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To Invest or Not Invest in Ponzi Schemes

As a wise man once said, ‘there is a sufficiency in the world for man’s need but not for man’s greed.’ Probably this thought defines why ponzi schemes continue to flourish across the world despite the unearthing of various scams and the resultant bad press. While the one who starts a ponzi scheme is one greedy person willing to break the law, those who invest in the same are blinded by the greed/lure of impossible returns—either that, or they are gullible dupes.
 
Ponzis have always existed, but caught attention of the mainstream TV media just about a few years ago for the sheer scale they had achieved – for the mammoth size of the wealth that its promoters had made and the infinite investors they had duped in the process. Financial losses, on-street protests and even suicides in some cases made them a serious political agenda.

In India, just when the government was mulling over making a special law against ponzis, reports emerged that a Bengaluru-based company had duped some celebrity sportspersons, including Rahul Dravid, Saina Nehwal and Prakash Padukone, of crores of rupees. Dravid had filed a police complaint alleging that he had invested Rs 20 crore in some ponzi-type Vikram Investments, but received Rs 16 crore in return (loss of Rs 4 crore) even though the company had promised a massive 40 per cent return. If you Google, you will know that it’s not just Dravid; many well-known businessmen, movie stars and politicians have also been conned by ponzi schemes run by pied piper-type conmen who come up with utterly believable investment schemes—as simple as we buy land, cut it in plots, and sell it at high rates making huge margins.

In February this year, the government had proposed a jail term of seven years for those running unregulated deposit or ponzi schemes, through a bill that would soon be introduced in parliament. An official statement from the ministry read: ‘Running such schemes exploit existing regulatory gaps and lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings.’

Understanding Ponzi

Ponzi schemes float around in many forms, involving investments starting from as meagre as Rs 10 to about a few crore rupees, making it a several thousand crore ‘parallel financial market’ by a few estimates.

There are two broad categories of ponzi schemes. One promises an impossibly high return on investments. For example, in the mid-1990s, a BEST employee started a scheme in Mumbai that doubled invested money within a few months. Those who invested and benefitted were also made agents, who not only reinvested what they earned but also received commissions by getting more investors. When it went bust, over 60,000 people in the city had lost several hundred crore rupees.

Promoters of the infamous Saradha Chit Fund in West Bengal managed an entire industrial conglomerate by revolving investor money. They even garnered politicians’ support by funding several development projects in the state.

The second category has pyramid or multilevel marketing schemes, wherein a company offers a product but makes actual money by ‘charging’ people who are appointed or become members to distribute and sell products. The product itself is immaterial in this ponzi model. The company makes money by getting in newer members to pay the membership fee, which pays off the people who entered the scheme earlier. In fact, the ones who joined earlier and were paid off also become ‘self-singing success stories’ to bring in new customers.

In a recent judgement, while denying bail to a promoter of one such ponzi company, the Mumbai High Court had observed: ‘The motto of the company “sell more, earn more” appears very attractive and innocuous… the true motto however is “sell more earn more by fooling people”. In fact, it is a chain where a person is first fooled and then is trained to fool others to earn money.’

The court also observed that stringent laws would be required to deal with ponzi schemes. As things stand, the Prize Chits and Money Circulation Scheme (Banning) Act, 1978, continues to be in force with all its shortcomings. The much-talked-about Banning of Unregulated Deposit Schemes Bill, 2018, is yet to become an Act and a Statute Law. Until that happens, the only way to not let the ponzis flourish is by investing thoughtfully and with care, and not letting oneself and known ones get lured into a trap.

Ask These Questions

 
Will the proposed law protect investments?

Relevant clauses to know:

  • ‘Any amount due to depositors from a deposit taker (of a banned unregulated deposit scheme) shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the appropriate government or the local authority.’
  • ‘An order of provisional attachment passed by the competent authority shall have precedence and priority, to the extent of the claims of the depositors, over any other attachment by any authority competent to attach property for repayment of any debts, revenues, taxes, cesses and other rates payable to the appropriate government or the local authority.’
 
What punishment/fine does the proposed law entail?

Relevant clauses to know:

  • ‘Any deposit taker who solicits deposits in contravention of Section 3 shall be punishable with imprisonment for a term which shall not be less than one year, but which may extend to five years, and with fine which shall not be less than two lakh rupees but which may extend to ten lakh rupees.’
  • ‘Any deposit taker who accepts deposits in contravention of Section 3 shall be punishable with imprisonment for a term which shall not be less than two years but which may extend to seven years, and with fine which shall not be less than three lakh rupees but which may extend to ten lakh rupees.’
  • ‘Any deposit taker who accepts deposits in contravention of Section 3 and fraudulently defaults in repayment of such deposits or in rendering any specified service shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to ten years, and with fine which shall not be less than five lakh rupees but which may extend to twice the amount  of aggregate funds collected from the subscribers, members or participants in the unregulated deposit scheme.’

 

Quick Facts to Crack a Ponzi

  • Investors are promised a high return on investments with very low risk of return, or a very consistent flow of returns regardless of the market conditions.
  • They operate secretly or have a complex strategy, and they do not generally send/share their actual performance in a report/statement form to their clients.
  • They earn the trust of the unsuspecting investing public by repaying some of the investments made, to make it appear that they are very clean about their financial dealings. Once trust is earned, they secure the money and disappear leaving no trace about their whereabouts.

Some Ponzi Companies

  • Sahara Group of Companies
  • Saradha Group
  • Pearl Agrotech Corporation Ltd (PACL)
  • Golden Forests India Ltd.
  • Peerless Finance Company
Divya Patwal

VOICE

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