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Ponzi schemes stump investors; at least Rs 40,000 cr in limbo

New Delhi, Dec 23, 2013 (PTI)
Police officials checking documents of the investors of Saradha Group chit fund company in the second phase of compensation from the state government in Balurghat in South Dinajpur district,on Thursday. PTI Photo

From illegal money pooling to siphoning off funds, a multitude of frauds together worth at least Rs 40,000 crore have come to light in 2013, even as government agencies and rejuvenated legislations promise to curb this spiralling menace.

With enticing promises of unrealistic returns, a large majority of these frauds revolve around unauthorised money raising activities or ponzi schemes targeting general public.

Not just greed, corporate governance lapses and regulatory loopholes also provided scamsters leeway this year.

If it was Saradha scam in the first half of the year, the latter part of 2013 witnessed National Spot Exchange Ltd (NSEL) fiasco and a soothing solution for the cheated investors still seems far away.


Saradha scam, perpetrated in the garb of chit funds, began unravelling in April before political ripples forced the governments, both at the Centre and in West Bengal, to swing into action.

Though there are no official figures, estimates peg the total amount involved in Saradha scam at about Rs 30,000 crore.

Adding to the list, NSEL's Rs 5,600 crore payment crisis has not only dragged the exchange but also its promoter Financial Technologies and other group firms.

Many of the frauds targeting investors' hard-earned money have striking similarity to 'ponzi' schemes, while there are also cases of promoters and top management personnel allegedly siphoning off money from their respective companies for personal gains.

Ponzi schemes involve collection of money from public investors with promises of huge returns that are paid from deposits made by new investors. It owes its nomenclature to Italian businessman Charles Ponzi who had launched such schemes in the US in 1920s.

In recent past, similar techniques were used by American stock broker Bernard Madoff, who is now behind bars for running a ponzi scheme worth billions of dollars.

While the size of individual ponzi schemes that came to light in India this year is relatively smaller, there are many cases and their cumulative size could easily run into a few thousands of crores.

Some notable instances include Sebi action against Alchemist group entities, where the money involved in fraudulent activities was around Rs 1,500 crore. In a major development, Sebi has been granted greater powers this year to crackdown on illegal money-pooling schemes and other frauds.

To curb the growing menace of frauds, the government has ordered SFIO probes against 76 companies so far this fiscal -- the highest count in three years. While SFIO was asked to investigate 12 firms in 2011-12, the number of cases shot up to 46 in 2012-13 period.

Summing up, as many as 134 cases came under the lens of SFIO alone in the last three years. 

Amid seething public anger following Saradha scam, the Corporate Affairs Ministry ordered Serious Fraud Investigation Office (SFIO) to probe into 58 cases related to chit fund activities, including Saradha entities, and a final report is expected soon.

Besides, an inter-ministerial group was set up with the mandate to frame regulations for clamping down on ponzi schemes.

Not satisfied with efforts taken with respect to Saradha fiasco, political pitch is getting shriller for a CBI investigation into the matter.

Amidst the rising din over fraudulent investment activities, the government is making efforts to ensure genuine schemes are not caught in legal ambiguities, especially against the backdrop of Kerala police action against global direct selling entity Amway in May this year.

The latest in the list is an alleged fraud committed by multilevel marketing firm QNet, although any official agency is yet to substantiate the allegations.

Going by studies, corporate frauds happen due to various factors including inadequate internal control procedures, diversion of funds by promoters or top management and failure of auditors in detecting the misdoings. Among them, lack of strong corporate governance is a key issue.

Nevertheless, the silver lining is the government's declaration that there has been no instance of Satyam like fraud since it came to light in early 2009.

The Satyam Computer scam, perpetrated by its founder B Ramalinga Raju, involved about Rs 7,800 crore and is still considered as one of the worst frauds seen by corporate India.

Meanwhile, faced with rising corporate misdoings as well as mushrooming ponzi schemes, multiple ministries and agencies are strengthening their watch.

Corporate Affairs Ministry, the repository of information about companies operating in the country, is working on boosting its fraud detection system while the SFIO too is focusing on similar initiatives.

Further, efforts are on to enhance regulatory co-ordination among various authorities including Sebi, RBI and the Corporate Affairs Ministry.

The new companies law has strong measures to prevent as well as clamp down on corporate misdoings and protect the interest of investors. 

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