Most schemes escape scrutiny simply because the firms floating them are neither banks, nor NBFCs nor publicly listed companies which would be registered with a financial regulator.

To plug this loophole, schemes such as plantation schemes and time shares were deemed "Collective Investment Schemes" (CIS), to be regulated by SEBI (SEBI Act, 1992, Section 11AA).

There is only one company registered under the CIS scheme, but no schemes have been launched. Promoters exploit the many exemptions to this provision and SEBI has received 660 complaints on CIS entities.

Consider the ‘potato bond’ scheme. In this, a buyer enters into an agreement to make regular monthly payments for a period of, say, one year to buy potato. This falls under the sale of goods category, not covered by SEBI rules. The attraction is that the agreement provides an exit clause that if the buyer wants to cancel the agreement, the money collected will be returned with an interest. The interest promised is in the range of 12 to 24 per cent, a big draw for investors.

Other schemes sell time share of a property, teak plantation, land and other real estate ownership, with an exit clause offering high interest payment.

Ponzi schemes such as these are neither new nor operational only in places with low financial literacy and inclusion. The original scheme by Charles Ponzi promised a 50 per cent profit within 45 days, or 100 per cent profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the US. His investors lost about $20 million in 1920 dollars.

Investment scams also go by a fashionable name - High Yield Investment Programs (HYIP).

Also read: Banking on investor gullibility

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