Soon after the unearthing of the Rs 3700-crore Noida Ponzi scam, which is claimed to have duped around six lakh people, another multi-hundred crore Ponzi scam is said to have surfaced in Noida. Although this is still being investigated, but the fact is the lure of big money not only attracts people to the stock market, but also to the Ponzi and other such fraudulent schemes. West Bengal’s Saradha Chit Fund scam is a case in point.
Interestingly, there are hundreds of such schemes flourishing in various parts of the country, putting the financial lives of crores of gullible investors at risk. Therefore, while scamsters across the world are cashing in on the ignorance of unsuspecting investors and other preople, it makes sense to take a look at some signs and precautions which can help you spot any pyramid, Ponzi or other such schemes.
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Here are some signs to spot whether you are about to step into a Ponzi scam:
Higher Returns: Operators of Ponzi and other such schemes usually lure investors by offering returns that are either abnormally high or unusually consistent. “A typical Ponzi scheme often leads gullible investors to believe that they are getting high, above-average returns on investments and that there are no risks involved. The returns look too good to be true, so unsuspecting investors get lured in,” says Adhil Shetty, CEO, BankBazaar.com.
For example, B K Jewellers’ promise of a return of Rs 26 lakh after a period of 5 years on an investment of Rs 13,000 should have raised the suspicion of investors in the first place. But that didn’t happen. Similarly, investors didn’t see anything wrong in the Stock Guru promise of 20% assured returns per month. So, ultimately they got duped.
However, “if you do not want to lose your hard-earned money in such schemes, then you must avoid any scheme which promises returns substantially higher than the risk-free returns available at any time. Currently the risk-free returns available from banks are around 7% on the fixed or time deposits. Provident Funds are giving returns around 8.5% with a 15-year lock in. So any scheme which promises substantially higher than these returns should be avoided unless you have the knowledge to understand the risks involved,” says Ashish Kapur, CEO, Invest Shoppe India Pvt Ltd.
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Complex Strategies: The investment strategies of such schemes are usually complex and may also be hard for investors to understand. “That is because one of the objectives of such schemes may be to misdirect investors,” says Shetty.
Therefore, always take time to understand the nature of the investments proposed. In particular the risks associated with the investment should be clearly understood.
Doubtful Business Model: According to the International Monetary Fund, common forms of financial fraud include pyramid schemes — typically referred to by scheme organizers as multilevel marketing schemes — and Ponzi schemes. The basic operation of a Ponzi scheme is commonly described as “robbing Peter to pay Paul.” Early investors in the scheme are paid with the money invested by later investors, while in a typical pyramid scheme, each member is promised a reward for recruiting more members.
Such schemes, however, usually collapse when defaults occur and promoters abscond with invested money. More because both pyramids and Ponzis typically have no true business activity or investments to generate the promised high returns, although some business, product, or service may be used as a front.
However, “once you’re into a Ponzi scheme, you may find recovering your capital to be difficult. You may receive good returns at first which may lead you to invest even more into the scheme, which would eventually lead to losses,” says Shetty.
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Unregistered Schemes: Illegal schemes are not registered with investment regulatory authorities. Therefore, investors are at great risk. The scheme runners may not have the requisite business licenses. Therefore, “always check if the person advising you is registered with SEBI as an advisor, broker, mutual fund distributor, portfolio manager or in some other way. Accreditation and credentials of the person are extremely important. Also, take references from the advisor and check whether he has been serving them in a proper way and whether his recommendations deliver as promised or not?” says Kapur.
Also, if you are planning to invest in an NBFC, then you should well be aware of that every NBFC is required to be registered with the RBI.
Doubtful Track Record: Always check the track record of promoters and the management team, besides getting financial information before making any investment decision. If the track record is doubtful, then stay away from such schemes. Also, the risks, expected returns and other features like liquidity, exit load and tax treatment associated with the proposed investment should be taken in writing from your advisor before you make your commitment. This written statement should be on the letter head of the advisor. You should also try and cross check online and with people experienced in investing about the features of the proposed investment.
