Signs of a Ponzi scheme

Regulatory confusion and delays in consumer courts mean the retail investor is on his own

It’s quite difficult to ignore the promise of ‘100 per cent returns’ in just two years. Especially, when relatives, neighbours and colleagues seem to have benefited by investing in these schemes. But millions of Indian investors, time and again, have learnt this lesson – Ponzi schemes don’t last for too long.

Yet, they continue to dabble with risky schemes. With the market regulator, Securities and Exchange Board of India (Sebi) launching yet another investigation – this time, into goat-rearing farms in Northern India that are promising spectacular returns, this is perhaps the nth time that retail investors have lost money.

There are always some tell-tale signs of a Ponzi scheme. For one, the idea itself is very innovative and too complex to understand. In recent years, with the Rs 500-crore plus Emu (an Australian bird) in Kerela and goats scams, the ‘animal instincts’ of fraudsters are in vogue. In the 1990s, plantation of teak wood, grapes etc snared thousands of people.

The most important sign is spectacular returns. The Emu offer: Invest Rs 1.5 lakh for three pairs of Emu chicks which would return Rs 3.34 lakh – over 100 per cent in just two years. The goat-rearing scheme is also quite similar. There are many others such schemes like gold trading and multi-level marketing.

Often, returns are guaranteed – a clear sign to worry because except a bank fixed deposit, it is quite difficult to generate definite returns from any instrument. Whether it is equities or property or gold, it is quite impossible to give guaranteed returns.

Then, the selling technique is quite unique. Often, it involves testimonies of people who have benefitted from these schemes. Word of mouth is the important tool for these companies. So, sellers of these products will often ask you to be their ambassador to promote their schemes. And there are benefits such as, more amount or gifts, as well if you get in more investments.

Often, if you ask too many questions about the scheme, the seller fails to explain. Instead he gives examples of people who benefited from the schemes.

In the US, the Securities and Exchange Commission’s website dedicates a full page on this subject where it describes what Ponzi schemes are, how do they collapse and what are some of the ‘red flags’?

In India, many of these schemes end up getting lost in the regulatory red tape. While Sebi is the regulatory authority of collective investment schemes, multi-level marketing schemes do not fall under it or any other regulator’s purview. As a result, such companies flourish in the absence of regulatory oversight.

Worse still, even if someone wants to approach consumer courts, there is a huge backlog. And that’s not all. Like consumer lawyer Jehangir Gai says, “Around 50 per cent – 20 out of 43 consumer courts – are not functioning in Maharashtra for the past six months because of delays in the selection process.”

So, there is little one can do, if they have invested in such schemes. As they say, prevention is better than cure...