Saju Mathew
Head, Dept. of Economics St. Joseph’s College, Jakhama, Nagaland
Ponzi scheme is a fraudulent investment operation that promises high rates of return in the short period at little risk to new investors. Initial investors may get high promised returns, i.e., money from new investors is given to old investors and thus it is only rotation of funds, and not real investment of funds.The perpetuation of the returns that ponzi schemes advertises and pays requires an ever increasing flow of money from investors to keep the scheme going. The schemes are named after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. At a time when the annual interest rate for bank accounts was five percent, Ponzi promised investors that he could provide a 50% return in just 90 days.
How does the ponzi scheme works: Initially the proprietors convince a few investors to place money into the investment scheme. After the maturity period, return the invested money to the investors with the promised high rate of interest. Showing the historical success of the investment, convince more investors to deposit their money into the scheme. Normally a vast majority of the earlier investors will reinvest their money as the system has been providing them with great benefits which they cannot get anywhere else. They also publicise their experience as how did they multiply their money in a short span of time. This induces their friends and relatives to do the same.
The proprietors repeat these process for some time and when the expansion of the business reach almost the saturation point, escape with the money to an undisclosed location or to a foreign country and start a new life. This kind of ponzi schemes appears and reappears in our society, in different names and forms duping a large number innocent investors and virtually destroying their future plans.
How to identify a ponzi scheme: Any investment scheme which offers abnormally high returns or benefits which other schemes cannot offer can be possibly a ponzi scheme. Ponzi schemes promise high returns and low risk to attract the investors. The ponzi schemes may vary from a small scheme run by a local money lender or a seller of products in the locality involving a few investors and a few thousands or lakhs rupees to a multibillion rupees business scheme involving thousands or lakhs of investors. However such schemes are sure to collapse by itself in the long run if it is not interrupted by the legal authority of the state.
What are the precautions need to taken before we choose an investment option: When we consider our next investment plan, it is good to check the following things.
(1) Does the proprietor of the investment scheme have licence?
(2) Is the scheme registered with any government regulator? Just a registration with any local body or society is not sufficient because unless it is registered with the government regulator, it is not monitored by any one.
(3) Do we understand the investment scheme or we just believed what the proprietor said? Do not invest in a scheme which we did not understand.
(4) Where can we look for help in case of any fraud? Do not invest just because a large number of people are investing in it or the scheme is inaugurated by a trusted person or a famous celebrity is the ambassador of the scheme.
(5) Do not invest on trust. Have everything backed up by documents.
(6) Beware of any investment scheme which promises unusually high returns.
Who are the Various Regulators in Indian Financial Markets: The following regulatory agencies monitor and regulate various sectors of the financial markets in India. (1) Securities & Exchange Board of India (SEBI) (2) Reserve Bank of India (RBI) (3) Forward Markets Commission (FMC) (4) Insurance Regulatory & Development Authority (IRDA) (5) Ministry of Corporate Affairs (MCA) (6) Ministry of Finance (MoF)
Saradha Chit Fund Scam, a recent example of major ponzi scheme in Eastern India: This scheme was run by Saradha Group, a consortium of over 200 private companies that was believed to be running collective investment schemes, popularly but incorrectly referred to as chit funds, in Eastern India. The group collected around 200 to 300 billion from over 1.7 million depositors before it collapsed in April 2013. In India, chit funds are often considered to be ponzi schemes. There have been many blow ups in the past in different parts of the country as there is no proper regulating agenesis for chit funds.
To prevent the repetition of the history in the way of the collapse of the ponzi schemes people themselves have to be more vigilant. The desire of the people to achieve excessive and sudden growth of their investment makes them more exposed to these ponzi schemes. Government should make proper regulations for the chit funds, money lenders, Pyramid Schemes and any other financial schemes which involve the money of general public. Every financial scheme needs to be made under the supervision of a proper regulatory authority and any scheme working without the proper permission needs to be controlled with the help of the local support and stringent and fool proof legal framework. The regulations and guidelines should be properly implemented for the registered investment schemes with the help of powerful regulatory authority.
Dear readers beware of fake investment schemes, Money Saved is Money Earned.
