a short-term measure that pushes the company deeper into debt. Since SEBI has now barred companies from accepting fresh deposits, more and more companies are defaulting on interest pay-outs and repayments to investors. One of them is Ravi Menon, who opted for voluntary retirement from Hindustan Lever Limited and invested Rs 2 lakh in a regular return scheme of Libra Plantations. Menon has not received any interest on his deposit from the company since December 1997. When he approached the company, he was flatly told "that since SEBI has banned new collections, we can't pay".

The audit was merely financial in nature. It didn't make a qualitative assessment of the companies' assets which might have reflected the magnitude of the problem. But it did uncover some glaring violations by these companies. For instance, it discovered that the assets were not being bought in the name of the company which mobilised the funds from the public. In other words, if the plantation company went under, investors would not get anything. Moreover, the companies were accepting cash deposits in total violation of the rules.

To be sure, the writing was on the wall long before SEBI embarked on the audit. According to the Mumbai-based Investors' Grievances Forum (IGF) -- a body looking after the interests of the investors -- it had cautioned SEBI that plantation companies were luring investors with false promises more than two years ago. But the regulatory body refused to act, saying that such companies do not come under its purview.

In the absence of a regulatory mechanism, plantation firms have thrived. The number of companies, the quantum of funds raised and the multitudes rushing to invest have grown exponentially. For instance, the total funds with Anubhav Plantations has grown from Rs 6.78 crore in 1993-94 to Rs 132.86 crore today and that of Enbee Plantations from Rs 2.02 crore in 1995 to Rs 99.87 crore in 1997-'98. The biggest of them all, Golden Forests -- with paid-up capital of just Rs 10 lakh -- has raised over Rs 1,100 crore.

Even now, there are several loopholes for these plantation companies to wriggle past. For one, SEBI cannot stop a company that has got itself registered and rated from accepting fresh deposits. So, even if the company has got a poor credit rating it can still go out and mobilise investments from gullible investors. The problem can be particularly acute in smaller towns and in villages where awareness is low.

The investors, meanwhile, have decided to take matters into their own hands. In June, the IGF filed a public interest petition in the Bombay High Court against the plantation companies for allegedly siphoning off funds. The IGF also urged that the assets of these companies be frozen and called for a probe by the Central Bureau of Investigation. IGF President Kirit Somaiya, who is also the president of the Mumbai unit of the BJP, lays the blame squarely at the door of the government. "Investor protection in India means only protection of the regulators' chair," he says. In Delhi, investors found a whipping boy in SEBI. In a petition in the Delhi High Court, the Forum of Investors of Agro Forestry Companies urged that SEBI should be asked to prepare a comprehensive package to salvage the estimated Rs 2,500 crore invested in these plantation firms. It also sought a CBI inquiry into the muddle.

For SEBI, it is like fighting with its hands tied. It has the powers to cancel and suspend operations and levy monetary fines. What it doesn't have are powers to inspect a company's books to check mismanagement and siphoning off funds. Also, it needs powers to issue winding up notices. SEBI has sought these powers since 1989 but DCA is yet to devolve them on the regulatory body. Clearly, the watchdog will have to wait for more teeth before it starts biting.