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Centre scan on Bengal Ponzi schemes

New Delhi, Dec. 11: The Bengal government may be shirking a debate on chit funds but the Centre has been keeping tabs on some schemes that are suspected to be Ponzi or illegal pyramid investment projects.

The Centre has drawn up a set of “model rules” designed to quell the moneymaking rackets that charlatans of various stripes have used over time to rip off investors.

Many of the pyramid schemes operating in Bengal and Andhra Pradesh have already come under the investigators’ scanner. The Ponzi scheme usually entices new investors by offering them higher returns than other investment avenues.

The generic term is named after the notorious US scamster Charles Ponzi who rigged a pyramid scheme in the 1920s that thrived because of an arbitrage opportunity between international reply paid coupons and postage stamps.

Chit funds have been in operation for well over a hundred years and are legitimate operations governed by Chit Funds Act of 1982. Under this Act, every chit fund must obtain sanction from the state government before it starts operations.

But in 1978, Parliament passed the Prize Chit and Money Circulation Scheme (Banning) Act, 1978, which was designed to stop unscrupulous people from devising moneymaking schemes and duping investors.

Even though this act is nominally administered by the department of financial services, the state governments are responsible for its actual implementation. States often fail to act against these firms because of a variety of reasons.

“The government is aware of these chit funds and will act against them; let the rules be framed. After that, we will act,” an official in Delhi said.

Officials said pyramid schemes operating out of Bengal, which have now spread their tentacles not only to neighbouring Assam and Tripura but also to the state capital, commanded resources of up to Rs 10,000 crore. They funnelled the money into hotels, amusement parks, resorts, media, realty and garment factories.

Officials said one Bengal-based firm under the scanner had developed a scheme based on investment in trees, which was supposed to multiply in geometric proportions and give fantastic returns.

“The only reason why we have delayed notifying these rules is representations from legitimate direct selling companies such as Amway, Oriflame and Tupperware which felt they may also be hit by the wording of the rules. We have ironed out these glitches and the new rules should come out anytime now,” said an official.

Markets regulator Sebi has separately launched investigations into several pyramid investment schemes. Some of the firms Sebi has started legal action against include MPS Greenery Developers, Rose Valley Real Estate & Constructions and Sun-PlantAgro. The regulator has launched prosecution in 59 cases.

The Centre has received reports from the Serious Fraud Investigation Office (SFIO) — a multi-disciplinary organisation under the corporate affairs ministry — as well as the Intelligence Bureau and Enforcement Directorate on the growing menace of fraudulent Ponzi schemes.

Earlier this year, an inter-ministerial task group of the department of financial services (DFS), the corporate affairs ministry, the Reserve Bank, the Securities and Exchange Board of India (Sebi), the department of consumer affairs and the Central Economic Intelligence Bureau had drafted model rules on multi-level marketing companies.

They also frame clarification guidelines on how to distinguish between direct sales and disguised money circulation schemes.

The ministry had referred some of the more complex schemes, with multi-state representations, suspected of being fraudulent to the SFIO. The Centre now plans to use the discreet reports prepared by the SFIO to crack down on these funds.

Officials say many of these chit funds have now shifted to the Internet to lure investors into their Ponzi schemes, adding a new dimension to the problem.

After the Speak Asia scandal burst into the open last year, North Block formed a high-level inter-ministerial group co-ordinated by the Central Economic Intelligence Bureau to crack down on such Ponzi schemes that offer up to 500 per cent returns.

Singapore-based Speak Asia, which hired some of India’s best PR and advertising firms, managed to enrol 1.9 million Indians. Each of them paid Rs 11,000 to the firm and were promised payments for every questionnaire they filled up. In all, the firm collected over Rs 2,000 crore from middle-class investors.