Sucheta Dalal :Ponzi schemes: Free for all
Sucheta Dalal

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Ponzi schemes: Free for all  

January 24, 2012

Perplexing lack of regulatory effort

Sucheta Dalal

The biggest sources of misleading advertisements are ponzi and multi-level marketing (MLM) schemes. Many of these schemes have a product which acts more like a cover for their mathematically unviable binary selling. Moneylife readers know how MLM schemes ensnare lakhs of people by promising extraordinary returns. We learn from the ministry of consumer affairs that the government is now waking up to the need for better regulation of MLMs and ponzis. At the same time, the powerful Direct Selling Association of the US is lobbying hard for an amendment to the grossly inadequate Prize Chits and Money Circulation Schemes (Banning) Act, 1978 so that international MLMs slip out of its purview. However, the fact that two states—Rajasthan and Meghalaya—have been forced to work on their own laws to curb the loot by ponzis is worrying the government. After all, crippling losses to a large swathe of people who borrow from moneylenders to invest in ponzis leads to a politically explosive situation.

Then there is selling through misrepresentation. One example is the Sahara group’s August 2011 claim that it would repay liabilities of Rs73,000 crore, four months ahead of the RBI-mandated deadline of December 2011 at which time it would have ‘no liability of a single paisa’. The ad did not a carry the company’s corporate logo or name the authorised signatory but drew no censure from RBI.

In December 2011, Sahara issued another advertisement extending the pre-payment deadline to March 2012 making no mention of how much money was paid out, if any. Meanwhile, SEBI is involved in a bruising litigation with two Sahara entities over raising several thousand crores of rupees through optionally convertible debentures issued without approval of or reference to the regulator.

Astonishingly, the biggest legal brains in the country are arguing the contention that companies must be free to raise stupendous sums of money without requiring regulatory approval, if they structure their products suitably. RBI, which ought to have joined SEBI’s battle, watches silently. The reason? Maybe there is something to SEBI director, KM Abraham’s allegation (in a letter to the prime minister) that the finance ministry was interested in scuttling action against Sahara and a few others. While SEBI is certainly fighting on, RBI’s silence is perplexing.

-- Sucheta Dalal