Ponzi Scheme

Ponzi Scheme Latest News

The Enforcement Directorate seized a business jet at Hyderabad airport in a ₹850 crore Ponzi scam probe against a Hyderabad-based company and its promoters.

About Ponzi Scheme

• A Ponzi scheme is an investment scam that pays early investors with money taken from later investors to create an illusion of big profits. A Ponzi scheme promises a high rate of return with little risk to the investor. 
• Origin: The Ponzi scheme gets its name from a swindler named Charles Ponzi, who in 1920 became a millionaire by promoting a nonexistent investing opportunity.
• Working:
  • It relies on word-of-mouth, as new investors hear about the big returns earned by early investors. 
  • Inevitably, the scheme collapses when the flow of new money slows, making it impossible to keep up the payments of alleged profits.
  • A Ponzi scheme is similar to a pyramid scheme in that both use new investors' funds to pay earlier backers. 
  • A pyramid scheme usually relies on rewarding early participants to recruit more participants but collapses when the supply of potential participants dwindles.
• Notable Ponzi Scams in India: 
  • Saradha Scam (2013): A multi-crore chit fund scam in West Bengal that defrauded lakhs of investors.
  • Rose Valley Scam: A larger scam than Saradha, involving over Rs 15,000 crore.
  • SpeakAsia (2011): A pyramid-like scheme posing as an online survey business.
  • PACL (Pearl Agro Corporation Limited) Scam: Collected Rs 49,100 crore from investors under the guise of land investments.

Safeguards against Ponzi Schemes in India

• Ponzi schemes are banned under the Prize Chit and Money Circulation (Banning) Act, 1978, a Central Act enforced by State governments.
• Additionally, the Unregulated Deposit Schemes Act, 2019 explicitly bans Ponzi schemes, further strengthening legal action against such frauds.
• These are also dealt with by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002.

Ponzi Scheme FAQs

Q1. What qualifies as a Ponzi scheme?

Ans. A Ponzi scheme is a fraudulent investment scam where returns to older investors come from new investors' money, not actual profits.

Q2. What is a Ponzi scheme vs. a pyramid?

Ans. A Ponzi scheme promises fixed returns from new investments, while a pyramid scheme involves recruiting members who pay into the system.

Q3. What are the laws against Ponzi schemes in India?

Ans. Ponzi schemes are banned under the Prize Chit and Money Circulation (Banning) Act, 1978, and the Banning of Unregulated Deposit Schemes Act, 2019.

Source: NDTV