Till date, crores of people have been duped by Ponzi schemes floated by businessmen promising very high returns to the investors. Many people invest their life savings in such schemes in the hope of good returns. The Saradha scam drove people to suicide after they lost all their money in the scheme. In the wake of legislative and regulatory gaps which end up helping the fraudsters, the best policy is to use ample precaution before investing in any high return schemes.
According to recent data, the CBI is probing Ponzi schemes worth over Rs One Lakh Crore. Recently, in Maharashtra, the Samruddha Jeevan chit fund scheme launched by Mahesh Motewar was busted by the agencies. It is estimated that over 20 crore people in India are affected by Ponzi schemes. “The worst sufferers are women and poor people who invest their life savings in the hope of better future,” CBI Director Anil Sinha said recently.
So, here’s what investors should look at, before deciding to invest in any financial scheme. The patterns followed by Ponzi schemes are quite typical. Officials privy to investigation of such large schemes have shared the following tips for the readers of The Sunday Guardian.
HUGE INITIAL INVESTMENT, PROMISE OF HIGH RETURNS
The cost of entering the scheme is quite high as new investments are the only source of income for such schemes. A Ponzi scheme has been defined as an investment fraud in which the old investors are allegedly paid returns from the contributions of the new investors. The trap for new investor is the promise of high returns. When the old investors are paid a monthly sum, word of mouth helps bring in new investors.
“The kind of interest they offer is unbelievable. They offer interest rates as high as 18%. One should think how so much interest will be generated, what will be the business model for earning that kind of money?” an official said. Also, there is an elaborate chain of agents who are paid high commission to bring in new investors.
“The typical way of going about such schemes is by roping in influential people. Some are promised high returns and hefty commissions. The Ponzi schemes ride on the credibility that these people enjoy in the society. When they get more investment, such people are paid handsomely. These agents are paid as much as 25% commission for bringing in new investors. Interest is paid regularly for nearly a year, so the scheme gains credibility and more investment. After that, everything stops,” an official said.
In a bid to gain credibility such fraudsters also buy media, endorse brands, hire famous personalities and buy media patronage. They hire big lawyers. Generally, the trail of investment goes bust in such cases. Leading lawyers are roped in to protect them in the courts. “Even if you catch them, you barely recover the property,” an investigator said.
HAZY INVESTMENT MODEL
Investigators said another important aspect of a Ponzi scheme is its hazy investment model and unsustainable business strategy. “If the investment model is not clear, and there is a promise of ‘assured high returns’, one should immediately smell a rat,” an investigator said.
There are several legislative and regulatory loopholes. But the companies have to get permission from financial regulators to collect public money. “There are so many cases where a co-operative is registered with the Ministry of Agriculture. There are plantation schemes. These might be registered, but they are not enrolled with the regulators for permission to collect public money. These companies flaunt their registration. But an investor has to verify if such companies are allowed to collect public money,” an official said.
The RBI regulates Non-Banking Finance Companies or NBFCs. Whereas the Securities and Exchange Board of India (SEBI) regulates listed companies, mutual funds and collective investment schemes.