How Have The Ponzi Schemes/UDSs/CISs Duped the Investors in India 1 Preface Though the nature of duping the public by promising unrealistic returns on their investment has been practiced since ages, in independent India, especially in the last few decades, there have been several such scams related to Ponzi scheme/unregulated deposit scheme (UDS)/illegal Collective Investment scheme (CIS) which have duped millions of gullible persons and have fraudulently collected billions of Rupees from them. Although the basic premise of these scams have remained same: collect money promising very high returns, pay the initial investors out of proceeds collected from subsequent investors till the scam/schemes bust, etc., the modus operandi has been evolving over the years. The idea for writing a book like this came up in discussion between teams of IEPFA and IICA, when it was discussed and decided to bring to the attention of public various Ponzi schemes/UDSs/CISs which have taken place in India over the years. To spread the message of such defrauding financial scams far and wide this book is being kept as an open source resource. In preparation of this book, active assistance was provided in terms of carrying out research, writing of cases, etc. by the research associate Shubhasree Bhadra. We are also thankful to the teams at IICA and IEPFA for their valuable comments on the subject. It is hoped that analysis of the cases contained in this booklet would prove useful to not only the public in saving them from similar defrauding schemes but also those institutions and agencies which impart financial/investor education as well as those who carry out research in this area. Kamakhya Narain Singh IEPF Chair Professor at IICA IEPFA - http://www.iepf.gov.in/ IICA - https://iica.nic.in/ For administration of Investor Education and The Indian Institute of Corporate Affairs (IICA) Protection Fund, Government of India has was registered as a society on September 12, 2008 established Investor Education and Protection Fund under the Societies Registration Act, 1860. Authority under the provisions of section 125 of the Companies Act, 2013 on 7th September, 2016. IICA works under the aegis of the Ministry of Corporate Affairs to deliver opportunities for The Authority, working under the aegis of the research, education, and advocacy. It is also a think Ministry of Corporate Affairs, is entrusted with the tank that curates a repository of data and knowledge responsibility of administration of the Investor for policy makers, regulators as well as other Education Protection Fund (IEPF), making refunds stakeholders working in the domain of corporate of shares, unclaimed dividends, matured affairs. deposits/debentures etc. to investors and promoting awareness among investors. 2 Executive Summary India, being a nation with diverse set of people, has always had fraudsters duping the common man, enticing them for their greed. A series of Ponzi schemes have appeared in various media over the years. All of them have similar characteristic. They all have had legal wrangling with regulators, promise of quick and high return to attract innocent people, influence of local agents, and performance of good and timely return in initial period of operation, which eventually ends with inevitable episode of default, resulting in economic hardship and financial loss to millions of people. All the Ponzi schemes have record of paying back the existing investors out of investment of new investors. When they fail to attract more new investors, the chain breaks down and the scheme defaults in repayment to investors. In the last few years, scams which have hogged the limelight in regular print/audio/video media and new-age social media are Sahara, Saradha, Rose Valley, PACL, Bike Bot, GainBitcoin, Bitconnect, etc. These are some of the bigger ones. There have been many smaller ones, taking place in local community, which don’t raise nationwide alarm. A number of research paper have attempted to find the major reasons for popularity of the Ponzi schemes among people in India. One of the reasons that has come to the forefront is low financial inclusion and financial literacy in India. As per NSSO 59th round survey, 51.4% of farmer household are financially excluded from both formal and informal sources. It is also gathered from World Bank “Financial Access Survey” that the level of financial inclusion in India is quite low as compared to most developing countries in the World. Most of the Ponzi schemes appear to take advantage of the gap by providing easy investment procedure, high and easy return, with convenient facility of doorstep services. Reserve Bank of India, and other regulators have taken variety of initiatives to enhance financial inclusion of poor people like – more branches by Regional Rural Bank (RRB) in rural area to cover more villages, more bank outlets in villages, agency banking through Business Correspondents, expansion of ATM (automated teller machine) network, financial literacy initiatives, etc. The apex banking institution and banking sector financial regulator, RBI, has launched 3 Sachet (www.sachet.rbi.org.in) in 2016. Sachet is a website from where anyone can get information about companies that are allowed to take deposit from individuals. Also individual can lodge complaint or can share information about illegal operation by any unscrupulous entities. It is an initiative by State Level Coordination Committee (SLCC), a joint forum comprising all the states of India, to ease information sharing among regulators like, RBI, Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India and Enforcement Directorate to control incidents of unauthorised acceptance of deposits. In addition, it is also an initiative to save the public from becoming victim of Ponzi schemes. This research project is aimed at throwing some light on different models and features of varied Ponzi schemes that took place in India and also on paradigm shift in the approach of the schemes to attract people in the era of digitalization. Most of the background material covered for preparation of these caselets have been taken from media reports, where, many a times, different reports had different set of data related to number of investors duped by Ponzi scheme, the amount of money collected under the scheme, etc. It has been tried to reconcile the data to the extent possible. The Case-lets (15 in number), which have been covered here, are: Sanchaita scam Saradha scam Peerless scam Pearl Agro scam Sahara OFCD scam IMA scam Bike Bot scam Noida scam QNet scam Social Cause scam Anubhav Plantation scam Rose Valley scam Speak Asia scam GainBitcoin scam 4 Bitconnect scam Sanchaita scheme duped around two-lakh investors, majorly in West Bengal, by offering, as high as, forty-eight percent astonishing rate of return on their investment. It is said to have garnered more than INR 100 crore from depositors/investors. After a long battle, those investors who had applied for recovery of their investment, got back major part of their investment in 2013. Kolkata based, Saradha Group of companies, had more than 100 firms registered with Registrar of Companies and dealt in various businesses like, education, automobile, entertainment and real estate, along with chit-fund business. Saradha started its journey as a chit fund entity but by 2012, SEBI was able to classify the group’s activity as collective investment schemes rather than chit fund. The estimated collection made by the group was nearly INR 10,000 crore. Mostly the collection was done in West Bengal, Assam, Odisha and Tripura and it affected lakhs of gullible depositors. Another Kolkata based company, Peerless General Finance and Investment Co Ltd, registered as Residuary Non-Banking Company, was able to attract 12 million people with total deposits of over INR 300 crore in late 70’s. After a long drawn pursuit of justice of 15 years by investors, Peerless scam is approaching towards logical end as a result of proactive action by IEPFA. In the year 2019, the Investors Education and Protection Fund Authority (IEPF) has finally compelled the company to transfer deposits worth INR 1514 crore to Investment Education and Protection Fund (IEPF), which will be used for repayment to investors. One of the biggest chit-fund scams witnessed by the nation has been the PACL (Pearl Agro Corporation Limited) scam. PACL had illegally collected approximately INR 49,100 crore from about 5.5 Crore gullible investors in the name of selling them plots of land over a period of 18 years. It raised money from poor investors by illegally selling title of agricultural land. The refund of money of the investors has been initiated. About 570,706 eligible investors with claims upto Rs 5000 have already got refund. Claims of investors with investment of 5000-7000 is currently being processed. 5 Another name, Sahara India Pariwar scam is well known within India with dubious record of collection of deposits from gullible investors. Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) were under the scanner of SEBI, as they were raising money of thousands of crore from public through optionally fully convertible debentures (OFCD) without permission taken from SEBI. SIRECL and SHICL had raised money aggregating to Rs 19,400.87 crore and Rs 6,380.50 crore respectively from around 3.07 crore subscribers/investors. As per directions of the Supreme Court order, Sahara Group has deposited an amount of Rs 15,448.67 crore to 'SEBI-Sahara Refund' account as on 01.02.2020. The fund would be used for repaying to investors. IMA scam is very new compared to other cases mentioned here. IMA was accused in 2019 of fraudulently collecting nearly INR 4,000 crore of funds in Karnataka in the form of investments under various Ponzi schemes such as Monthly Plan, Education Plan, Marriage Plan, etc.