Ponzi Investment Schemes – Protect yourself from misleading investments

Last Updated at: October 23, 2019
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Ponzi Investment Schemes - Protect yourself from misleading investments

Most men pursue pleasure with such breathless haste that they hurry past it. – Kierkegaard

Since time immemorial, men and women across societies have been driven by the need for more money, a great way of pursuing which are good investments. However, many times people are lured into scams where instead of earning returns, they lose all of their money. Such scams are called Ponzi schemes, named after Charles Ponzi, a con man who had promised US-investors staggering returns of 100% in three months. In this post, we contour some dynamics common to most Ponzi schemes and also highlight how you can protect yourself from such fraudulent investments.

IMA Scam 2019 – A Massive Ponzi Scheme

In Karnataka, the IMA Scam which was recently unearthed revealed a fraudulent collection of more than 2000 crores. The company, called I Monetary Advisory was touted as halal company deriving its profits from jewellery and bullion sale, instead of interest which is considered illegal in Islam. The company promised returns of 3-4 per cent every month, therefore a 36% annual return looked very bright to its investors, who largely put in their small household savings. People did initially receive these staggering returns and encouraged their relatives and friends to apply, leading to a total tally of 40,000 investors. The investors were given written documents that said that their principal amount could be returned in 45 days after putting in a request. However, the scam was unearthed when many investors stopped receiving their regular payouts, and the company kept delaying their requests to refund the principal investment. The face of the scheme, Mohd. Mansoor Khan is allegedly on the run and faces charges of fraud, and a possible conviction under Fugitive Economic Offenders Act.

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So, how could these investors putting in their small savings, safeguard themselves from such a scam?

  1. Returns look too good to be true – One of the foremost characteristics of a Ponzi Scheme is that it offers very high rates of returns. In the IMA scam, a yearly return of 36% is unbelievable, especially at a time when the economy is slowing and stock markets have been uncertain. This appealing nature of Ponzi schemes should put any investor on the guard. As a precaution, one should check credentials of not just the company but also fund and portfolio managers and analyse their track record to assess the financial credibility of the scheme.
  2. Multi-level marketing schemes – While not all of the schemes patterned on this multiple level styles are illegal, many of them are. Also known as Pyramid Schemes, here, people invest and recruit other new investors, creating a triangular structure, where the people at the bottom contribute money as investments, cashing out the other older investors at the top. Any scheme asking you to bring more investors and pool in their money should make you cautious. These are also part of a larger plan, where investors host glitzy public gatherings and parties to recruit new members while also giving them the promise of foreign trips, gifts etc to recruit more investors from their network.
  3. Proper documentation – Having a clear and authentic report, laying out sources of funds, their possible use, permissions obtained for such use, past record of the company and personal profiles of those claiming ownership over the project are an absolute must.
  4. Registration with SEBI and other regulators– Most of these schemes are in the nature of collective investment schemes, which are compulsorily required to be registered with the regulating body, the Securities and Exchange Board of India. Since SEBI acts as a watchdog of investment schemes in India, it is likely to identify and ban investment schemes that look dubious. Similarly, RBI permission may be required for undertaking certain investment activities. Thus, one should be careful to check if such permission has been obtained.

Banning of Unregulated Deposit Schemes Bill, 2019

Until now, there had been no specific regulation for punishing such illegal deposit schemes with usual criminal and economic laws being attracted to punish offenders. The government enacted the Banning of Unregulated Deposit Schemes Bill, 2019 recently.  Under this, a deposit-taking scheme is defined as unregulated if it is taken for a business purpose and is not registered with the regulators listed in the Bill such as the RBI, SEBI, MCA etc. The Bill seeks to punish floating, advertising, promoting unregulated deposit scheme, wrongfully inducing depositors to invest as well as defaulting on regulated deposit schemes.

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Ponzi Investment Schemes – Protect yourself from misleading investments

432

Most men pursue pleasure with such breathless haste that they hurry past it. – Kierkegaard

Since time immemorial, men and women across societies have been driven by the need for more money, a great way of pursuing which are good investments. However, many times people are lured into scams where instead of earning returns, they lose all of their money. Such scams are called Ponzi schemes, named after Charles Ponzi, a con man who had promised US-investors staggering returns of 100% in three months. In this post, we contour some dynamics common to most Ponzi schemes and also highlight how you can protect yourself from such fraudulent investments.

IMA Scam 2019 – A Massive Ponzi Scheme

In Karnataka, the IMA Scam which was recently unearthed revealed a fraudulent collection of more than 2000 crores. The company, called I Monetary Advisory was touted as halal company deriving its profits from jewellery and bullion sale, instead of interest which is considered illegal in Islam. The company promised returns of 3-4 per cent every month, therefore a 36% annual return looked very bright to its investors, who largely put in their small household savings. People did initially receive these staggering returns and encouraged their relatives and friends to apply, leading to a total tally of 40,000 investors. The investors were given written documents that said that their principal amount could be returned in 45 days after putting in a request. However, the scam was unearthed when many investors stopped receiving their regular payouts, and the company kept delaying their requests to refund the principal investment. The face of the scheme, Mohd. Mansoor Khan is allegedly on the run and faces charges of fraud, and a possible conviction under Fugitive Economic Offenders Act.

Start Your Own Business

So, how could these investors putting in their small savings, safeguard themselves from such a scam?

  1. Returns look too good to be true – One of the foremost characteristics of a Ponzi Scheme is that it offers very high rates of returns. In the IMA scam, a yearly return of 36% is unbelievable, especially at a time when the economy is slowing and stock markets have been uncertain. This appealing nature of Ponzi schemes should put any investor on the guard. As a precaution, one should check credentials of not just the company but also fund and portfolio managers and analyse their track record to assess the financial credibility of the scheme.
  2. Multi-level marketing schemes – While not all of the schemes patterned on this multiple level styles are illegal, many of them are. Also known as Pyramid Schemes, here, people invest and recruit other new investors, creating a triangular structure, where the people at the bottom contribute money as investments, cashing out the other older investors at the top. Any scheme asking you to bring more investors and pool in their money should make you cautious. These are also part of a larger plan, where investors host glitzy public gatherings and parties to recruit new members while also giving them the promise of foreign trips, gifts etc to recruit more investors from their network.
  3. Proper documentation – Having a clear and authentic report, laying out sources of funds, their possible use, permissions obtained for such use, past record of the company and personal profiles of those claiming ownership over the project are an absolute must.
  4. Registration with SEBI and other regulators– Most of these schemes are in the nature of collective investment schemes, which are compulsorily required to be registered with the regulating body, the Securities and Exchange Board of India. Since SEBI acts as a watchdog of investment schemes in India, it is likely to identify and ban investment schemes that look dubious. Similarly, RBI permission may be required for undertaking certain investment activities. Thus, one should be careful to check if such permission has been obtained.

Banning of Unregulated Deposit Schemes Bill, 2019

Until now, there had been no specific regulation for punishing such illegal deposit schemes with usual criminal and economic laws being attracted to punish offenders. The government enacted the Banning of Unregulated Deposit Schemes Bill, 2019 recently.  Under this, a deposit-taking scheme is defined as unregulated if it is taken for a business purpose and is not registered with the regulators listed in the Bill such as the RBI, SEBI, MCA etc. The Bill seeks to punish floating, advertising, promoting unregulated deposit scheme, wrongfully inducing depositors to invest as well as defaulting on regulated deposit schemes.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.