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Govt crackdown on Ponzi schemes aimed at protecting the small depositor

Suraj Nangia
ponzi schemes, ponzi

The President of India recently promulgated the Banning of Unregulated Deposit Schemes Ordinance, 2019, with effect from February 21, 2019. Unregulated deposit schemes, such as pyramid and ponzi schemes, have been used to swindle depositors out of enormous sums of money.

Ponzi schemes

India, traditionally, did not have a unified regulatory regime to counter Ponzi or pyramid schemes whose operators typically grab deposits to meet their promise of guaranteed returns to savers. Such schemes optically swell but are destined to eventual collapse when they run out of new savers. The lack of sanctions meant that the kingpins behind such failed deposit schemes are rarely punished.
As per the website of the Ministry of Corporate Affairs, there are close to 11,000 registered chit funds in India. The projected number of unregistered chit funds would be multi-fold of the registered ones. The unskilled and semi-skilled workforce engaged in casual or contractual employment do not typically want to engage with the formal financial sector institutions to park their savings or borrow funds. Taking advantage of low literacy, unemployment and urge of people to earn easy money, many fraudulent deposit schemes and chit funds have been collecting huge sums of money and vanishing overnight. It is estimated that over `5 lakh crore has been lost so far in various such scams nationally.

Consumer protection legislation

Now, with this ordinance, any deposit taker promoting, operating, issuing any advertisement, soliciting participation or enrolment in, or accepting deposits (directly or indirectly) in pursuance of any deposit scheme that is not regulated would be subject to stringent penalties. However, the implementation channels are still to be laid. Notification of competent authorities, designated courts, central database, etc., needs to be done to ensure that this legislation is not a non-starter. People must be vigilant to the announcements to be made by the government in this regard. Till that happens, some short-term actions must be taken immediately. While it better for depositors to invest in regulated schemes such as Systematic Investment Plans (SIP) in mutual funds, banks or post offices, if they still want to pursue the deposit route, they must ensure that money is not put in any unregulated schemes, including chit funds and gold savings schemes.

Existing schemes

The fate of the existing unregulated schemes is still unclear and the depositor may have to wait for some time to hear some announcements from the government on this new legislation. It needs to be kept in mind that this law would regulate the deposit running entities going forward and the credibility of schemes should get higher in the longer run. Depositors must keep in mind that deposit takers such as Sahara, Rose Valley and Saradha would have to now go by the rule book. The statute adopts a prescriptive approach to describe regulated deposit schemes and provides a list of schemes/ arrangements that are considered regulated deposit schemes, by nine specified regulators, including RBI, Sebi, MCA, EPFO, NHB and state and Union territory governments. This includes chit funds with the sanction of the state government and regulated by Chit Fund Act, 1982 as well.

Get-rich-quick financial schemes propounded by the Ponzi scheme runners defy all conventional elements of an ethical financial product. Don t let these shady financial schemes burn a hole in your pocket.

The writer is partner, Nangia Advisors (Andersen Global). Inputs from Sandeep Jhunjhunwala, director, Nangia Advisors (Andersen Global)