Government move to curb Ponzi schemes: What you need to know

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Updated: August 17, 2018 2:21 PM

In the realm of the real world, high return and guaranteed return don't go hand in hand. As an answer to Ponzi schemes, the government has recently tabled the Banning of Unregulated Deposit Schemes Bill, 2018.

Financial Express/ Ponzi Schemes, Government has tabled the banning of Unregulated Deposit Schemes Bill, 2018 and the Chit Funds (Amendment) Bill, 2018 in Parliament.

Do you remember the Saradha chit fund and the Rose Valley chit fund scams? These were Ponzi schemes in which investors lost millions of rupees. Thankfully, in order to put a curb on such fraud schemes, the government has recently tabled the Banning of Unregulated Deposit Schemes Bill, 2018 and the Chit Funds (Amendment) Bill, 2018 in Parliament. These bills aim to regulate the solicitation and acceptance of deposits by various business entities which otherwise are not regulated by regulators such as RBI, SEBI etc. The companies or institutions running Ponzi schemes have been exploiting the regulatory gaps and a lack of administrative measures to dupe the gullible people of their hard-earned money. Similar to real estate projects which are required to be registered with the Real Estate Regulatory Authority, this bill also aims to register all the deposit-taking entities with a competent authority which is notified. The details will be made available to the public through a website.  

However, until that is done, investors, be aware! These schemes can be spotted with certain abnormality associated with them. Firstly, these schemes promise an abnormally high rate of return. Secondly, they promise a guaranteed return. Mind you investors, a very few schemes give a guaranteed return. Also, in the realm of the real world, high return and guaranteed return don’t go hand in hand.

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“Investors who are gullible to such schemes are generally the one who are not exposed to formal investment products other than fixed deposits and saving schemes. The hygiene factors to bear in mind is to ask the depositors as to who are they answerable to and if something looks too good to be true, then inquire about the source of such unbelievable return,” advises Harshvardhan Roongta, Certified Financial Planner, Roongta Securities.

For instance, promises like 30-40% returns are too good to be true because it is tough for any business to earn returns like that consistently. Also, high returns almost always mean high risks – there are no free lunches. Such promises should make you suspect that the person making the offer is either in deep financial trouble or is running a scam.

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Amar Pandit, CFA and founder of, points out to do your due diligence before committing to such schemes.  He says, “People go great lengths to find details about the Ponzi schemes, promoters, visit their office etc after they realize they have been tricked. Like they say, prevention is better than cure. A vivid example of this is the Saradha scam which had 17 lakh depositors before collapsing. Another national-level scam which duped 24 lakh investors was the Speak Asia fraud where people were lured by the promise of an annual payment of Rs 52,000. They had to pay Rs 11,000 each for a subscription to online marketing surveys and bring in more members in return for monetary rewards. The company blew up in 2011.”

Another thing you should keep in mind is that if the investment process appears convoluted, then be warned. If the agent doesn’t explain the investment risks, then stay away from the schemes. In case of a genuine entity, the salesperson will share the registration licence and number. As an investor, you must be aware of the fly-by-night operators.

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Investors can check if the debt offering has been rated by any of the credit rating agencies like Crisil, ICRA or CARE. A high credit rating can be one important filter to sort out suitable deposit options, advices Ashish Kapoor, CEO of Invest Shoppe India Ltd.

 The Indian penal code contains law pertaining to fraud. Proving a fraud takes a lot of time and the penalties are also not high. The existing deterrents are inadequate to stop these schemes.

The issue is that regulators like RBI only regulate entities like banks and NBFCs. The SEBI-regulated collective investment schemes do not cover co-operative societies.

“In order to protect the naive investors, it will be easier to identify the deposit takers who are registered and if investors come across any entity who are soliciting deposits if they are not registered, then they can intimate the competent authority to initiate a necessary action against them,” says Sandeep Shah, partner, N.A Shah Associates LLP

The strength of the legislation is its sweeping nature. It brings under its purview every kind of deposit raising schemes. Schemes already regulated by the existing regulators will fall under its purview. If any entity raises money but fails to repay investors the principal and interest due to fraudulent causes, it will be held liable.

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“The penal provisions (both ranging from 1 lakh to 25 crore/3 times the profit) as also imprisonment term ranging from 1 year to 10 years have been specified in the bill,” says Shah.

The judicial process is slow in India and those being prosecuted find a way to delay it further. Hence, it takes a lot of time to bring the culprits to book. The legislation allows the competent authority being set up in the states to attach assets that have been acquired through unregulated deposits. Even if there is syphoning of funds to related parties, this legislation allows the special court to go to the entity to which money has been transferred. It can ask the concerned party to show cause why it shouldn’t attach such transferee’s assets of equivalent value. The recipients will have to show that they paid fair value for the assets acquired in such related party transactions. The financial and incarceration based deterrents of this legislation are much higher.

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The government should fix the flaws in the judicial system by empowering it with adequate resources. It should improve infrastructure and appoint enough judges so that litigation moves at a faster pace.

Many western countries have effective policies for incentivising and protecting whistleblowers. Experts say such a policy should have been incorporated in this legislation. The enactment of a new harsher law may not end this menace entirely. Legislative measures need to be supplemented with financial literacy initiatives.

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