 "Only your prudence can keep scamsters at bay")
Muhilan M, 48, a government employee at Pattukkotai, Tamil Nadu, began investing small sums with PACL in February 2009. In February 2015, he deposited all his bonds at their office and expected to be paid Rs 37,500 as the maturity amount. A year has gone by and he's yet to hear from the company.
PACL is said to have collected Rs 49,000 crore from around 50 million investors across the country. The Central Bureau of Investigation (CBI) arrested the company's founder, Nirmal Singh Bhangoo, in January. The Supreme Court has appointed a committee headed by former chief justice R M Lodha, which will take over the assets of PACL and its group firms, to reimburse investors through their sale.
News of investors losing money in illegal investment schemes hits the headlines with disconcerting regularity. While regulators tightening the law's loopholes to make it more difficult for fly-by-night operators to raise money, it is primarily the investor's responsibility to avoid falling prey to fraudulent schemes.
Typically, a fanciful story is sold to the investor about how a company is earning very high returns from an exotic investment. The operators raise money from the first round of investors. The principal is used to pay these investors a high rate of return. When word of those high returns spreads, more gullible ones get drawn in. Again, money collected from the new investors is used to pay returns to older investors. This gets repeated a few times. When it becomes unviable to repay investors, or the promoters feel they have collected enough, they disappear with the money.
All investment scams share certain characteristics.
Guaranteeing a high return: An uncharacteristically high rate of return should serve as the first red flag. "When a personal loan costs around 14 per cent in interest and the rate on commercial loans is around 18 per cent, beware of any investment scheme that promises a rate of return of 20 per cent or more," says S G Raja Sekharan, lecturer on wealth management at Christ University, Bengaluru.
The promoters of such schemes also say their investment carries very little risk. "It is a fundamental rule of finance that investments which offer higher returns involve higher risk. The moment someone offers you high returns with no risk, stay away," says Anil Rego, chief executive, Right Horizons.
High returns that are also guaranteed should be viewed with suspicion. Normally, when returns are guaranteed, these are on the lower side. A traditional insurance plan might offer a guaranteed return but these usually don't exceed five-six per cent a year. High returns, on the other hand, tend to be volatile. They move up and down in line with market conditions, as in the case of equity mutual funds.
Unregistered investments: An investor is relatively safe when he puts money in a scheme run by a company overseen by one of the regulators - Sebi (for stock markets and mutual funds), Irdai (insurance companies), RBI (banks) and PFRDA (pension sector). The entity should also be registered under the Companies Act. "It is advisable to check if the company is registered and the investment scheme offered is approved by one of the regulators," advises Rego.
Fancy stories and swanky trappings: Most scamsters do not reveal how they will earn the returns. Stay away if the investment strategy is complicated or there's a veil of secrecy around it. "Ask the agent how the firm will generate such a high rate of return. If the agent is unable to give a convincing reply, shun the scheme," says Ashutosh Wakhare, managing director, Money Bee Institute. "Don't get taken in by swanky offices or the use of celebrities to promote a scheme," adds Raja Sekharan.
Irregular communication: The absence of regular updates about the performance of your investments and inconsistencies in statements should make you wary.
Irregular or late payouts: If the promised returns arrive late or not at all, that is usually a precursor to a scheme going bust.
What should you do?
Before rushing headlong to invest in a scheme, ask a few hard questions from the agent (based on above points). Verify his replies from independent sources. Bear in mind the adage that if something appears too good to be true, it probably is.
If you encounter a problem with an entity running a collective investment scheme, such as money not being refunded, first file a complaint with the company. If it does not respond, do so with Sebi (See box: How To Complain at SCORES).
PACL investors should also file complaints at the SCORES website or will not get back their money.
When it comes to financial scams, prevention is better than cure.
HOW TO LODGE A COMPLAINT AT SCORES If the firm does not reply within 30 days, the matter gets passed to a dealing officer at Sebi
PACL is said to have collected Rs 49,000 crore from around 50 million investors across the country. The Central Bureau of Investigation (CBI) arrested the company's founder, Nirmal Singh Bhangoo, in January. The Supreme Court has appointed a committee headed by former chief justice R M Lodha, which will take over the assets of PACL and its group firms, to reimburse investors through their sale.
News of investors losing money in illegal investment schemes hits the headlines with disconcerting regularity. While regulators tightening the law's loopholes to make it more difficult for fly-by-night operators to raise money, it is primarily the investor's responsibility to avoid falling prey to fraudulent schemes.
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Ponzi schemes
Typically, a fanciful story is sold to the investor about how a company is earning very high returns from an exotic investment. The operators raise money from the first round of investors. The principal is used to pay these investors a high rate of return. When word of those high returns spreads, more gullible ones get drawn in. Again, money collected from the new investors is used to pay returns to older investors. This gets repeated a few times. When it becomes unviable to repay investors, or the promoters feel they have collected enough, they disappear with the money.
All investment scams share certain characteristics.
Guaranteeing a high return: An uncharacteristically high rate of return should serve as the first red flag. "When a personal loan costs around 14 per cent in interest and the rate on commercial loans is around 18 per cent, beware of any investment scheme that promises a rate of return of 20 per cent or more," says S G Raja Sekharan, lecturer on wealth management at Christ University, Bengaluru.
The promoters of such schemes also say their investment carries very little risk. "It is a fundamental rule of finance that investments which offer higher returns involve higher risk. The moment someone offers you high returns with no risk, stay away," says Anil Rego, chief executive, Right Horizons.
High returns that are also guaranteed should be viewed with suspicion. Normally, when returns are guaranteed, these are on the lower side. A traditional insurance plan might offer a guaranteed return but these usually don't exceed five-six per cent a year. High returns, on the other hand, tend to be volatile. They move up and down in line with market conditions, as in the case of equity mutual funds.
Unregistered investments: An investor is relatively safe when he puts money in a scheme run by a company overseen by one of the regulators - Sebi (for stock markets and mutual funds), Irdai (insurance companies), RBI (banks) and PFRDA (pension sector). The entity should also be registered under the Companies Act. "It is advisable to check if the company is registered and the investment scheme offered is approved by one of the regulators," advises Rego.
Fancy stories and swanky trappings: Most scamsters do not reveal how they will earn the returns. Stay away if the investment strategy is complicated or there's a veil of secrecy around it. "Ask the agent how the firm will generate such a high rate of return. If the agent is unable to give a convincing reply, shun the scheme," says Ashutosh Wakhare, managing director, Money Bee Institute. "Don't get taken in by swanky offices or the use of celebrities to promote a scheme," adds Raja Sekharan.
Irregular communication: The absence of regular updates about the performance of your investments and inconsistencies in statements should make you wary.
Irregular or late payouts: If the promised returns arrive late or not at all, that is usually a precursor to a scheme going bust.
What should you do?
Before rushing headlong to invest in a scheme, ask a few hard questions from the agent (based on above points). Verify his replies from independent sources. Bear in mind the adage that if something appears too good to be true, it probably is.
If you encounter a problem with an entity running a collective investment scheme, such as money not being refunded, first file a complaint with the company. If it does not respond, do so with Sebi (See box: How To Complain at SCORES).
PACL investors should also file complaints at the SCORES website or will not get back their money.
When it comes to financial scams, prevention is better than cure.
HOW TO LODGE A COMPLAINT AT SCORES
- Visit the SCORES website (www.scores.gov.in). Fill the complaint registration form with the personal details
- Choose the appropriate category and provide details
- Scan and upload the relevant documents
- Mention the value of your claim
- If unable to file it online, send it to one of Sebi's offices
- The firm must reply to your complaint within 30 days.
- Track the progress on your complaint (click on 'View Complaint Status' button)