Teak, emu, goat and land: Why Indian middle class falls victim to financial frauds

Ponzi schemes in India have a long history. Fraudsters always find a way to fool aspiring millionaires and get around the regulatory hurdles by constantly changing their look and modus-operandi. One of them is PACL, where about Rs 50,000 crore was duped from small investors. In many cases, by the time regulators take action, crores of funds invested by poor investors would have gone beyond trace. This too is not different. In mid-90s, it wasn’t unusual if one come across pamphlets appended to news papers promising to double their money by investing in Teak plantations. People, mostly middle-class salaried class or housewives hoping for quick returns, invested their life’s savings in such schemes and waited the teak saplings to grow to the skies turning them into millionaires in no time. When the saplings never come out of the soil and the companies who had amassed large chunks of investors’ money disappeared overnight, their dreams fell apart. [caption id=“attachment_2578450” align=“alignleft” width=“380”]  Reuters[/caption] Some sought help of police, some chose to end their lives. But such ponzi schemes, first identified as Collective Investment Schemes (CIS) by the government on 18 November, 1997 under the 1992, Sebi Act, reinvented their faces to defraud masses again and again. In 2012, a scam broke out in Erode and surrounding areas in Tamil Nadu, where investors were promised higher return for growing emu bird, one of the running birds from the Ostrich family. Such schemes offered investors grow their money multifold with a one-time investment of, say Rs 3,00,000. Hundreds of croes worth funds collected from households. These small investors, the companies promised, will be able to reap in profits of Rs 300,000 every years as long as emu lays eggs ie for a minimum 30 years, since the market value per emu egg is Rs 1,500-Rs 1,600. Here again, the emu farms flew to newer pastures with investor money, while the emu chicks couldn’t. They followed their ‘millionaire’ caretakers for food (they eat a lot) and care. All these while, both the banking sector regulator, Reserve Bank of India (RBI) and the markets regulator, Securities and exchange board of India (Sebi) didn’t have a clue on how to go about in effectively tackling the fraudsters. But the fraudsters still found out a way to dupe investors. In August, 2014, Sebi barred a company engaged in illegal livestock investment scheme — Step up Marketing Pvt Ltd, for defrauding customers promising higher returns through a goat rearing scheme. Two of its directors– Harjit Singh Dhariwal and Raghbir Kaur — too were barred from the securities market. The scheme involved company nurturing the livestock for an investor who puts in money and return the funds with high returns after a certain period. In the case of PACL, the company and its associates duped closer to 6 crore investors promising higher returns by investing in agriculture land. As per the estimates of market regulator Sebi, the company raised Rs 50,000 crore from investors and will have to repay about Rs 55,000 crore (including the promised returns) to the investors. The firm offered small agricultural plots to villagers using various group companies in total executing some 19,000 sale deeds. The funds were collected from the investors in the guise of cost of land, registration expenses, developmental charges and other incidental expenses. The Central Bureau of Investigation has arrested PACL Chairman-cum-Managing Director of Pearls Group Nirmal Singh Bhangoo and three other top officials in connection with the scam. The PACL scam, going by the amount involved, is much bigger than the Sahara episode, where the company and its promoters have been asked by the Supreme Court of India to refund about Rs 24,000 crore to investors. The Sahara-scam operated as a pure financial investment scheme, where investors were offered high returns against their investments. After a prolonged public battle between the Sahara leadership and the judiciary on the merits of the case, Ray was arrested on 28 February, 2014 in connection with the case. But this doesn’t still assure the investors, thousands of them, will get their money back. What really cause the common man fall into the trap of fraudsters again and again? “It’s pure greed at play,” said Jayanta Sinha, an independent banking consultant and a veteran banker who used to be with State Bank of India (SBI). “People would want to make quick money and often put their whole life-savings to such Ponzi-schemes in the hope of doubling it in no time. There are also issues of lack of financial literacy and the lack of ability from the part of regulators to effectively tackle such operators,” Sinha, who used to head the rural business of SBI for several years, said. Market regulator Sebi has intensified its fight against Ponzi schemes in the recent years. The Sebi has clamped down on over 60 companies in the first eleven months of 2015 for raising crores of rupees from investors. In comparison, 45 firms were penalised by the regulator in the entire 2014 for raising money through Collective Investment Schemes (CIS). Besides, PACL, this also includes companies like Raghav Capital, Emerging India, BNP India Developers & Infrastructure, Popular Agro, USK India, IHI developers, Samruddha Jeevan Foods, Yatra Art Fund, Wisdom Agrotech and JSR Diaries. Sebi has indeed more teeth to tackle CIS as the new Securities Laws Amendments Act, enables it to take action against illegal money-pooling activities involving Rs 100 crore or more. The Act also provides for setting up of a special court to expedite the cases filed by Sebi. With this, in 2015 itself, a special court started functioning in Mumbai and cases filed by Sebi are being heard on a daily basis. Lower savings rate another reason Even though the regulator has more teeth to tackle illegal schemes, this would not alone be sufficient to save common man since there are too many of them around operating illegally such as unregistered chit funds and people are often falling gullible to Ponzi-schemes on account of the lower returns offered on savings. There is no actual estimate of the informal finance market in India. According to a report in Mint, there are over 30,000 registered chit funds alone in India, which are regulated by state registrars under the 1982 Chit Funds Act, but many states do not have a mechanism to effectively regulate such firms. The fact is that too low returns on public savings schemes and bank deposits (say less than 8 percent) as compared with Ponzi schemes (where the returns are promised double or more the money in a few years), encourage public to embrace Ponzi-schemes despite knowing the risks. It is nearly impossible for the government to increase savings rate or banks deposit rates in a falling interest rate regime (because the borrowing costs too need to remain low). In this backdrop, it’s greed that has taken the central stage.