Skip to main content

Ponzi: India’s problem isn't absence of legislation, it's lack of accountability, corruption, fraudsters using legal means

Charles Ponzi
By Moin Qazi*
In 1919 Charles (Carlo) 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.
The Italian immigrant coaxed thousands of people into sinking millions of dollars .Ponzi fleeced investors worth at least $15 million — or about $190 million in today’s dollars — over the course of just eight months 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 scammers 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.
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 -- 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 Rs 85,000 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 the potential pool of new savers runs dry. This will occur when the scheme runs up against the natural limits of its strategy for recruiting 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. The promoters tout phenomenal returns for 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 swindler parries questions about legitimacy wit huge dividends and creates an illusion of solvency by paying off early 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 liabilities actually exceed assets and the firm is permanently insolvent .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 promoters even pay up the fanciful returns, perhaps even higher than the promised dividend, out of their personal funds, thus confirming the promoter’s credibility. A firm cannot keep on paying dividends out of capital contributions.
The whole structure collapses like a house of cards when the flow of fresh money dwindles, and 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.
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.
On account of lack of proper awareness and failure of institutions to properly guide them, people buy insurance policies without planning and give up midway because they don't have money to pay the premium. Aggressive selling prevents the agents from properly assessing the consistency in income streams of the buyers for servicing their policies. The customers end up losing heavily due to harsh penalties.
Persistency measures how long customers persist with their policies. The Insurance Regulatory and Development Authority of India (IRDAI), in its Handbook on Indian Insurance Statistics 2015-16, has provided persistency figures of the life insurance industry and the numbers are abysmal. For FY2016, the life insurance industry, on average, had a persistency rate of 61% in the 13th month, which means: 1 year after the sale, only 61 out of every 100 policies were renewed.By the 5th year of policy sale, 16 out of the 24 life insurance companies couldn't retain even a third of the policies. This shows the huge money customers are losing on account of bad financial planning.
People who have a strong grasp of financial principles are able to better understand and negotiate the financial landscape and avoid financial pitfalls. Conversely, people with a lower degree of financial literacy struggle to understand money matters and the potential impact on their financial well-being. Financial ignorance carries significant costs and results in people spending more on transaction fees, getting overextended with debts on account of them being ripe prospects for predatory practices. To blunt the potential for risk, it’s more important than ever to arm customers, especially the newly banked, with skills they need to borrow, save and move money prudently and to keep distance from unscrupulous and dubious investment schemes that are likely get them into serious trouble.
Financial knowledge is particularly important in times where increasingly complex financial products are easily available to a wide range of the population. To keep abreast even those who are financially literate need to brush up on financial skills.
---
*Contact: moinqazi123@gmail.com

Comments

TRENDING

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Union budget 'mum' on relief to marginalised communities facing climate change impact

Counterview Desk  ActionAid, an international advocacy group which claims to work for a world without poverty, patriarchy and injustice, has wondered if the Union budget 2023-24, which is being acclaimed for providing succour to the middle classes, has anything to offer to the India's poor. In a statement, it said, while the budget may have "prioritised inclusive development", the financial outlay for ensuring it "does not show the zeal as hoped." Stating that the Finance Minister said Rs 35,000 crore revenue would have to be "forgone" due to a reduction in personal income taxes, "fiscal prudence is not enough to expand public employment, social security, welfare, education and health expenditures considerably." "The need of the hour is to raise revenues through the reduction of revenues forgone and innovative mechanisms such as wealth tax on super accumulation of wealth", it added. Text: The Union Budget 2023 has given significant

Savarkar 'criminally betrayed' Netaji and his INA by siding with the British rulers

By Shamsul Islam* RSS-BJP rulers of India have been trying to show off as great fans of Netaji. But Indians must know what role ideological parents of today's RSS/BJP played against Netaji and Indian National Army (INA). The Hindu Mahasabha and RSS which always had prominent lawyers on their rolls made no attempt to defend the INA accused at Red Fort trials.

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

Why no information with Assam state agency about female rhino poaching for a year?

By Nava Thakuria   According to official claims, incidents of poaching related to rhinoceros in various forest reserves of Assam in northeast India have decreased drastically. Brutal laws against the poachers, strengthening of ground staff inside the protected forest areas and increasing public awareness in the fringe localities of national parks and wildlife sanctuaries across the State are the reasons cited for positively impacting the mission to save the one-horned rhinos. Officials records suggest, only two rhinos were poached in Kaziranga National Park and Tiger Reserve since 1 January 2021 till date. The last incident took place probably in the last week of December 2021, as a decomposed carcass of a fully-grown (around 30 years old) female rhino was recovered inside the world-famous forest reserve next month. As the precious horn was missing, for which the gigantic animal was apparently hunted down, it could not be a natural death. Ironically, however, it was not confirmed when

Civil rights leaders allege corporate loot of resources, suppression of democratic rights

By Our Representative  Civil rights activists have alleged, quoting top intelligence officers as also multiple international forensic reports, that recent developments with regard to the Bhima Koregaon and the Citizenship Amendment Act-National Register of Citizens (CAA-NRC) cases suggest, there was "no connection between the Elgaar Parishad event and the Bhima Koregaon violence." Activists of the Campaign Against State Repression (CASR) told a media event at the HKS Surjeet Bhawan, New Delhi, that, despite this, several political prisoners continue to be behind bars on being accused under the anti-terror the draconian Unlawful Activities (Prevention) Act. Addressed by family members of the political prisoners, academics, as well as social activists, it was highlighted how cases were sought to be fabricated against progressive individuals, democratic activists and intellectuals, who spoke out against "corporate loot of Indian resources, suppression of basic democratic

Kerala natural rubber producers 'squeezed', attend to their plight: Govt of India told

By Rosamma Thomas   Babu Joseph, general secretary of the National Federation of Rubber Producers Societies (NFRPS) at a recent discussion at Mahatma Gandhi University, Kottayam, explained that it is high time the Union government paid greater heed to the troubles plaguing the rubber production sector in India – rubber is a strategic product, important for the military establishment and for industry, since natural rubber is still used in the manufacture of tyres for large vehicles and aeroplanes. Synthetic rubber is now quite widespread, but styrene, which is used in making synthetic rubber and plastics, and also butadiene, another major constituent of synthetic rubber, are both hazardous. Prolonged exposure to these even in recycled rubber can cause neurological damage. Kerala produces the bulk of India’s natural rubber. In 2019-20, Kerala’s share in the national production of rubber was over 74%. Over 20% of the gross cropped area in the state is under rubber cultivation, with total

How lead petitioner was rendered homeless when GM mustard matter came up in SC

By Rosamma Thomas*  On January 5, 2023, the Supreme Court stayed a December 20, 2022 direction of the Uttarakhand High Court to the Indian Railways and the district administration of Haldwani to use paramilitary forces to evict thousands of poor families occupying land that belonged to the railways.  Justice AS Oka remarked that it was not right to order the bringing in of paramilitary forces. The SC held that even those who had no rights, but were living there for years, needed to be rehabilitated. On December 21, 2022, just as she was getting ready to celebrate Christmas, researcher Aruna Rodrigues was abruptly evicted from her home in Mhow Cantonment, Madhya Pradesh – no eviction notice was served, and nearly 30 Indian Army soldiers bearing arms were part of the eviction process. What is noteworthy in this case is that the records establishing possession of the house date back to 1892 – the title deed with the name of Dr VP Cardoza, Rodrigues’ great grandfather, is dated November 14

Lack of welfare schemes, BSF curbs force West Bengal farmers to migrate far away

Counteview Desk  In a representation to the National Human Rights Commission chairperson, a senior West Bengal based activist has complained that villagers living near the border with Bangladesh are forced to migrate to as far away as Mumbai and Kerala because of lack of government sensitivity towards their welfare in original villages. Giving specific instances, Kirity Roy, secretary, Banglar Manabadhikar Suraksha Mancha (MASUM), said, if the Border Security Force (BSF) had not put any restriction on agricultural activities, and if villages had properly implemented welfare schemes, these people would never migrate to other States. Text: I want to attract your immediate attention to the inhumane condition of the migrated workers of Gobra village, Swarupnagar Block in North 24 Parganas district of West Bengal to seek your urgent intervention to protect the rights of these people. Gobra is a village situated near the Indo-Bangladesh Border where the border fencing is about 500 meters i

Bangladesh 'rights violations': US softens stance, fears increased clout of China, India

By Tilottama Rani Charulata*  In December 2021, in addition to the Rapid Action Battalion (RAB), the United States imposed sanctions on seven former and current officers of the force, alleging serious human rights violations. Benazir Ahmed and former RAB-7 commander Miftah Uddin Ahmed were banned from entering the US. RAB as an institution was also canceled the support it was getting from the US and its allies. At the same time, those under the ban have been notified of confiscation of assets held abroad. The anti-crime and anti-terrorism unit of the Bangladesh Police, RAB is the elite force consisting of members of the Bangladesh Army, Bangladesh Police, Bangladesh Navy, Bangladesh Air Force, Border Guard Bangladesh, Bangladesh Civil Service and Bangladesh Ansar, and has been criticized by rights groups for its use of extrajudicial killings and is accused of forced disappearances. The government of Bangladesh has been insisting about lifting the ban on RAB, but the US had till recen