SEBI clamps down on collective investment scheme by potato company

The Securities and Exchange Board of India (SEBI) has clamped down on a bizarre investment scheme by a Kolkota-based company, Sumangal Industries, which promises returns of up to 100 per cent through purchase of potatoes.

The market regulator has directed the company to stop raising any further money from the public, and also barred it from diverting or alienating any assets of funds till further orders.

SEBI also asked West Bengal-based Sumangal Industries, to reply within 15 days to its prima facie observations in the matter.

SEBI said it has taken cognizance of an advertisement dated 11 September 2012 published in the Kolkata edition of Bengali newspaper 'Anandabazar Patrika' by Sumangal Industries Ltd (SIL) soliciting funds from the public promising returns of 20 per cent to 100 per cent under a 'Flexi Potato Purchase Scheme'.

As per the advertisement, the scheme would use funds so collected from the public to buy potatoes from the market on behalf of the investors when the price is low and preserve them in their own cold storage and later on sell them when the market price rises.

There is a guarantee of 20 per cent to 100 per cent profit. The percentage of profit would depend upon the market price of potato.

It takes 15 months to complete the whole business and return to the investor the sale value of his potatoes.

The advertisement further states that those who will invest this year by September, hopefully will get a profit of 58 per cent.

An investment of Rs1 lakh for 15 months in potato will bring a guaranteed return of Rs1.20 lakh; it could also reach up to Rs2 lakh.

Purchase potato bond of Rs1 lakh will fetch an annualised return of 15.6 per cent after one week.

SEBI in a note issued on 11 October 2012, had advised SIL against carrying on or launching a collective investment scheme without obtaining a certificate of registration from SEBI.

The company in its reply to SEBI has denied mobilising funds from the public. It also submitted that it is trading in potatoes, for which it has a trading licence, and is dealing in agricultural and non-agricultural products, both within and outside India.

The company denied that it was running a collective investment scheme and submitted that the question of obtaining a certificate of registration from SEBI does not arise. The company did not provide the information and documents sought by SEBI.

SEBI has noted that since the complete control of the management of the scheme starting from purchase of potatoes, storing them in cold storages, exploring market for
buyers, execution of MoU with state governments are with the company, the investors do not have any day-to-day control over the management and operation of the scheme.

The term `Collective Investment Scheme' has been defined in the SEBI Act as ''Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, by whatever name called, are pooled and utilised solely for the purposes of the scheme or arrangement.''

''Sumangal Industries has to be prevented from carrying on further with its activity related to collective investment scheme (CIS) without obtaining due registration from SEBI in accordance with law,'' the regulator said in an order.

The company has been directed not to launch any other collective investment scheme without SEBI's approval.