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Ponzi Scheme – Precautions to take

A Ponzi scheme is an investment fraud that promises quick, easy, and significant returns on investments with little or no risk. Ponzi schemes are also known as pyramid schemes they pay existing investors out of the money invested by new investors. These schemes require a constant flow of new money in order for it to work. When it becomes hard to recruit new investors, or existing investors don’t pay, the scheme fails.

Ponzi schemes are named after Charles Ponzi, who organised a large fraud operation with a in the 1920s. His operations was uncovered and he went to jail.

Ponzi schemes are prevalent in India. People often fall prey to these scams, even someone as self-aware and wise as Rahul Dravid. Then we are forced to think about the fate of millions whose financial lives are at stake with thousands of such schemes. These scamsters exploit the investor’s lack of knowledge and showcases a very lucrative return.

Here our 6 precautions to take before deciding on an investment schemes:


1)  Higher returns with small or no risks

The first thing is to lure the investors by offering double or triple of the principal amount  with very little or not any risks. You know there is something faulty. If someone says it is a “risk-free investment” there is no such thing and that is a scam for sure.

2) Complicated investment plan

Investment strategies in a Ponzi scheme uses the same tricks as a magicians, he often hides the risks in the complicated jargons or the magical act/performance. In turn, making it hard for a common man to grapple. It is best to ask a trusted financial advisor before taking the plunge. Make sure to read the fine print and understand the terms and conditions.

3) No business model

The basic operation works when you pay the new investors with the earlier investor’s funds. The money has to constantly flow otherwise the scheme will collapse. These investment schemes come to a grinding halt when promoters either default on payment or run away with the money. There is no actual business taking place in these schemes that promise significant returns. Although the con-artists may use some service or product as a front to persuade investors.

4) Authentic credentials & registrations

Every Non-Banking Finance Companies (NBFC) has to be registered with the Reserve Bank of India. If it isn’t then you know that it is a scam.More than 100 companies in Assam, which are not registered with RBI as deposit taking companies, are involved in such schemes.

Also, look into the Ministry of Corporate Affairs database for any potential information about the company. If the company isn't mentioned you know hit has to be avoided.

Also, you must also ensure that the portfolio manager, financial advisor, analyst, mutual fund distributor or broker is registered with the Securities and Exchange Board of India (SEBI).
Check the past performance/criminal record (if any) of the company and the credibility of its management. And If you cannot find any authentic information about the company online, then it is best to just avoid it.

5) Check the Ratings

NBFCs which take deposits should have minimum investment grade credit rating granted by an approved credit rating agency. If not, investing in them can be risky.

6) Informed Decision & Proper Receipts

The con-artists dangles an investment plan to convince you that it’s a win-win situation. An informed decision has to be taken and it can’t be taken on impulse or greed. You should check for the past record of the schemes, team details, corresponding regulations & financial information before making any investment decision.

Also, payment transactions must be made by cheque against proper receipt only. Don’t accept handwritten/rough receipt.

If it’s too good to be true, it’s a faulty scheme! Be alert and take an informed decision before making any financial decision.

Divya Patwal


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