India's Ponzis

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Everyone wants to make a quick buck, but few look at what that entails. Nisarg Kamdar analyses some Ponzi schemes in India and reveals how greed for wealth has led to more loss than profit

With the economic liberalisation in the 90s, India’s financial sector grew with a wide variety of investment opportunities for the Indian citizen. However, the prevailing regulatory framework was abominable and allowed all sorts of dubious investment vehicles. Ponzi, pyramid and multi-level marketing schemes mushroomed with the primary objective of duping gullible and unenlightened investors.

THE BIRTH OF FRAUD
Charles Ponzi, a fraudulent businessman, lends his name to the term Ponzi scheme. Ponzi intended to purchase an international reply coupon in Spain for one cent, exchange it for American stamps and subsequently sell the stamp in America where it was worth six cents – a 500% profit. To get started, he invited people to invest, and raised close to fifteen million. In what would become the trait of every similar scheme, he promised to double their money in 90 days. The scheme failed to account for the avalanche of red tape and word soon got out about its dubious viability. Ponzi was condemned to a life of lawsuits and prison terms.

WHAT IS A PONZI SCHEME?
A venture where handsome gains are awarded to the initial investors using the money brought in by subsequent investors and not by the profit made by the enterprise. High returns on investment is promised, which requires an ever-increasing supply of money from new investors.

IDENTIFYING FRAUD
Unusually high and fixed rates of returns as compared to other investment options is the first sign of something being amiss. An investor must know that there is no easy money to be made in the stock market. It is the rapacity of investors that makes them susceptible to deception. Many Ponzi schemes invest time and money in brand building exercises to gain trust. MMM, a Russian Ponzi scheme had Sachin Tendulkar, Hrithik Roshan and Shahrukh Khan as brand ambassadors. These celebrities distanced themselves from the firm once it went down, leaving investors high and dry. Speak Asia, another Ponzi scheme, channelled funds into an extensive print campaign designed to subtly gain trust of the investor. Other Ponzi schemes have organised getaways to exotic islands for ‘premium investors.’
The wisdom here is that there is no substitute for due diligence before trusting someone with your money. Rather than being swayed by celebrity mania, it’s much more astute to understand the source of the promised high returns.

COMBATING FRAUD
The government has twice promulgated an ordinance which amends the SEBI (Securities and Exchange Board of India) Act. It is meant to empower the agency with a slew of investigating powers as well as regulatory powers over any fund that raises more than a hundred crore from investors. It also allows SEBI to facilitate a faster refund of investors’ money.
The tragedy, though, lies in the fact that the ordinance has still not been converted into a law. The government is likely to promulgate an ordinance again – an ordinance expires every six months unless passed by the parliament in which case it becomes an act. But when the government is unable to promulgate an ordinance and the parliament refuses to enact legislation, SEBI will be rendered effete against these fraudulent schemes.

IN CONCLUSION
Time and again investors have been fooled into investing in Ponzi schemes which keep appearing in morphed forms. At one level it shows the failure of the formal banking system. As the Economic Times pointed out, “India is notoriously under banked.” For a population of 1.26 billion, India has 65 banks, while America at less than a third of India’s population has upwards of 6000 banks.
If a first time investor isn’t aware of the prevailing interest rates and rate of returns in the market, how is he expected to identify the anomalies in what the Ponzi scheme is promising him? Investor education drives by SEBI and non-profit NGOs like Moneylife Foundation have certainly impacted and while this has reduced the number of Ponzi schemes, the schemes themselves are not totally extinguished. What might make them extinct is the fear of swift prosecution.

PUNISHING THE PONZIS
In the last couple of months there have been punitive actions against pernicious Ponzi and MLM schemes, notably:
» The Supreme Court of India restricted the personal freedom of Sahara Group founder Subrata Roy in view of Sahara’s violation of the SC’s judgment wherein real estate investors were to be repaid the invested amount along with accruing interest
» The arrest of Kunal Ghosh, a suspended member of parliament, for conspiring with Sudipta Sen in the Shardha chit fund scam which drowned thousands of crores of investment of people from the lower income strata
» The Economic Offences Wings apprehended Ram Niwas Pal, the alleged kingpin of the Speak Asia racket

THE POTENTIALLY FRAUDULENT
» Amway was accused of being a pyramid scheme where people are merely recruited to sell the brand. No recruitment means no return on investment. Although a ruling declared them not such a scheme, suspicions are still rife.
» QNet is another business sued for being a pyramid scheme. Supposedly sells nutrition, energy and weight management related products.
» Bitcoin is a digital currency that has divided opinions. While mainstream media tends to treat it with more contempt and calls it a Ponzi scheme for the lack of regulatory oversight, folks of the internet seem to be grateful for a currency free from the clutches of the Federal Reserve.

 

Volume 3 Issue 7

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