On Sunday, April 21, 50-year-old Urmila Pramanik, a housewife in Baruipur in West Bengal committed suicide on the news that Saradha Group, where she had deposited her savings of Rs 30,000, had collapsed. Flashback to early 2000s, RBF and other finance and jewellery companies in Tamil Nadu that offered high rates of return shut down. In the early nineties, agro-based and plantation companies that lured investors with returns of 18-30 per cent also failed to repay even the principal, causing severe loss. Going back to 1980s, Sanchaita Investments in West Bengal shut down, causing panic among investors.
Feed the Greed
Why is it that history repeats itself when it comes to financial fraud? The first reason seems to be that unregistered deposit schemes promise very high returns. For example, the scheme on teak wood bond from MPS Greenery offers to give Rs 1 lakh in 25 years on an investment of Rs 4,000 – an interest rate of 13.7 per cent. Others take in Rs 100 a day for a year and return Rs 1 lakh, ‘offering’ an annual return of around 200 per cent. Plantation schemes and potato bond schemes have been known to offer 20 per cent interest on the amount paid in addition to a passback of the agent’s commission.
Second, agents who sell these schemes earn sky-high commissions, up to 30 per cent, compared to the sub-3 per cent range for registered deposits. And that comes with the promise of foreign trips and jet planes as performance bonus. Some schemes also use multi-level marketing methods. The agents themselves may not be aware of the legality of the investment. The trust they command in their neighbourhood helps rope in new investors.
Third, advertisements in the media featuring prominent personalities, also impresses investors. Promoters of such schemes also make sure that the promised ‘returns’ are indeed earned by the initial depositors. They then spread the word, helping the scheme go ‘viral’.
Also read: How schemes evade regulation
Fighting back
With many dubious schemes and regulatory loopholes, how can investors avoid being taken in by unscrupulous promoters?
* A simple rule of investing is that if returns appear too good to be true, they probably aren’t real.
* The best way to avoid risks is to simply keep away from unregulated deposit takers. When you come across a deposit taking scheme, always check under whose regulatory ambit the company would fall under – RBI, SEBI or state government. If it comes under no one, it is best to avoid it.
* If a deposit is promising high returns, you need to know where those returns will come from. Check for credit ratings, financial track record and credentials before handing over the money.
* Check the regulator’s Web site for registered providers and for those against whom complaints and cases have been recorded. If you find the provider to be dubious, bring it to the attention of authorities and also create awareness among other investors using traditional and online media. This will be in the interest of all investors.