Beware of unregulated schemes

These schemes are unsecured, illegal and not recognised by the government
This is actually what a Ponzi trap is, and such schemes are known as Ponzi schemes.
This is actually what a Ponzi trap is, and such schemes are known as Ponzi schemes.Special arrangement

Is somebody promising you extraordinary returns on your investment in a scheme which falls outside the ambit of the formal financial system? If it is so, then beware! It could be a trap of duping you of your hard earned money through some unregulated deposit and investment schemes.

It has been a common practice from ages where fraudulent individuals and companies have been duping gullible investors through fake deposit/investment schemes.

They have been collecting money from investors and later pay them (old investors) the money back which is collected from new investors. Once any of the investors stops paying the money, the chain breaks and the old investors are not paid their dues. This is actually what a Ponzi trap is, and such schemes are known as Ponzi schemes.

Millions of gullible investors/depositors have been robbed of their hard earned money through Ponzi and other unregulated schemes. A financial fraud committed by the Saradha Group is a constant reminder of the financial losses caused by the Ponzi scheme.

The scheme collapsed in April 2013. The Group was a consortium of over 200 private companies that was believed to be running a wide variety of collective investment schemes popularly referred to as the Chit Fund scheme. The scam caused an estimated loss of Rs.200–300 billion to the small investors mostly based in West Bengal.

It is worth mentioning that the worst victims of these unregulated schemes have been the poor and the financially not-so-fully-aware-population. Here is a word of caution to investors.

Is somebody promising you extraordinary returns on your investment in a scheme which falls outside the ambit of the formal financial system? If it is so, then beware! It could be a trap of duping you of your hard earned money through some unregulated deposit schemes.

What is the modus operandi of fraudsters while launching dubious or unregulated schemes?

The promoters of such schemes float companies with attractive names. They start in a particular area and then on attaining saturation of member enrollments, keep shifting over to new areas. While promoting the dubious schemes, they get film stars, politicians, sports persons, etc. at grand functions to impress the public.

They engage persuasive direct marketing agents, print attractive brochures, release eye-catching advertisements and hoardings. They even offer gifts to the investors, besides honouring their members with a tag like “Silver member”, “Gold member” etc. Their slogan of promising to make their investors rich overnight has been a huge attraction to entrap the gullible public.

What kind of schemes do they offer to the public?

The most common schemes they tailor to attract depositors and investors are: Money Circulation Scheme (MCS), Multilevel Marketing Schemes (MLM), Network Marketing Schemes (NWM) and even schemes in the name of Self Employment Yojana (SEY).

By investing in such schemes, one gets back some or full initial investment and then keeps earning by enrolling new members. The second set of enrollers keeps multiplying and they too gain financially, which attracts the onlookers.

Once a strong chain of investors is formed, providing profits to everyone in the existing chain, ultimately breaks down at some stage and results in big financial losses to most of the investors.

Mostly, the promoters of the schemes cleverly blame the investors for their failure to get new investors in the scheme and this way they save their skin. Many companies have now disguised themselves into the activity of marketing goods, services, drugs and healthcare products.

There are finance companies which take deposits from the public, promising them unusually high returns. In the given interest rate scenario, such high returns are unsustainable.

Technically speaking, ongoing repayments of interest and deposit amounts depend on the continuous and uninterrupted flow of fresh deposits. At some stage, when the fresh flow of deposits gets stilled, the payments to the investors stop, leaving them in financial stress.

It is worth mentioning that many plantation companies are in the market offering to multiply money by investment into plantation. Most of these companies are not registered with any regulator. When we look at the past performance of such unregulated plantation companies, we find most of them have fled with the investors’ monies.

Why do people fall in the lap of these kinds of unregulated deposit schemes?

Basically the greed to make easy money is so intense it sometimes overpowers their financial wisdom of investors. There are innumerable instances of retail investors who fell prey to Ponzi traps.

I am privy to the plight of a local investor who had invested half a lakh rupees in a private financial scheme offering amazing returns every month. An attractive ad campaign about the scheme on most of the television channels had motivated him to invest in the scheme.

After some months of investment, he started receiving returns on investment (ROI) to the tune of Rs.5,000 and more every month.  He had every reason to be content as he was receiving the ROI every month without doing anything.

This lured him to reinvest the returns he got from his initial investment in the scheme and over a period of time raised his total investment to over Rs.3 lakhs.  During the course of time he had got some 100 more people on board through this scheme. But soon a ‘disaster’ struck him.

Inflow of returns abruptly stopped. Among the chain of investors he had created over a period of time, some had left the scheme midway. So, other investors who had put their money in the scheme couldn’t recover their capital investment and not to speak of return on investment. Ultimately, the investor suffered a net loss of almost Rs.2 lakh.

This was basically a Ponzi scheme. As already stated above, in this type of scheme, investors are paid from money collected from new investors instead of the scheme’s earnings.

The scheme runs as long as new investors keep investing in the scheme. This scheme actually yields the promised returns to earlier investors, as long as there are more new investors. But collapse when the new investments stop.

What is the note of caution for the general public?

There are no free lunches. There is some catch when someone offers to make money for you in an easy and quick way. Any schemes which promises magically high returns should be suspected as a trap to dupe you of your hard earned money.

These schemes are unsecured, which means return of your investment is not guaranteed, illegal and not recognized by the government. You cannot eve seek support from the government or any regulatory authority if you lose your money in an unregulated deposit or investment scheme.

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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