We cannot all blame it on investors and of course, I think the large part of the solution is in educating investors but it is it is not the whole thing. You also need very heavy action against the fraudsters so that it becomes an example for future scamsters that this is what happens. It is not just the cost of doing business but you go straight to jail.
It is usually quite a difficult scam to crack simply because the funds have actually gone to innocent people. In terms of just the size, the scale is what is astounding I would say, I think most of the Ponzi schemes are quite small, they are localised but at that 15000 or 16,000 crores this is really quite a spectacular scam for a for a single individual or a small team of people," says Sandeep Parekh, Finsec Law Advisors.
It's like the real life Bunty Babli scam, if I can call it, what has been the modus operandi, it is called the Bike Bot Scam?
Yes. So essentially, I guess it was a classic Ponzi scheme, which in the name of selling the electric bike this lady has raised money and essentially was paying some interest. And that interest was actually on the principle of later investors. So it is a classic Ponzi scheme and it is a very, very old trick, really. It is hundreds of years old, started probably in the South Sea Bubble in the UK several hundred years back and continues to kind of attract lots of scamsters.
We have had so many in the past 20 years and this just has a different label attached to it, which is for two wheeler motorcycles to be used for taxis. The scam is usually very straightforward. You kind of say there is some business behind raising of capital and you offer a return. And ultimately, as I said, it is it is a good Ponzi scheme. The principle of the later investor goes towards the interest payments for the former investor and therefore, by the time you crack it most of the money has actually gone to other investors even if you can trace first his or her income. So it is usually quite a difficult scam to crack simply because the funds have actually gone to innocent people. In terms of just the size, the scale is what is astounding I would say, I think most of the Ponzi schemes are quite small, they are localised but at that 15000 or 16,000 crores this is really quite a spectacular scam for a for a single individual or a small team of people.
So, as you just said that it is a Ponzi scheme and it is quite difficult scheme to crack but in spite of that, we will have to give away to this scamster who has duped lakhs of investors and almost 15,000 crore rupees that we are talking about. But it is not anything innovative or any new kind of a scam that we are talking about. This actually signals or hints towards the lack of awareness and lack of financial literacy in the country that needs to be done. Now, even though we know that the investors have filed a complaint and this is going on since 2019, I believe and what are the chances of these investors getting back their money? Is there any hope for them?
Usually the chances are quite slim because, as I said, bulk of the money in a Ponzi scheme goes to prior investors. So even assuming that the scamster still has all the money, which she has kind of made out of this it will usually be a small percentage of what is owed to the later investors. So, record in a Ponzi scheme is very poor because the regulator wants to go after innocent investors. I mean, main thing like you rightly said, is investor education and I think investors should look at outsized returns which are being offered, fantastic schemes which are being offered, they should look at whether the person offering is registered with any regulators. I think these are kind of a couple of simple things.
So we cannot all blame it on investors and of course, I think the large part of the solution is in educating investors but it is it is not the whole thing. You also need very heavy action against the fraudsters so that it becomes an example for future scamsters that this is what happens. It is not just the cost of doing business but you go straight to jail.
What is the lapse over here? Why are we still seeing these kind of Ponzi scams active after coming up with such stringent rules and laws? We can still witness these happening and these are the ones that have been reported. I am sure there are many which go unreported, and people are not even aware that they have been a victim of such scam.
Absolutely. I think your second point is extremely important because usually these are localised, they run into a few lakhs, cumulatively at the most a few crores. So, they are all below the radar and people are embarrassed to be honest. So, if somebody has stolen your Rs 50,000 through a scam because you wanted 25% return per annum, you probably would not report it to the police. You are not going to report it to anybody. You will just kind of take it on the chin and move on. Secondly, litigation in India is very painful and coming to your first comment really, the way the laws is there is a transmission lawsuit between way the laws are written, how they are enforced and ultimately how long it takes for the enforcement.
So, this transmission means that the justice is very-very delayed and therefore it becomes a bit of a difficult task for somebody who has lost a few lakh or a few thousand rupees to really challenge it, whether criminally or through civil court and therefore, the scamsters end up seeing it as a cost of doing business and ultimately, they do not go to jail, they do not pay the missing and at the worst they do, they pay back what little money they have and they keep fighting for decades at length, both in civil and criminal proceedings.
What all people need to understand and maybe just before falling prey to these kind of schemes or becoming a victim, what could be the red flags that one can notice and observe and then take step accordingly?
The biggest red flag for anybody has to be outsized returns. If your bank is giving you 5%, 6%, equities are returning 10%, there is no way any credible person will give you 20%. So, I think the greed kind of attracts these kind of victims very easily and then the first payment is kind of reaffirmation psychologically in the investor mind that I have got the money in my hand, I have got these Rs 2 back from the hundred I have given and that is what all of these rely on that kind of reassurance that is given with the first payment and Ponzi schemes work only.
They kind of keep going and growing geometrically. I think the first catch is really kind of to eliminate greed, which is if something is too good to be true, it is. Second is, I think, just look for regulated people. Are the people who are selling you stuff, are they regulated by anybody because almost all financial products today fall within the regulatory ambit of one or another regulatory.
Most states have regulation against raising any kind of capital, including all the local schemes that you have, chit funds, etc. The third is, I think, really just using common sense that if there is some business behind it and if it is such a large business, in this example, somebody has raised 15,000 crores, that is kind of almost like a multi-unicorn business that has been claimed to exist, so that can easily be verified. In all cases, of course, it can be verified if it a small chit fund in Nagpur I do not think Indore residents can figure out, but once it gets this large, it is difficult to say that the investors did nothing at all and could do nothing at all.
So I think a lot of this has also happened in the last two years, where people have seen other investors make lots of money from equity markets, from crypto, that neighbours making a lot of money. So, I think a lot of people are going to learn the hard way that there is no concept of free money. You can make some investments and make some reasonable return, but free money does not really exist.
