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Spotting Ponzi Schemes: Protect Your Hard-Earned Money From Scamsters!

Recently, Rahul Dravid, Saina Nehwal and Prakash Padukone were reported to be among the over 800 people who were duped of crores of rupees.

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Last week, news reports emerged of a Bengaluru-based company duping major sporting personalities like Rahul Dravid, Saina Nehwal and Prakash Padukone of crores of rupees.

Over the weekend, Dravid filed a police complaint, alleging that he had invested Rs 20 crore in Vikram Investments, but received Rs 16 crore in return, leaving him Rs 4 crore short of the principal amount invested. Based on news reports, one can gather that the company had promised a massive 40% return on investment to the victims of their alleged Ponzi scheme.

Even someone as self-aware, erudite and worldly-wise as Rahul Dravid has fallen prey to such Ponzi schemes. One can only imagine the fate of millions whose financial lives are at stake with innumerable such schemes flourishing across the country. These con artists exploit the investor’s lack of information/ignorance.

Former Indian cricketer Rahul Dravid. (Source: Facebook)
Former Indian cricketer Rahul Dravid. (Source: Facebook)

Therefore, it would seem prudent for them to comprehend some of the signs and precautions they can take to figure out Ponzi, pyramid and other such schemes.

These are the four signs to look out for before you invest your hard-earned money into some scheme.

1) The promise of higher returns

There is a reason why advertisements for mutual funds have a disclaimer, which reads: “Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing.” One can apply this logic to all manner of investments.

What Ponzi or pyramid scheme operators do is lure unsuspecting investors by offering them unusually high or above average returns without any of the associated risks.

When someone dangles a “risk-free investment”, you must avoid it, because is no such thing as a risk-free investment. The potential returns often blind investors to the pitfalls. In other words, avoid all manners of investment schemes with the promise of higher returns unless and until you have all the necessary information and understand the potential risks.

For representational purposes only. (Source: Facebook)
For representational purposes only. (Source: Facebook)

“If you think about it, if a company can promise investors 20% returns per annum, this means that they have to generate returns higher than 20% for them to turn a profit. And if this company can generate annual returns above 20% consistently, the owner of the company should already be one of the richest men on the Forbes list. For context, Warren Buffett’s annual return over the last 51 years (1965-2016) is 20.8%, and he’s arguably the world’s greatest investor,” says this column in The Fifth Person, a portal dedicated to financial literacy.

2) A vague and complex investment plan

Many magicians will tell you that misdirection lies at the heart of their tricks. Investment strategies laid down by Ponzi scheme operators are often laden with unnecessarily complicated jargon which investors may fund to comprehend.

Always consult with a trusted financial analyst, chartered accountant or investor not associated with the investment on offer to you. Always read the fine print (terms and conditions) and makes sure you understand every potential aspect of this investment.

Read also: Withdrawing PF Above ₹5 Lakhs? Here’s All You Need to Know the New Rules

3) Unviable business models

“The basic operation of a Ponzi scheme is commonly described as ‘robbing Peter to pay Paul.’

Early investors in the scheme are paid with the money invested by later investors, while in a typical pyramid scheme, each member is promised a reward for recruiting more members,” explains this Financial Express column.

However, these investment schemes come to a grinding halt when promoters either default on payment or just run away with the money. Also, one can spot a pyramid scheme on the horizon if the sales personnel are earning very attractive commissions.

Essentially, there is no actual business happening in these schemes that promise significant returns, although they may use some service or product as a front to lure investors.

Read also: Not Too Late to Save Tax: 5 Simple Things You Should Do Before March 31!

Speaking to The Economic Times, Ashish Kapur, the CEO of Invest Shoppe India Limited asks investors to “ensure that the company/organisation has a good track record, has been making profits and has no overdue deposits, except unclaimed, in its books.”

If you cannot find any authentic information about the company online, then it’s best to just avoid it altogether.

4) Check for registration credentials before investing

To the uninitiated, NBFCs are non-banking finance companies. Every NBFC has to be registered with the Reserve Bank of India. When the Saradha chit fund scam struck West Bengal, it was found that the Saradha Group was not registered with the RBI.

Also, look into the Ministry of Corporate Affairs database for any potential information about the company. If you can’t find these companies in any of these databases, you should immediately avoid it.

Thousands lost their life savings after the Saradha chit fund scame in West Bengal. (Source: Facebook)
Thousands lost their life savings after the Saradha chit fund scame in West Bengal. (Source: Facebook)

“It is also worth noting that the registration of an NBFC with the RBI merely authorises the company to carry on its financial business and is not a guarantee for repayment of deposits by the NBFC. Also, keep in mind that NBFCs are not allowed to use the name of the RBI in any manner,” adds Kapur. Those registered NBFCs, meanwhile, must obtain a minimum investment grade credit rating from a reliable credit rating agency.

Also, you must also ensure that the portfolio manager, financial advisor, analyst, mutual fund distributor or broker is registered with the Securities and Exchange Board of India (SEBI). It’s imperative to double check the credentials of the person soliciting financial advice.

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