Some 21 years ago, stockbroker Harshad Mehta was accused of having diverted money against fake banker's receipts. He had taken money and didn't have the securities to deliver. It was one man's high jinks, but others, including foreign banks, were playing a similar game with him - they were taking advantage of the Reserve Bank of India's laxity as the regulator and supervisor. (The role remains blurred even today when it comes to consumer finance issues.) It was more a banking scam than a stock market scam.

This time, the Indian financial system has been rocked by a scam that is unprecedented in scope: the National Spot Exchange Ltd (NSEL) has collapsed. It turned out to be a sham operation, was using a flimsy regulatory passport, and was running a para-banking operation without a system of securities and collaterals in place. In essence, it is no different from Saradha, the chain-money scheme that went belly up in West Bengal in April this year. Both schemes ensured that money was funnelled in and then diverted. There were no regulatory checks and balances. Until they collapsed, everything seemed to be in place; but they had been benefiting shady politicians and promoters.

There is a one small but funny difference. This time, instead of heart-rending stories of people jumping off bridges or consuming poison in the wake of unbearable losses, we have the bizarre spectacle of Mercedes-Benzes, BMWs and imported SUVs driving down to the offices of NSEL to an "organised" protest to demand money. The Saradha scam took money from the poor and collapsed. The NSEL scam took money from the rich and collapsed. The most vocal among the protesters asking for a government takeover of NSEL is a man worth over Rs 100 crore.

While sympathising with those who have lost money in any scam, the angst, anger and alarm of the rich gives me something of a sense of Schadenfreude. I feel vindicated about something that I have been arguing for some time: we can blame the consumers of financial products for "financial illiteracy", but such blame is misplaced and will come around and hit us directly or indirectly. There will be more scams, more mis-selling.

Though it is true that we must ultimately take responsibility for our actions, it cannot be denied that we simply do not want to face a basic fact about the financial services business: the system that is essentially based on the principle of "catch me if you can while I deceive you". If you can catch us, we may pay up; if you can't, too bad for you. That is the business model. Even as sellers play this game, buyers are supposed to educate themselves. Sellers have the upper hand throughout.

It is quite amazing that one and a half months after the NSEL scam broke out, there has been no real enforcement action so far. You wonder what really is the job of the Serious Fraud Investigation Office (SFIO), the Economic Offences Wing (EOW) and the Central Bureau of Investigation (CBI). All we are seeing is "independent" directors deserting the ships of NSEL, Financial Technologies and MCX, like rats. Ironically, the group still has on its rolls former finance ministry officials and regulators as directors and advisors. As a parallel, the Harshad Mehta scam broke out on April 24, 1992; the CBI was called in and Mehta and scores of others, including bankers, were arrested on June 5. There was no EOW and SFIO in those days. Yet, despite a plethora of investigation agencies funded by taxpayers, NSEL is untouched by any criminal investigation.

NSEL investors are rich, connected and financially literate, and yet they cannot force the government to initiate tough action to get their money back. It is much worse when investors are less financially literate middle-class people who have no voice, individually or collectively. Here are two recent examples from the insurance sector.

n The largest insurance companies are in bed with multilevel marketing agencies to meet sales targets. These multilevel marketing agencies sell wrong policies to their consumers. Those duped have no voice. When Moneylife brought a few of these cases to the attention of these insurers, they promptly distanced themselves - even as the websites of these multilevel marketing agencies continue to flaunt their association.

n Moneylife's Insurance Helpline has received a dozen cases of outright fraudulent promises to sell toxic insurance policies. Thanks to our efforts, 22 people have got back more than Rs 5.5 lakh. But the insurance regulator is still sleeping; nothing has happened to the crooked corporate agents despite our repeated letters to the regulator. They will emerge as repeat offenders.

The NSEL and Saradha scams have the same roots. They are products of a regulatory system that asks buyers to watch their backs as they tread warily in the financial jungle. Notice that a progressive and peaceful civil society does not ask its citizens to rely on continuous self-defence and eternal vigil while going about their day-to-day activities. If policy makers don't see that financial sector transactions should be on the same footing, we would have lost the message sent out by two major scams in a space of just six months. The more we laugh at people for being financially illiterate, the more vulnerable we become to being taken for a ride by the system.



The writer is the editor of www.moneylife.in

editor@moneylife.in