Investment firms running Ponzi schemes with impunity
On Monday morning a motley crowd gathered outside the city sessions court awaiting the outcome of an anticipatory bail application. The man who sought bail was the promoter of a company that had attracted investments from a multitude across the country by promising fancy returns. The crowd outside the courtroom was anxious to find out what happened next.
After the judge granted the promoter a week-long bail — an interim protection — the investors, some of whom had come from distant cities, hired a cab to meet a senior official of the Mumbai police. “We don’t know how to recover our investments… we hope the police does something,” said a lady who was part of the crowd. Driven by police complaints, the media glare and a separate set of allegations related to alleged violation of foreign currency rules, the company will soon hold meetings with investors, some of whom have given up hope.
It’s a re-run of the ‘get rich quick’ schemes floated by dubious investment companies in the 1990s, promising fantastic returns in a short period to gullible investors, only to leave them high and dry later. Amazingly, such schemes still continue to find takers even today.
More than 12 years after the Reserve Bank of India (RBI) tightened norms for non-banking finance companies (NBFCs) in the wake of the scam involving the high-profile CRB Group, many ‘investment firms’ continue to run Ponzi schemes with impunity, taking care to ensure that they do not fall under the purview of any regulatory body. Ponzi schemes, named after American swindler Charles Ponzi, give returns to investors from money taken from other investors. At some point, the chain snaps when fresh money stops coming in, and the scam is exposed.
At least three dozen such firms are said to be operational in Mumbai alone. The schemes, known as growth, investment, or non-working plans, use the multi-level marketing (MLM) route to fly below the radar of regulatory bodies. For instance, since these firms do not technically collect deposits, they are not regulated by RBI. For instance, with Shree Om Sainath you can place an order for a brand new Tata Indica for just Rs 1.25 lakh. You will get your car only after five years, but till then the company will pay you Rs 3,435 per month. So, the payment of Rs 1.25 lakh is not a deposit, but an investment.
For a deposit of Rs 1.39 lakh, City Group, which has a dozen or so businesses, City Limouzines, City Realcom and City Hospitalities, and so on, will give you Rs 8,800 every month for the next five years. Metro Cruise’s retail plan promises an even higher return: Invest Rs 1.05 lakh and collect Rs 12,517 every month for five years. Then there is the ‘pay-per-click’ scam, where an investor has to pay Rs 1,500-2,500 for enrolling with an online firm. The firm will send links of around 10 advertisements to the investor everyday, promising him Rs 5-7 for clicking on each of those links.
But some of these firms have run into trouble, and chances are that before long others will too, as investors rush to redeem their deposits. One such company, City Limouzines, defaulted on its payments to depositors last month, and the Mumbai-based Economic Offences Wing (EOW) is learnt to be looking into a few companies operating on similar lines. “EOW is coordinating with other bodies like RBI to seek their help on the matter. We are keeping a close watch on new schemes that are launched,” says Sanjay Saxena, additional commissioner of police, EOW.
On its part, RBI has stepped up vigilance against firms offering unrealistically high returns. The central bank has been convening meetings with banks, drawing their attention to the fact that MLM companies are opening accounts in various banks, mostly private ones, for collecting deposits from the public with promises of exorbitant returns. Often, these accounts are opened without complying with Know Your Customer (KYC) norms and overruling provisions of the Anti-Money Laundering Act.
Some of the companies the banking regulator has named include Fine India, Alaska India, Trident Advertising and Travelink, Superlite Linked Distributors, Luebrial Education, Many Mantra Marketing, Laxya Levels Marketing, Star Consultancy and Seashore Funds. RBI has cautioned banks to report to it about any unusual/heavy transactions in newly-opened bank accounts that appear suspicious. It is also freezing the accounts of companies with cash deposits from various locations where the amount exceeds Rs 50 lakh in a month.
According to people familiar with such concerns, the firms manage to raise Rs 15-20 crore every month and the size of the industry runs into several thousand of crores in Mumbai alone. “These companies use MLM compensation schemes. Unsuspecting investors/depositors fall prey to such schemes, lured by the high returns they offer,” says Daniel R Pranjal, who heads Strategy India, an MLM consultancy firm in India.
“There is no regulatory body for direct selling (MLM) in our country as of now, and so we have been coordinating with relevant authorities in the government to unearth scams operating under the guise of MLM. We have a list of such companies operating all over India that is updated on a weekly basis and were surprised to learn that 10-20 new ones were being added every month,” he adds.
The modus operandi of such companies is the same each time. The initial set of investors are paid the high returns they were assured. Word gets around, and more investors hop on to the bandwagon. Money received from new investors is used to pay the earlier set of investors. Once the promoters of the firm have collected enough money, or observe that fresh inflows are insufficient to meet prior commitments, they decamp.
All these investment plans need a technology vendor who can provide the software to manage the database of investors, deposits, calculations and payouts. Usually, this software is designed by a handful of firms which are fully aware that the business model is a scam.
“Investors should not invest in high-return, short-period schemes launched by people whose integrity is in doubt,” says Mr Saxena. But it’s not yet clear whether he and his team in the EOW will be able to salvage the funds that these companies have walked away with. For investors, who are paying the price for ignorance, it could be a long wait.