nirav modi

In 1919 Charles Ponzi, a clerk in Boston, suckered Americans with a scheme that is now identified with his name. At a time when interest rates stood at 5 percent, Ponzi offered investors a 50 percent return in just 45 days. The pitch was to buy postal coupons—used for buying foreign stamps, in a particular country, and then capitalize on exchange rate differences by redeeming them at a profit in the US. Ponzi only bought a handful of stamps. But he kept the scam going by robbing from Peter to pay Paul. Interest for early stage investors was paid out of funds from new investors and thus, he formed a cycle. Ponzi fleeced investors worth $10 million before his scheme finally crashed in 1920. Ponzi scams keep coming back because it is so lucrative and so easy to do in different forms. Almost a century later, this kind of con continues to haunt regulators across the globe.

India   has always been a fertile ground for such fraudsters who have exploited the illiteracy of the poor to rob them of millions. There have been so many fraudulent operators in rural areas that the poor are now wary of investing money, even in credible organizations. Deliberations at the 22nd Conference of the Central Bureau of Intelligence (CBI) and vigilance agencies in November 2016 estimated that more than 60 million Indians were victims of such unscrupulous companies spread across 26 states. The amount of money lost was estimated at a colossal Rs85,000 crore.

To check this menace, the   government has approved a draft bill to tackle this menace of illicit deposit. This move will provide tighter regulation of financial industry and will bar several platforms from taking public deposits. The new Bill—The Banning of Unregulated Deposit Schemes Bill 2018—provides for complete prohibition of unregulated deposit-taking activity. It also provides for deterrent punishment for promoting or operating an unregulated deposit-taking scheme.

The law proposes to create three different types of offenses; running of unregulated deposit schemes, fraudulent default in regulated deposit schemes, and wrongful inducement in relation to unregulated deposit schemes. -They will also set up competent authorities to ensure repayment of deposits in the event of default by a deposit-taking establishment. Heavy fines and punishments are also proposed. There are also provisions for repayment of deposits, attachment of properties and assets for repayment to depositors.

This law is necessary because there have been rising instances of people in various parts of the country being defrauded by illicit deposit-taking schemes. The leaders in the pack are Sahara, Sarada Group, Speak Asia, Rose Valley and Gold Sukh. They have between themselves duped investors of millions. India’s problem has never been the absence of legislation—but the lack of accountability, corruption and ability of the fraudsters to use legal eagles to game the judicial system. This applies to bad loans and banking frauds, as much as it does to the thousands of illegitimate schemes that have    gobbled up a staggering Rs85,000 crore of hard-earned savings

India does not have a unified regulatory regime to counter Ponzi or pyramid schemes whose operators typically grab new deposits to meet their promise of guaranteed returns to existing savers.These schemes can snowball but are eventually doomed to failure when they run out of new savers.

The Securities and Exchange Board of India (SEBI), the country’s capital markets regulator, can only investigate and stop operations of schemes that raise over Rs100 crore. These are called as collective investment schemes. But this leaves out small cooperatives that operate in the hinterland and collect small sums from investors.

A Ponzi scheme is a classic swindle, similar to a pyramid scheme in the sense that both are based on using new investors’ funds to pay the earlier investors. One difference between the two schemes is that the Ponzi originator gathers funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit in proportion to the number of new investors recruited. Older members are allowed to withdraw money after a certain period of time and receive bonuses for encouraging new entrants to sign up. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system. The gullible investors are normally illiterate and do not understand the nuances of finance.

They don’t realize that existing investors are paid money not than from genuine business profit. They believe their funds are used to finance a very profitable and legitimate business. The scheme generates returns for older investors by acquiring the ever-increasing number of new investors. This scam actually yields the promised returns to early-stage investors, as long as new investors keep adding to the fold. The scheme moves seamlessly, without raising a faintest hint of suspicion, until a point when it is no longer able to attract new investors. The whole structure collapses like a house of cards when the cash outflow exceeds the cash inflow. It simply means that the number of people in need of help outnumbers the number of people joining. The promoters try to siphon off as much of the money as they can before the scheme fails.  Both schemes will inevitably collapse though Ponzi schemes may operate for longer periods than pyramid schemes.

The Indian government’s move might even spell serious repercussions for bitcoins and other cryptocurrencies.  The government has already cautioned investors about the hazards of virtual currencies like bitcoins, the world’s biggest and best-known crypto currency, warning Indians about the perils of investment in such tools. “There is a real and heightened risk of investment bubbles of the type seen in Ponzi schemes which may result in a sudden and prolonged crash, exposing investors, especially retail consumers, to the loss of their hard-earned money. Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes,” the government had said in a statement. Bitcoin has gained more than 19-fold during the last year.

Digital currencies are now very popular, with several finance pros leaving the world of banking to plunge full time into this largely lawless industry. They’re putting their expertise into constructing a marketplace for virtual currencies with all the features found in traditional finance like derivatives, leverage, short-selling, and cryptocurrency price indexes.

Ponzi schemes have always risen phoenix-like when real estate looked shaky and the stock market was wild. The truth is that the regulators either know about these scams and do nothing or they completely overlook it on account of powerful promoters who have political links that bilk billions out of the investors.

While we should continue to make a case for strong regulations, we must remember that good financial literacy among citizens is the most effective antidote against these moral abuses in the financial system. To blunt the potential for risk, it’s more important than ever to arm customers  with skills they need to borrow, save and move money prudently and to keep  distance from unscrupulous and dubious investment schemes that have lacerated the financial lives of multitudes of them after they got into  serious  mess with them..

Moin Qazi is the author of the bestselling book, Village Diary of a Heretic Banker .He has worked in the development finance sector for almost four decades .He can be reached at

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