2 min read.Updated: 28 Jul 2019, 10:53 PM ISTVivek Kaul
The newly-passed bill talks about setting up of courts which would ensure equitable distribution of money among depositors after attaching and selling the property of scamsters
Ponzi schemes, such as the recent IMA Jewels scam in Bengaluru, have been a menace in the country for a while now. To tackle such schemes, the Lok Sabha passed the Banning of Unregulated Deposit Schemes Bill, 2019, last week. Mint looks into the details.
What is a Ponzi scheme?
Ponzi schemes are named after Charles Ponzi, an Italian-American who launched an investment scheme in Boston, US, in 1919, promising to double investors’ money—first in 90 days and then in 45 days. Ponzi, however, had no business model to double the money in such a short time. All he did was use money being brought in by the new investors to pay off the old investors, skimming a little every now and then to fuel his luxurious lifestyle. The scheme ran until the money being brought in by the new investors was more than the money being paid to the old investors. Once this equation reversed, the scheme collapsed.
Why are they rampant —and popular?
Over the years, India has had more than its fair share of Ponzi schemes. Rose Valley, Saradha, IMA, Stock Guru, and Speak Asia—besides many multi-level marketing schemes—are among the major scams in the recent past. A major reason for their popularity is that they offer a higher rate of return than conventional forms of investing such as post office schemes and fixed deposits. They appeal to basic human greed. Also, it is very convenient to invest in these schemes with agents providing door-to-door service. Sometimes, brand ambassadors associated with these schemes provide them legitimacy.
How much money have such schemes made over the years?
Data on Ponzi schemes is, at best, sketchy. However, it would be safe to say that they have robbed the people of the country of thousands of crores.
How does the new law plan to tackle these?
The newly-passed bill talks about setting up of courts which would ensure equitable distribution of money among depositors after attaching and selling the property of scamsters. It envisages the court completing the process in 180 days after it has been approached. The law also talks of creating an online database for information on deposit takers. It makes it compulsory for deposit takers to inform the database authority about their business. The law also mandates the appointment of an officer to deal with Ponzi schemes.
What else needs to be done?
The law basically aims to speed up the process of justice after a scamster is caught. While that is important, what is more important is to nip these schemes in the bud. For this, the Securities and Exchange Board of India and Reserve Bank of India, which has offices all over the country, need to be more vigilant than they are. They need to be aware of Ponzi schemes while they are getting popular and spreading, and act on them fast.
(Vivek Kaul is an economist and the author of the Easy Money trilogy)