Sahara and Ponzi schemes: What are the parallels?
Dr KM Abraham, a former Whole-Time member of the Securities Exchange Board of India (Sebi) – the man whose original order led ultimately to a Supreme Court verdict forcing the Sahara Group to wind up two bond schemes and repay investors over Rs 24,000 crore – made a brief allusion to Ponzi schemes in his order. While ordering two Sahara group companies, Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) to return the money raised from investors in optionally fully convertible schemes (OFCDs), rejected the idea that just because there were no investor complaints, it does not mean there was no problem with the schemes. In his order dated 23 June 2011, Abraham had said: “The Learned Counsel (i.e. Sahara’s counsel), at one point in the submissions before me, mentioned the fact that there are no investor complaints at all from any investor in the OFCDs ….raised by the two companies. Going by the history of scams in financial markets across the globe, the number of investor complaints has never been a good measure or indicator of the risk to which the investors are exposed. Most major ‘Ponzi’ schemes in the financial markets, which have finally blown up in the face of millions of unsuspecting investors, have historically never been accompanied by a gradual build up of investor complaints.” A Ponzi scheme is essentially a fraudulent investment scheme where money brought in by the newer investors is used to pay off the older investors. This creates an impression of a successful investment scheme. Of course, as long as money entering the scheme is greater than the money leaving it, all is well. The moment the situation is reversed, the scheme collapses So does that mean that Sahara is a Ponzi scheme where money is simply being rotated? While there is not enough information available in the public domain to come to this conclusion, nevertheless several interesting points can be made. One of the characteristics of a Ponzi scheme is that the scheme appears to be a genuine investment opportunity but at the same time it is obscure enough to prevent any scrutiny by the investors. The OFCDs that the two Sahara group companies issued to raise money from nearly three crore investors do fall into this category of investment which sounds genuine enough and at the same time is obscure enough to prevent any scrutiny by investors. Further, Sahara raises its money from the lowest strata of the society, a lot of whom do not even have bank accounts. So the chances of questions being asked are very low. Another characteristic of a Ponzi scheme is that the operators in the scheme persuade investors to roll over the profits into the next investment cycle. So the returns remain on paper. Since the money remains with the operator the Ponzi scheme keeps running. A Sahara ad issued recently has this to say about how its representatives always try and convince investors to roll over their schemes into other ones. “For the past 30 years, we have observed that our field workers try their best to pursue the depositors/investors to reinvest in some other scheme of the group because they get their livelihood from that by way of commission.” Further, “they (the agents) always impress and hold their introduced depositor/investor by giving best human service throughout the tenure of the scheme.” This does not mean Sahara was running a Ponzi, but it does confirm that its investors were often being asked to reinvest their money in new scheme. However, one cannot say the same thing about a host of other non-banking financial corporations (NBFCs) in the nineties. Billboards promising exorbitant rates of return started showing up all over small town India. Money from the later investors was used to pay off the earlier investors. In many cases, once their investments matured, the investors were persuaded to reinvest the principal and interest on the investment back into the...
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