What is a Ponzi or multi-level marketing scheme?
A Ponzi scheme is a system in which new members enrich the old ones resulting in a fragile financial pyramid that suddenly collapses one day.
How is a Ponzi scheme structured?
It is structured like a pyramid. It starts with a firm X who recruits a person Y, who is required to “invest” Rs. 100 to be paid to X. The, Y recruits more people under him, each of whom invest a Rs. 100. If Y gets 10 more people to invest, Y will make Rs. 900 with just Rs. 100 investment.
Firm X, who gets paid each time a new member is enlisted, then transfers the money to personal bank accounts of its promoters. The promoters, in turn, wire transfer the money to an offshore bank account in a tax haven. They keep on moving money across offshore havens to blur the trail of funds.
Can it be elaborated through a live example?
In 2010, XYZ Ltd had launched a car leasing scheme, promising very high returns to investors. Investors deposited 25% of the car’s value ( Rs. 225,000 for a Honda City ZX).
The company promised to pay Rs. 8,000 a month to the investor, let the investor use the car for 2-3 days, every 2-3 months, and hand over the car after 5 years. After collecting about Rs. 562 crore from 25,000 people, the promoters of the company disappeared.
What are collective investment schemes?
Collective investment schemes, or CIS schemes, typically involve pooling of funds from the depositors that can be used only for a specific purpose approved by the regulators. Some such schemes, the ones that West Bengal’s Saradha group was carrying out, typically raises funds from the public to invest the money in a project and the returns are shared at a later stage.
What is a chit fund?
A chit fund is an arrangement among a group of people or investors who pool in a fund in a pre-defined manner on a periodic basis. The pooled funds are then paid out among the members in a manner that each will get her turn. For instance, if a group of say 25 members pay Rs. 5,000 each a month, the total monthly pool becomes Rs. 125,000.
If five members need money at the same time, one among them will be chosen through an auction and the lowest bidder gets the deal. Assuming the lowest bid is Rs. 30,000, then bidder will get Rs. 30,000 immediately and the balance will get divided among the remaining members.
Organised chit funds in India are governed by Chit Funds Act of 1982. Many states have also legislated state chit fund acts. A registrar of chit funds monitors the operations of organised chit funds in the state and use of money and members’ subscription are strictly enforced through an office of “registrar of chit funds”.
What is the state of play in India’s regulatory architecture in this area?
As the government launched a multi-agency probe into the activities of Kolkata-based Saradha group of companies in a scandal involving thousands of crores of rupees that has engulfed politicians, bureaucrats and media figures in a swirl of allegations, it now appears India’s regulatory architecture is not equipped to prevent such systematic financial swindle of savings of thousands of gullible small depositors.
There have been increased incidences of such firms operating between the regulatory boundaries at their will, defrauding investors in the name of emus, plantations, and pyramid formations and experts said that all such schemes fall under India’s rapidly growing unregulated “shadow banking” area.
The present work allocation — between the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Insurance Regulatory Development Authority (IRDA), Pension Fund Regulatory Development Authority (PFRDA) and Forwards Markets Commission (FMC) — has evolved over the years, with a sequence of piecemeal decisions responding to immediate pressures from time to time, experts said.
Unlike China’s anti-pyramid statutes and Singapore’s Multi Level Marketing and Pyramid Selling (Prohibition) Act, India does not have any such central legislation, although 14 states have passed special Acts to deal with MLM companies.
What does the government plan to do?
The government, it is learnt, is mulling the idea of setting up a central agency empowered to examine the scheme in its early stages on the basis of initial complaints, media reports, suspicious transaction reports, filed by the Financial Intelligence Unit (FIU) and the inputs from central intelligence agencies.
The issue was discussed at a recent inter-ministerial meeting which was attended by senior officers from the Intelligence Bureau (IB), Central Economic Intelligence Bureau (CEIB), RBI and Enforcement Directorate (ED). A new set of guidelines is also on the works to ensure there is clarity in the implementation of Prize Chits and Money Circulation Schemes (Banning) Act, 1978 or the PCMCS (B) Act.
The economic offences wings of state police forces are not clear about how to implement the Act, and hence opt for the new guidelines. While it is mandatory for all CIS schemes to register with SEBI, in practice many of these come under the radar only after the regulator receives complaints from the investors after they are duped by the promoters of such firms.