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Home Economy

Ponzi scheme

April 16, 2021
in Economy
Reading Time: 2 mins read
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Ponzi scheme
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About Ponzi scheme

  • A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. 
  • A Ponzi scheme is a fraudulent investing scam which generates returns for earlier investors with money taken from later investors.
  • The scheme leads victims to believe that profits are coming from product sales or other means, and they remain unaware that the later investors are the source of their returns.
  • The scheme traces its origin to a person named Charles Ponzi, who became notorious for using the technique in the 1920s.

 

Understanding Ponzi Schemes

  • A Ponzi scheme is an investment fraud in which clients are promised a large profit at little to no risk. 
  • Companies that engage in a Ponzi scheme focus all of their energy into attracting new clients to make investments.
  • This new income is used to pay original investors their returns, marked as a profit from a legitimate transaction.
  • Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. 
  • When this flow runs out, the scheme falls apart.

Characteristics of Ponzi scheme

  • High investment returns with little or no risk
  • Overly consistent returns
  • Unregistered investments
  • Unlicensed sellers
  • Secretive or complex strategies
  • Difficulty receiving payments

Government efforts to control Ponzi scheme

  • Currently the Ponzi scheme frauds are dealt by Enforcement Directorate under Prevention of Money Laundering Act, 2002.
  • Attempts to regulate Ponzi schemes have taken the form of SEBI’s ‘collective investment scheme’ regulations.
  • The central government has formulated a Banning of Unregulated Deposit Schemes Bill. This was approved by Lok Sabha but is pending in the Rajya Sabha. 

Regulators Overseeing Deposit-taking Schemes

  • The nine authorities charged with the oversight and regulation of deposit-taking schemes include the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), the Ministry of Corporate Affairs (MCA), and state and Union Territory governments. 
  • Each authority oversees different types of deposit-taking schemes, with the RBI overseeing deposits taken by non-banking financial companies (NBFCs).
  • Sebi oversees mutual funds. 
  • Any deposit-taking scheme must be registered with the relevant authority, based on the category it falls under, and only then is its operation legal.
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Source: RSTV & AIR
Tags: AIRPrelims

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