Ponzi Scheme

Everyone must have heard about the Sarada Group scam that happened on April 2013. Sarada group operated a so called “chit fund” with the help of 200 companies collectively which was illegal but very popular.

Sarada group has followed the Ponzi scheme to raise funds and see profits.

So, What is Ponzi scheme?

Ponzi Scheme is a illegal methodology being followed by companies to see unimaginable profits. A company collects money from investors attracting them by advertisements that project higher returns with less risk. These companies will provide returns to old investors by identifying new investors. As people get promised returns they start reinvesting, which is advantageous to the company.

The risk involved here is, if the company goes un-viable to attract new investors then it would reach an end to generate money to satisfy the old investors. Also, if the economy falls reinvestment may reduce. Investors may even end up withdrawing their money. Sometimes even a legal mutual fund company may end up in ponzi scheme due to lack of profitability or bad management/decisions.

The advantage factor that drives these schemes are that rural India is not educated about formal banking and financial services being provided in India. So, promoters of Ponzi scheme may easily attract rural India with attractive returns. As good amount accumulates the promoter disappears leaving behind tears in rural India. The most unbelievable fact is that when big shots like Sarada group promotes about higher returns even educated personnel are ignorant to end up losing their money, just because of the brand name and fake confidence.

In Sarada group scam, 200 companies used to collect money from public by selling debentures and bonds of their companies, acted as frontline helpers for Sarada group. But as per SEBI’s legislation a company can collect capital only from 50 investors without SEBI’s permission. Beyond 50 people, proper permission has to be obtained from SEBI. So, Sarada group was warned by SEBI regarding the capital raise issue. Sarada group offered 20-25% commission to agents who worked as frontline officers.

At last, they were successful in collecting Rs.200 to 300 Billion from 1.7 million depositors and collapsed on April 2013. State government of West Bengal finally managed to generate a fund of Rs.5 Billion and helped some of the low income investors who lose their money in Sarada scam.

Today’s government has opened a provision in Prevention of Money Laundering Act (PMLA) recently stating that money and assets will be restituted to poor and small investors who were tricked. This provision has provided higher power to respective authorities to confiscate the assets from deceived promoters. Yet now, there are 243 cases being monitored by CBI in eastern India alone. This new provision is to recover from Ponzi scheme frauds worth Rs.80000 crore in India Think twice, Act wise.

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