WHAT IS A PONZI SCHEME ?

PYRAMIDS SCHEMES

Bound to fail

VICTIMS LOSE RS 41 CRORES OVER PONZI SCHEME

Dated 25.02.2025 : Bengaluru-based newspaper Deccan Herald reported that more than 183 persons in Bengaluru lost Rs 41 crores , falling prey to a ponzi scheme .

The victims were allegedly duped by Falcon Invoice Discounting, which promised annual returns of 11-22% on short-term investments. The firm lured victims through an invoice discount investment, a process where companies sell their invoices at discounted rates for cash flow while investors get the money plus interest once the customer clears the invoices. . Investigations revealed the suspects had launched an app and a website, falsely using the names of reputable companies to attract investors. In reality, the vendor profiles were fabricated. The firm collected a total of Rs 1,700 crore from investors …

Read more at: https://www.deccanherald.com/india/karnataka/bengaluru/falcon-ponzi-scheme-over-180-bengalureans-lose-over-rs-41-crore-3420085

WHAT IS A PONZI SCHEME ?

A Ponzi scheme is a form of Fraud that lures investors with high returns and pays off the committed amount to earlier investors from the funds received from the later investors . The schemes make investors believe that the return is coming from the profit while returns are being handed over from the funds invested by the new investors .
The scheme is named after Charles Ponzi who perpetuated the scheme in U.S in 1920s . However such schemes were carried out much before . Such schemes have been used to defraud gullible investors in ingenious names and schemes in different parts of the world .
Pyramid schemes are also similar to Ponzi schemes where the returns to earlier customers come from money paid from later customers . But Pyramid schemes ask their earlier customers to bring new customers and bringing in new customers will be a pre-condition for paying out . Hence Pyramid schemes are easy to identify while Ponzi schemes are not so easily identifiable .

MODUS OPERANDI OF PONZI SCHEMES :

Basic purpose of a Ponzi scheme is to lure you to part with your funds as a safe and high yielding investments . But terminology and techniques used are different . The basic technique is :
1. Promise stable and high return on investment made by the clients .
2. Pay Dividends / Interests promptly to the initial investors and gain confidence .
3. Promote the scheme either through high blitz advertising or word of mouth through existing customers who are being paid regularly .
4. Honeymoon with existing customers will continue till new investors are pouring in .
5 Once the momentum of new investments reduce , liquidity problem to pay starts .
6. On a one fine morning , Promotors will vanish with whatever amount of funds left with them .
7. The entire cycle may take two to three years or longer

PONZI SCHEMES IN INDIA :

Ponzi schemes have come to India in many forms like Chit Funds , Real Estate Investments , Teak Investments , Gold investments , MLM ( Multi Level Marketing ) schemes and latest in the form of Limited Liability Partners for a Business Group . ​ Investors , who had invested in greed of very high returns , have lost heavily to the tunes of thousands of crores of rupees duped in many ways . ‘Some of the well known cases include Agri GOLD , Saradha Chits , Guru Teak and latest IMA .

HOW TO IDENTIFY A PONZI SCHEME ?

Some of the clues one may have about the scheme being a Ponzi scheme / Pyramid scheme
1. Promise of High consistent Returns with little or no risk .
2. Unregistered promoting companies trying to bypass the existent laws .
If a company is prohibited to take deposit from large number of investors , it will float hundreds of smaller associate companies . If a firm is prohibited from taking deposits , it will make potential investors as Limited Liability Partners . A Jeweler takes money as advance payment for future sale .
3. Nonviable complex business models .
Some times promoters make schemes involving overseas investment schemes or complex financial products , the business of which ordinary investors may not understand . However showing past performance , customers are lured .

4. PAST PERFORMANCE IS NO GUARANTEE FOR BRIGHT FUTURE : If an promoter promises 10% per month return , he can promptly pay for 10 months out of your own funds invested . In the mean time , he would lure to invest more or bring your relatives / friends as new customers . Lured by past performance of few months , you may oblige .
Note that professionally managed financial institutions / banks are finding it hard to manage , while they pay just less than 0.5 % per month . HENCE , CUSTOMER YOU BEWARE

INDIAN LAW REGARDING PONZI SCHEMES :

To curb the menace of unregulated deposit taking by unauthorized persons /companies , Government of India on 21.02.2019 promulgated an ordinance banning unregulated deposits under the name “THE BANNING OF UNREGULATED DEPOSIT SCHEMES ORDINANCE, 2019 ” The ordinance aims to control the menace of illicit deposit taking activities . The law bans illicit deposit taking activities and carries punitive actions against the defaulters . The salient features of the ordinance are :
1. It covers all types of deposits , taken by way of loan or advance except taken by banks ,approved financial institutions , political parties , SHGs , relatives , advance against sale of property ,or business loans or deposits covering genuine business transactions .
2. Regulated Deposits include schemes approved by RBI , SEBI , IRDA , central or state governments .
3. Any deposit takes who solicits or takes deposit in violation of the law or defaults in repayment is punishable under the law by way of imprisonment and fine as follows under sec 21 :
Sec. 21 (1) Any deposit taker who solicits deposits in contravention of section 3 shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to five years and with fine which shall not be less than two lakh rupees but which may extend to ten lakh rupees.
(2) Any deposit taker who accepts deposits in contravention of section 3 shall be punishable with imprisonment for a term which shall not be less than two years but Which may extend to seven years and with fine which shall not be less than three lakh rupees but which may extend to ten lakh rupees.
(3) Any deposit taker who accepts deposits in contravention of section 3 and fraudulently defaults in repayment of such deposits or in rendering any specified service, shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to ten years and with fine which shall not be less than five lakh rupees but which may extend to twice the amount of aggregate funds collected from the subscribers, members or participants in the Unregulated Deposit Scheme.
4. In case of claim , depositors will have priority over all other types of creditors .
Though the ordinance will be a welcome step against Ponzi scheme operators , it is felt that a borrowing from friend or an acquaintance would be a problem . Further jewel shops and other gold traders , who are running deposit schemes may also be affected .
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LOOPHOLES PONZI COMPANIES FIND IN THE LAW :

The above ordinance has certain categories of fund raising activity which are exempted from the law like :
1. Contribution by partners / limited liability partners
2. Advance payment on real estate . 3. Advance payment towards business deals .
THESE PROVISIONS , which are necessary for regular business conduct , MAY BE USED AS LOOPHOLES BY VENDORS AND HENCE BEWARE OF THE RISK BEFORE PARTING YOUR MONEY