Beware of Ponzi schemes: Kirit to officials

Public representatives, ministers and officials should stay away from companies that collect money/deposits without authorisation, as thousands of unsuspecting investors have lost their savings, according to Kirit Somaiya, Member, Parliament Committees on Public Accounts and Finance.

Besides, the Bharatiya Janata Party Member of Parliament (MP) feels there is a need for a strong time-bound action plan by authorities against the 162 fraudulent or Ponzi schemes and chit fund companies identified by the Securities and Exchange Board of India (SEBI).

Intervention sought These companies are believed to have floated schemes that duped investors of thousands of crores of their hard earned money with the promise of high returns.

The Lok Sabha MP from North-East Mumbai has flagged the issue of unauthorised acceptance of deposits with authorities, including the Ministry of Company Affairs, Finance Ministry, Reserve Bank of India, Serious Fraud Investigation Office and Mumbai Police, and has sought their intervention.

The capital market regulator is understood to have circulated the names of the 162 identified companies to the authorities about seven months ago.

Spreading awareness Somaiya said, “It is understood that these companies with illegal and diversified businesses, are floating various projects, including media and newspaper platforms, wherein prominent personalities are invited and this misleads the common man as well as small investors.”

Hence, there is a need to develop a mechanism so that the general public/small investors may be informed about these fraudulent companies. The MP added, “It seems that action is yet to be taken by the concerned ministries and departments.”

In 2013, the RBI had issued an advisory to members of the public, urging them to carefully evaluate their investment decisions, including making deposits with non-banking finance companies.

According to the central bank, investors must generally be circumspect if the interest rates or rates of return on investments offered are higher than those offered by others in the market place. Unless the entity accepting funds is able to earn more than what it promises, the entity will not be able to repay the investor as promised.

For earning higher returns, the entity will have to take higher risks on the investments that it makes. A higher risk could generally mean undertaking speculative activities and on such activities, there can be no assured returns.

“As such, members of the public should forewarn themselves that the likelihood of losing money in such schemes, which offer high rates of interest, is much more.

“Nevertheless, if they want to invest in schemes that promise high rates of return, investors must ensure that the entity offering such returns is registered with one of the financial sector regulators and is authorised to accept funds, whether in the form of deposits or otherwise,” the advisory said. The Centre has constituted an Inter-Ministerial Group to formulate guidelines for effective regulation of schemes under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

Amendments proposed Amendments that are being considered to the Act include giving power to the Central Government to notify a Specialised Central Agency for the investigation of multi-level marketing/Ponzi schemes.

Further, an offence under the Act could be made a Predicate Offence under the Prevention of Money Laundering Act, as these frauds often involve money laundering of the proceeds within, as well as outside the country.

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