The scam perpetrated by multi-level marketing (MLM) firm Stock Guru India is one more wake up call, for it exposes innumerable holes in our system of checks and balances.
Consider this: The Ulhas-Raksha couple used about five identities, managed to get documents such as PAN cards and driving licences in each name, opened 94 accounts in 20 different banks with 13 different names, bought 12 properties and also owned 12 luxury vehicles, according to media reports.
All these ideally should have gone through elaborate checks by so called regulators. Or are they only for the commoners?
At least, so it seems. Otherwise, how could Ulhas Prabhakar Khaire and Raksha J Urs manage to skirt all the rules and get multiple PAN cards, driving licences and passports?
Other numbers related to the scam are also mindboggling-only in Delhi about 14,000 complaints against the company and more than 2 lakh investors duped.
What is more surprising is the time it took for the authorities to track down the scamsters.
According to media reports, after receiving investor complaints it took more than one year for the authorities to arrest the couple, who reportedly were roaming around with bouncers in Dwarka.
Moreover, they had a highly sophisticated scheme-they conducted conferences, distributed brochures at five-star hotels and even had multiple agents across the country.
All these, under the nose of the highly alert watchdogs like Sebi and others. More surprisingly, there were suspicions raised about the company's functions and schemes.
A report published in MoneyLife magazine in December 2010 had raised important questions about the functioning of the dubious firm.
How can Stock Guru promise 120 percent return from investing in stocks "even as leading investors like Rakesh Jhunjhunwala found it very hard to earn even 20 percent return", it had asked.
According to the report, Stock Guru advised investors to buy shares at a low price and sell them at a higher price.
"Selecting the right share at the right price and entering the capital market at the right time is an art. We help all our clients to make huge profits by investing in good shares for very short/short/medium/long term depending upon the client's requirements. Trading/investment for minimum intraday to T+5 days may give you a handsome return of 5% to 25% on your capital investment," the report quoted the company as saying.
At least the Sebi should have smelled a rat then.
Lessons from the Guru
The company promised mouth-watering returns-Rs 22,000 on an investment of Rs 10,000 in one year.
It is clear people made a beeline for the company's schemes blindly. They did not even check the credentials of the claims Stock Guru made.
According to the MoneyLife report, while Stock Guru promised a demat account with Sharekhan, the brokerage denied any such deal with it.
It is to be presumed that no investor ever tried to check the veracity of this claim because of the lure of making a quick buck.
But then, this is not the first firm to cash in on investors' greed. There have been many such instances recently. Over the last few years, the country has witnessed mushrooming of such multi-level marketing companies in different sizes and shapes.
Why are such multi-level marketing companies thriving in India?
The simple answer is regulation of such firms is a a grey area in India.
Take the case of Stock Guru. The company was not registered with either RBI or Sebi, both key regulators that oversee the financial sector. That highlights a bigger malaise in the system.
According to the MoneyLife report there are many MLM companies that operate without even a trading licence from the Sebi and RBI.
Another issue that the scam brings into focus is lack of regulation of investment advisory firms in India.
Sebi had in 2007 come out with a draft regulation, which was revised twice later. In effect, the guidelines remain just that-the draft.
The regulator has not yet been able to arrive at a consensus to finalise the guidelines.
The sooner a guideline is put in place the better, because one thing is for sure-this is not the last scam.
Especially, since the government has expressed its intention to channelise household savings away from real estate and gold to stocks and other financial assets.
Towards this end, it is wooing investors from small towns and rural areas to financial investing.
The Stock Guru scam also has pointers to the dangers involved in such a plan, if executed without creating enough investor awareness.
For, a combination of financial illiteracy and greed can easily overpower the fear factor in investing-with dangerous consequences.
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