Why Ponzi schemes never go out of fashion

fraudulent investment

Direct any person who has made a profit or averted loss by indulging in any transaction or activity related to the contradiction of the act, to give out an amount for the wrongful gain made in the same. Section 73 and76 of the Companies Act, 2013 concern deposits and are read with the Companies Rules, 2014. The provision further stipulates that the misrepresenting individual is liable for detainment for a period between 6 months and 10 years in addition to a fine. If the fraud relates to public interest, the minimum imprisonment is 3 years. To print this article, all you need is to be registered or login on Mondaq.com.


At learning Perspectives, We see the world differently and we want you to take a deep dive into this world to understand various management concepts in a different than usual manner. Ranging from 1 year to 10 years and fines ranging from 2 lakh to 50 crore rupees to act as a deterrent. Plans that will help you to achieve your life goals across multiple time frames.

The firm has been accused of being a pyramid scheme, and it will definitely needed to restructure its business to appease regulators. But that hasn’t stopped it from being profitable – it’s the third-largest direct promoting firm on the planet. Multilevel advertising companies, or MLMs, are a widely known business model in the United States. Leaders at these corporations tout massive advantages like excessive incomes, part-time hours, and general life improvement from participating in their direct sales downlines.

Ponzi Schemes in India –The Legal and Regulatory Landscape

And the Regulations require Chinese or international corporations (“FIEs”) who intend to have interaction into direct sale enterprise in mainland China to apply for and procure direct selling license from the Ministry of Commerce (“MOFCOM”). In 2016, there are 73 companies, including domestic and overseas companies, which have obtained the direct promoting license. Some multi-stage advertising sellers have circumvented this ban by establishing addresses and financial institution accounts in Hong Kong, the place the apply is legal, whereas selling and recruiting on the mainland.

  • But a rich man will not buy it except under extraordinary circumstances.
  • But then, virtual collapse of crypto currencies also means small investors globally would be at the receiving end.
  • In this piece, we will look at some characteristics of these schemes and why they continue to remain popular, which also hints at what to watch out for while investing one’s hard-earned money.

Currently, investigations are on in Karnataka and Uttar Pradesh into what has come to be known as the IMA Jewels scam, which duped around 40,000 people of about Rs 2000 crore in the guise of making them ‘partners’. In Bengal, the Saradha chit fund scam continues to make its reverberations felt, while investigations into a clutch of too-good-to-be-true schemes in other parts of India still continue. In October, Rajasthan became the first state to implement the Central Government’s Banning of Unregulated Deposit Schemes Act, 2019. The move comes amidst reports that Ponzi schemes active in the state have fraudulently collected some Rs 26,000 crore from depositors. When it comes the BUDS Act and Rules, Section 10 remains shrouded in mystery; whether the specific mentioning of certain companies exempts all other regulated deposit takers from communicating to the authority their business?

The investors in Salai Holdings are hoping against hope of getting back their money. More recently there are schemes like Sarva Public Ltd., Osmose Technology Pvt. It is a well known fact that in order to get better valuations on the street, companies tend to inflate their profits. In simple words, either by showing higher than actual sales, essentially inflating the topline. Second, don’t show expenses by using creative accounting methods and not booking certain expenses and show higher than actual profit.

Differences between Direct Selling and Ponzi Pyramid Schemes

The main victims of Ponzi schemes are typically individual investors, who may have been convinced to invest their money by the promise of high returns or by the trust they have in the person or group running the scheme. The victims can be from all walks of life, but they are often unsophisticated investors who may not have a good understanding of financial markets and investments. Multi-degree advertising, a authorized form of direct promoting, shares some similarities with pyramid schemes. But with a legit multi-stage advertising firm, there’s a possibility to make money selling products individuals wish to actual clients. In 1920s USA, an Italian immigrant named Charles Ponzi ran a fraudulent scheme that promised a 50 per cent return on investment within a few months. While the scheme lured investors with the claim that investments were in international mail coupons, it was actually a fund embezzlement cycle wherein monies were rotated from new investors to pay “returns” to older investors.

This was the classic pattern seen in the Saradha case in West Bengal, in which politicians of the ruling party have been accused. Here is where local money lenders stepped up with their exorbitant interest rates. In an otherwise bleak financial rural environment, companies began to offer Ponzi schemes promising high returns, easy processing and borrowing facilities to their investors. These came to be known as chit funds and soon flourished.3 These Non-Banking Financial Companies are based on trust and coordination; they may be carried out by organised financial institutions or through unorganised schemes. A Ponzi scheme is an illegal investment scheme that pays existing investors a portion of funds collected from new investors. The Ponzi scheme is named after Charles Ponzi, who committed one of the most famous frauds in New England back in 1920.

We have a very well designed 6 stage wise courses on securities market which covers from Equity, Derivatives, Commodity, Currency, Mutual Funds and Technical Analysis. States like Tamil Nadu and West Bengal, where Ponzi schemes have been popular in the recent past, are reasonably well penetrated when it comes to banks. Further, it’s not the poor but the middle class that end up getting stuck in these schemes. Over the years, many Ponzi schemes have successfully used brand ambassadors for brand building.

Chit funds are legal if registered under theChit Funds Act, 1982. Here, one enters into an agreement with a few others, accepting a certain sum of money for a specified period. On regular collection, certain members received the majority chunk of the collection.

According to a report that studied the enterprise fashions of 350 MLMs, published on the Federal Trade Commission’s web site, at least 99% of people that be a part of MLM corporations lose money. Nonetheless, MLMs function as a result of downline members are inspired to carry onto the idea that they will obtain massive returns, whereas the statistical improbability of this is de-emphasised. MLMs have been made illegal or in any other case strictly regulated in some jurisdictions as merely variations of the normal pyramid scheme, together with in mainland China.

India is no stranger to Ponzi schemes, numbers of which have surged in the recent times. While central legislations and regulations are in force to regulate and/or ban certain deposit collecting activities, several unscrupulous schemes continue to operate outside the purview of any regulatory body. The presence of several sector-specific regulators has resulted in contemporaneous jurisdiction of many regulatory bodies and as a paradox, several gaps in their operation.

“Network marketing” and “multi-level marketing” have been described by author Dominique Xardel as being synonymous, with it being a kind of direct selling. Some sources emphasize that multi-level advertising is merely one type of direct selling, somewhat than being direct selling. Other terms which are sometimes used to describe multi-level advertising include “word-of-mouth marketing”, “interactive distribution”, and “relationship marketing”. Critics have argued that the use of these and different different phrases and “buzzwords” is an effort to tell apart multi-degree advertising from unlawful Ponzi schemes, chain letters, and consumer fraud scams. Such unanimity in action is of paramount importance in severe cases involving multi-State scams as India has seen over the last two decades.

Tweet Buster: Tanmay Bhat’s bet on momentum stocks and bitcoin vs ponzi scheme

The most famous example of this is hometrade.com, a sophisticated Ponzi scheme of the early 2000s. The company used cricketer Sachin Tendulkar and actors like Shah Rukh Khan in endorsement campaigns. In India, these days, we are often hearing about various notorious purported businessmen and Companies who are making money out of such ‘Ponzi Schemes’ and who suddenly disappear once ample benefits are reaped out of such frauds. The second kind of offence is punishable by imprisonment for three to 10 years, and fines ranging from Rs 2 lakh to double the amount collected from depositors. Repeat offenders may be punished by a five- to 10-year stint in prison, and fined between Rs 10 lakh and Rs 5 crore. The Act empowers the states to formulate their own rule and regulations to implement the law.

Furthermore, banks have their equity in addition to the debt they take from the depositors. Ponzi schemes are investment scams in which investors are assured of exceptionally high profits at little to no risk. Companies indulging in Ponzi schemes put all their efforts in attracting new investors to make investments, who will not realise that they are falling prey. ​Leaving India’s largest mutual fund houses disappointed, the Finance Ministry intends to remove the long-term tax benefit that debt fund investors enjoyed after three years of investment. The proposed rules, once cleared, will come into effect from next month at the beginning of FY24 and bring debt funds at par with bank FDs.

Pyramid schemes are usually either done in chit funds or for selling products. Amway, Sharadha Group Chit fund scam, Speak Asia, and City Limousines scam are a few examples of pyramid schemes. In all the cases, the money collected from new investors or distributors is used to pay off old investors.

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Make sure your adviser is legit, ask friends and relatives for recommendations, dig deep, be sceptical of pitches for exotic or obscure products and be vigilant. Those hopeful of high returns in the short run tend to lose the most. With a total of 40 FIRs registered by victims and Punjab, a large number of people from other states may have also lost their hard-earned savings in the GainBitcoin scam. Nifty in a correction mode and how much time it will stay in that mode, it is anyone’s guess.

They came out with an app called PikFlick, a reward for using it is Rs.20/- per day with a downline option. There are attractive rewards like Dream House, World tour, Mercedes Car, etc. Lets look at how one can achieve Mercedes Car, which is after referral of 1,00,000 people within 4 months time. The sheer number of downline you need to generate and the limited timeline makes it almost an impossibility and in favour of the operators.

Income Tax Filing

D. Ponzi schemes can also impact the communities in which they operate, as they often target specific groups of people, such as retirees, people nearing retirement, or people with lower income levels. Ponzi schemes can also lead to the erosion of trust in the government and its regulatory bodies, as they may not have been able to prevent the scheme or recover the lost money of the investors. Bernie MadoffIn 2008, Madoff’s scheme collapsed when the market downturn made it difficult for him to attract new investors and pay returns to existing ones. Madoff was arrested and charged with securities fraud, and in 2009, he pleaded guilty to 11 federal felonies and admitted to operating the largest Ponzi scheme in history.

Please read all scheme related documents carefully before investing. A pyramid scheme is a business model where the top-level members recruit a few members, and these members recruit more investors. When the new member is recruited, a certain up-front fee is collected. And as and when the fee is collected, a portion of it is given to the top-level members. If you don’t know what to do with your money, the ponzi scheme operators or the scammers are stretching out their hands to hand over your money to them. It would be quite logical to think that in times of crisis like this, during the covid19 lockdown, since you are not able to work, it sounds quite reasonable to let your money work hard for you.

Till date, the Government has no specific act or mechanism to curb and control such schemes. Any person if proved to be guilty for such an act shall be punishable for cheating, fraud, etc. under the Indian Penal Code. However, in light of the increasing number of cases of such Ponzi Schemes, the Government of India has now deemed it necessary to take requisite steps to take actions against such notorious entities. Humanity Salt Lake the NGO filed a PIL against the in-actions taken by the regulatory body, SEBI.

The SEBI Act confers broad adjudicatory powers upon the SEBI to issue summons, and make such orders for penalty as are in the best interest of investors. The Securities and Exchange Board of India has so far initiated as many as 567 cases against illegal investment schemes collecting public money.5 These Collective Investment Schemes are defined under Section 11AA of the SEBI Act, 1992. They have been regulated by the Act and the SEBI Regulations, 1999. The primary focus under the Companies Act, 2013 is from the perspective of corporate frauds.

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Industry critic Robert L. FitzPatrick has referred to as ponzi scheme meaning-stage advertising “the Main Street bubble” that can finally burst. The primary gross sales pitch of MLM firms to their members and potential individuals isn’t the MLM firm’s services or products. The merchandise/companies are largely peripheral to the MLM model. The memoir illustrates the multi-degree advertising sales precept often known as “promoting the dream”. MLM firms have been looking for methods round China’s prohibitions, or have been growing different strategies, corresponding to direct sales, to take their products to China by way of retail operations.

ponzi schemes

Madoff’s scheme, which ran for decades, promised consistent, above-market returns to investors, regardless of market conditions. He used the money from new investors to pay returns to existing investors and also used it for his personal benefit. A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for early investors by acquiring new investors.

Where they are different is that in a Ponzi scheme, investors believe that they are earning interests from lucrative investments done on their behalf by founders of the scheme. Whereas, in a pyramid scheme, participants are expected to rope in new participants to ‘expand’ or continue the business. In which case the participant essentially becomes a part of the scheme to further their own interests. Typically, extraordinary returns are promised on the original investment. The fraudster will vanish with investors’ money, so the system eventually collapses with later investors receiving nothing – including their initial investment.