5 Ways to identify a Ponzi scheme and stay safe

Ponzi schemes are more common than you realise and here's what you need to know to protect yourself

5 Ways to identify a Ponzi scheme and stay safe

In October, Rajasthan became the first state to implement the Central Government’s Banning of Unregulated Deposit Schemes Act, 2019. The move comes amidst reports that Ponzi schemes active in the state have fraudulently collected some Rs 26,000 crore from depositors.

As a first step, the Rajasthan government has asked the Chief Justice to open designated courts at all divisional headquarters to help implement the Act. Its next step will be to put on trial those behind the frauds; namely, unscrupulous ‘promoters’ who run fake cooperative societies to dupe depositors, including the unbanked poor.

Ponzi defined

Needless to say, Ponzi schemes are not unique to Rajasthan. Currently, investigations are on in Karnataka and Uttar Pradesh into what has come to be known as the IMA Jewels scam, which duped around 40,000 people of about Rs 2000 crore in the guise of making them ‘partners’. In Bengal, the Saradha chit fund scam continues to make its reverberations felt, while investigations into a clutch of too-good-to-be-true schemes in other parts of India still continue.

Related: Phone bank scams you should avoid falling for 

So what’s a Ponzi scheme and why are they so prevalent?

Essentially, a Ponzi scheme is a fraud that lures investors with the promise of making them rich quickly through high returns, without any stable business model, or a legitimate business that generates profits, or any risk of loss to the promoters.

The main reason such scams manage to dupe gullible people are the high returns promised. And in the early days, it does generate returns for early investors by acquiring new investors; as the word spreads, a fresh lot of new investors get attracted. Investors are led into believing that the company’s ‘profits’, out of which their ‘dividends’ are paid, come from product sales or some bona fide business activity, whereas the actual source of funds is investments from later/other investors.

A Ponzi scheme is a real-life example of borrowing from Peter to pay Paul. When nothing more can be borrowed – fresh ‘investments’ inevitably die down as new investors cannot be found any longer and their numbers dwindle – the company stops paying dividends to its other investors.

It is when dividends stop that the original ‘promoters’  tend to disappear, and the scam surfaces, as has been the case with IMA. But one does not have to wait for a personal loss to spot a potential scam; here are five tell-tale warning signs or red flags:

1. Ridiculously high returns:  The most that you can expect from legal investments will be in the range of 10-15%; if someone is promising you higher returns, especially in a relatively short time, your alarm bells should start ringing.

2. Guaranteed dividends:  No investment business can ever guarantee a steady and fixed ROI on a long term basis – there has to be ups and downs in the economy that affects market conditions and a company’s revenues. So if the promoters offer very high returns (say, 30% over five years),  it's likely to be phoney.

3. Lack of transparency:  Most Ponzi promoters keep revenue generation details vague, or simply evade explanations. In the case of Anubhav Planta t ions, where investors were cheated of Rs 400 crore in the 1990s, revenues were to be raised from the sale of teak, but it was never explained how the demand for teak would stay at a steady level, or how it can be crash-proof. This is typical of most  Ponzi schemes, which never forewarn of possible downsides.

4. Glitzy marketing:  If the investment is sold to you with a lot of marketing hoopla, it’s safe to presume it’s a  Ponzi scheme. Old-timers will still recall the marketing blitzkrieg on TV and other media by players such as  Anubhav and Home Trade.

5. Unlicensed company:  What the  Ponzi operators do is to get registered with the Registrar of Companies (ROC), and that impresses investors who are not aware of the law. In India, only finance companies registered with SEBI, RBI, IRDAI (Insurance Regulatory and Development Authority of India), and PFRDA (Pension Fund Regulatory and Development Authority) can sell securities and launch finance schemes.  Any ‘finance company’ not authorised by these is almost certainly suspect.

Related: 5 Things to do if your financial information is stolen  

Taking action

Lodging a complaint is not at all difficult; RBI has a website to spread investor awareness and enable people to lodge complaints. Called Sachet ( https://sachet.rbi.org.in/ ), this website has all the information about companies that have got the authorisation that allow s them to accept deposits. There is also a provision for filing complaints and sharing information about illegal acceptance of deposits by  Ponzi operators.

Sachet is an initiative by the State Level Coordination Committee (SLCC), a joint forum formed in all Indian states to facilitate information-sharing among regulators such as SEBI, RBI, IRDAI, and the Enforcement Directorate, to control incidents of unauthorised acceptance of deposits.

So, if you come across any shady schemes or suspect one of being illegal, you can lodge a complaint on the website and share information about illegal acceptance of deposits. You can also post alerts about companies that offer above-normal interest rates on deposits, or extends dubious loans at low interest rates. The information would be shared with the regulator concerned or a law enforcement authority, which will then initiate action as per their procedures.

Last words

If an investment scheme is a scam, it is bound to start unravelling at some point of time. When that happens, someone somewhere is going to be unhappy, and express their grievances. If you come across newspaper reports of investor complaints with a state agency, or encounter them on online forums, you should take the hint.

Complaints may not necessarily mean that an investment scheme is a Ponzi operation, but then legitimate and sound investments seldom attract investor complaints. If you want to explore the various short term legitimate and sound investment options, take a look at short term investment options for high returns.




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