PONZI Schemes Ordinance
20, Feb 2019
Prelims level : Economy-Investment Models Mains level : GS Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
- The Union Cabinet Tuesday approved promulgating an ordinance with regard to the Banning of Unregulated Deposit Schemes Bill to protect gullible investors from Ponzi schemes.
- The lower House, or the Lok Sabha, had passed the Bill on the last day of the budget session by a voice-vote, but could not get the approval of the Rajya Sabha.
- This was informed by Finance Minister Arun Jaitley after meeting of the Union Cabinet. The Cabinet has requested the President of India to promulgate an Ordinance in this regard.
- The Bill seeks to put in place a mechanism by which such depositors can be compensated. It has incorporated recommendations of the Standing Committee on Finance. The legislation is aimed at effectively tackling the menace of illicit deposit-taking activities, and prevent such schemes from duping the poor.
- The proposed law provides for severe punishment and heavy pecuniary fines to act as a deterrent.
- A Ponzi can be any scheme in which the returns to promised to older investors are paid from the money collected from new investors, and not actual profits from the investments. Ponzi schemes were named after Charles Ponzi, a clerk in Boston who, almost a century ago, duped thousands of investors into speculating on phenomenal returns from the humble postage stamp.
- Those running a Ponzi scheme reel in their first set of investors by introducing them to a great opportunity. They may even pay up the fanciful returns out of their personal funds. But once investors begin to bite, they build a house of cards, using money from the stream of new entrants, to pay the older patrons. Even if profits are made from the investments, more often than not, the scheme operators siphon it off to private accounts.
- As long as new investors are willing to sign up, the Ponzi scheme works. But when the flow of fresh money dwindles, the house of cards collapses.