Here's how to spot a ponzi scheme instantly and avoid becoming a victim

When a company offers 20-50% interest income on investments, it is a sign to stay away

Hyderabad-based Heera Group is in the eye of a storm for its scheme Heera Gold, which offered spectacular returns to investors. However, it has been unable to pay for the past few months. A report by Moneylife says the market regulator, the Securities and Exchange Board of India, has identified it as a ponzi scheme and referred the case to the Economic Offences Wing, Enforcement Directorate and Commissioner of Police, Hyderabad.  

The group has drawn flak from investors for not paying them “monthly profits” since May. The company has been collecting money from investors and sharing its “profits” with them. Till recently, it gave returns once a month or once a year. In July, it declared it would give profits once in three months or once in two years. This change in policy has caused panic among investors. 

Before the change in policy, Heera Group paid Rs 1,500 per month on Rs 50,000, Rs 800 per month on Rs 25,000, and Rs 100,000 a year on Rs 200,000. The rates of return ranged from 20 per cent to 50 per cent. 

Heera Group says it runs a ‘halal’ and ‘interest-free’ business under ‘Tijarah’, the Islamic way of doing business. A marketing executive of the company said the gap or delay in payouts was owing to the levying of the goods and services tax on financial transactions and some changes in the Reserve Bank of India’s policy. However, he could not explain what the change in policy was.

News of investors losing money in unregulated deposit schemes hits the headlines with disconcerting regularity. In the past, investors have lost millions in irregular schemes like Saradha, Rose Valley and DS Kulkarni. These schemes follow a predictable pattern. The promoters promise very high returns to investors, due to which the latter invest their hard-earned money. After paying the promised returns for some time, the promoters default and investors often end up losing even the principal.

Investors on their part need to be able to spot a ponzi scheme and stay away from it. Srikanth Meenakshi, founder and chief operating officer at FundsIndia.com, says there are two basic guidelines investors need to follow. “One, any company that offers 4 percentage points higher return than a bank fixed deposit should be suspect. Second, before investing, they should enquire about the business of the company and how it plans to pay such high returns.” 

State Bank of India’s fixed deposit (FD) rates are 5.75-7.35 per cent currently. Fixed deposits of well-known companies are also able to offer only 2 percentage points higher returns than bank FDs. Meenakshi says if you adopt the above-mentioned guidelines, you will never fall prey to such schemes.

Consumer activist Jehangir Gai suggests to recover their money, investors should approach a consumer forum in the area where the company has its operations. They can start criminal proceedings as well. “They can approach any court of law but there is a big question mark on whether money will be recovered,” says Gai. In most such cases, those involved in frauds transfer money or assets to their relatives’ names. “A criminal court is unable to recover the money as by the time investors realise they have been cheated, the promoters have diverted all the money elsewhere,” he says.

5 signs of a Ponzi scheme

• The first sign is the promise of an abnormally high rate of return
• You are promised a ‘guaranteed’ rate of return  
• The business that will generate the returns appears to be complex
• The person selling you the scheme does not talk of risk; only of returns 
• The person is unable to tell you which regulator the scheme is registered with