West Bengal plans law against Ponzi schemes

West Bengal plans law against Ponzi schemes

Kolkata: West Bengal will introduce a new law to stem the mushrooming of Ponzi schemes in the state’s rural areas.

Under the law, be introduced in the assembly during the ongoing winter session, police would have the power to launch investigations, detain the operators of such schemes and seize their assets even without complaints from investors, according to a finance department official who did not want to be named.

“The Bill is going to be tabled in the assembly during the winter session," said Asim Dasgupta, West Bengal’s finance minister. “I can’t say more about the law until it has been tabled in the assembly."

Illegitimate investment schemes offering huge returns, which are paid out of money raised from new depositors, are called Ponzi or pyramid investment schemes.

Named after Charles Ponzi, who gained notoriety in the early 1920s for running illegitimate schemes and for duping investors in the US, such scams typically collapse when the operator fails to raise more money through fresh deposits than is due for repayment.

Such investment schemes are widespread in states such as West Bengal and Tamil Nadu.

“Depending on (their) renown, operators raise money by issuing simple receipts or exotic securities such as debentures and preference shares of companies that do not exist or are of no worth," he added.

“These schemes thrive when the economy booms," says Abhirup Sarkar, professor of economics at Kolkata’s Indian Statistical Institute. “When people have money, and don’t know where to invest, they invest in such schemes."

The key problem is people’s ignorance, according to Sarkar. “There’s of course greed too," he added.

In 2001, the police in West Bengal launched a statewide crackdown on Ponzi schemes after the main operator, who was based in Kolkata, defaulted on payments to depositors, having run such funds across West Bengal for several years. The schemes promised around 10% in monthly interest on deposits.

The police acted on complaints lodged by depositors who didn’t get their money back and arrested almost all the operators in the state, even those who hadn’t defaulted because the main player had named them as accomplices.

“Because we could act only after the main investment scheme had collapsed, we could recover very little money," recalls a police officer who played a key role in the investigation. “By the time we arrested the main man in the business, he had already transferred the money out of the state, perhaps out of the country," he added, speaking on condition of anonymity because he isn’t authorized to speak to the press.

Under the proposed law, action can be taken earlier.

“There’s a provision in the new law under which the state could seize even personal properties of the people who run investment schemes if it is sufficiently convinced that the intention is to cheat depositors," said the official cited earlier.

This provision would substantially increase the chances of recovering money from Ponzi scheme operators, said the police officer quoted earlier. “More importantly, it would give the police the power to stop such schemes from spreading without having to wait for at least one of them to collapse," he added.

The need for a stringent law to tackle Ponzi schemes was first felt during the 2001 crackdown, according to the finance department official. “But we took time to prepare the law because we had to consult the RBI (Reserve Bank of India) to make sure that we didn’t transgress our jurisdiction," he said. “We had to exercise caution because most finance companies are governed by the RBI."

Under the new law, those guilty of cheating depositors could be sentenced to life in prison, according to the finance department official.

“This came as advise from the president’s office. Accordingly we increased the maximum penalty under the new law," he said.

The law is being introduced now because Ponzi schemes are making a comeback after almost eight years and they are fast spreading in rural areas. “Other states such as Tamil Nadu, Maharashtra, Orissa, Bihar and Goa have already introduced stringent laws to tackle this menace," the official said.