Ponzi Scheme: Explained

Recently, a company in UP defrauded unsuspecting investors of thousands of crores via a Ponzi Scheme.

Let's understand how.

A name. 

What’s in a name? 

Most people try to make a “name” for themselves.

So did Ponzi. But in a way, he had never imagined. 

101 years ago, Charles Ponzi started Scheme 101 to fool people out of their money. And guess what? It’s still in fashion today!

He started a company, the “Securities and Exchange Company,” and invited small investors like us to invest in it. 

The bait? A whopping 50% return on investment (ROI) after 45 days and 100% ROI after 90 days. 

Investors hearing this be like:

Any person who came to know about this ran to invest their money.

So much money was pouring in that he had to hire 16 clerks just to count the money and store it.

So how did the scheme work, exactly?

Ponzi portrayed himself as a master investor and got some noob investors to trust him with their money. The scheme was very complex for the layman to understand, he said. (ReadOn was not putting up jargon free pieces at that point in time, so not entirely the investor's fault).

Ponzi guaranteed a great return every month, and paid to the existing investors consistently. How? How could he do so without investing the money anywhere?

Here’s his secret recipe:

Take Rs. 1,00,000 from Bholaram and promise Rs. 20,000 monthly payments for 12 months (a neat profit of INR 1,40,000).

Pay Bholaram on time at the end of the first month.

Now, the confident Bholaram will obviously boast about the scheme in front of all his friends. Convinced by Bholaram’s endorsement, 5 more people (Copycats) put in Rs. 1,00,000 each.

Ponzi gets Rs. 6,00,000 by paying only Rs. 20,000. Smart Ponzi. 

He then runs away with this money. Of course.

Just imagine this happening at a super large scale, with lakhs of small savers involved, and you have for yourself a Ponzi scheme.

A similar Ponzi Scheme, duping Indian investors, came into light recently. 

Any guesses on how much was stolen?

Drumrollsssss….

INR 42,000 crores!

A UP based company, Garvit Innovative Promoters Limited, came up with a great offer - invest in bikes, and get assured returns of ~80%+ per annum. 

They called the scheme “Bike Bot” (not so innovative, eh?).

An investor would invest ?62,000 and get ?9,500 per month for a year, or invest ?1,24,000 and get ?17,000 per month. That’s for one bike. A person could invest in as many as 7 bikes.

That comes to approx. 4% compounded return per MONTH. Banks offer that kind of a return in a YEAR.

And obviously, the common man’s hunger to make quick money is insatiable. Dangle a 4% per month return in front of them and they will stick to the scheme like a fly sticks to flame.

Only that the fly forgets that the flame is bound to burn it.

And, what do the good Bholarams in our lives do when they come across such a scheme?

Obviously, they boast about it to their friends (the Copycats) over chai and samosa.

More than 2,00,000 small investors got attracted to this scheme.

That’s how big this was. The bucks started rolling for the schemers as more and more people “joined the ride.” They were sorted as long as they kept getting enough cash to pay off the old investors.

New money was funding the old returns.

All hell broke loose once the fresh money stopped pouring in and investors started poking around. 

That was the cue for the scamsters to count all the money they had, and run for it.

And that’s what the duo from UP did. They ran.

Note: The two have now been arrested by the Delhi Police.

So, how to identify such schemes and protect yourself?

In fraudulent schemes like these, the Ponzi Schemer always offers “high and consistent” returns even when the market is unstable, and these returns are alleged “low risk or risk-free”.

Plus, they require negligible paperwork.

They say that the schemes are complex in nature, and can’t be explained to a layman.

Next time you come across such a scheme, send it to us. We will simplify it for you.

Or even better, just turn around and run!

Take care, stay safe, and ReadOn.

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