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 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.
