Prime Minister Narendra Modi yesterday gave approval to ban Ponzi schemes or unregulated deposit schemes to protect the savings of investors.
“The Bill contains a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme. The principle is that the bill would ban unregulated deposit taking activities altogether, by making them an offence ex-ante, rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags,” the bill stated.
Ponzi schemes and unregulated deposit schemes have duped investors on the pretext of making them rich. Most of these schemes follow multi-level-marketing approach, i.e., creating a community of people who come together to invest in a scheme with no pre-defined objective. Many people, especially from small cities and towns, fall prey to such schemes.
We spoke to a few financial advisors to understand if the move would benefit mutual funds.
Bhilai-based Zian Khan, of Omega Financial, believes that the industry will find it difficult to convince people who have invested in Ponzi schemes to invest in mutual funds. “Shifting consumers from these unregulated schemes to mutual funds is a tough task. Having already burned their fingers, these investors are generally sceptical of exploring new products like mutual funds. They prefer FDs and LIC over MFs. However, industry can bring these investors to the mutual fund fold through financial awareness by making the language of communication simple,” Zian said.
Kolkata-based Sanjeev Chakraborty, of Right Choice Securities, thinks that an effective marketing strategy can help the industry attract more investors. “Although it is hard to persuade customers, who have been duped by these companies, these customers are familiar with the big names in the mutual fund industry as they think they are backed by big corporate houses and banks,” Sanjeev said.
The prime minister has also given his approval to introduce the Chit Funds (Amendment) Bill, 2018 to facilitate the growth of chit funds and remove bottlenecks.
In simple terms, a chit fund is a savings-cum-borrowings scheme, where a few people come together and invest a fixed amount every month for a fixed period.
Generally, one member of the group, known as the Foreman, manages the chit fund. The Foreman is responsible for collecting the subscription amount from the members, recording details of members and conducting the auctions. The Foreman gets a commission of 7% for carrying out these tasks.
In chit funds, customers cannot withdraw their money at will. It depends on how much the other person is bidding for. For example, if there are 10 members contributing Rs.5,000 on a monthly basis then the total monthly collection in this chit fund is Rs.50,000. Suppose in the first month, two members need funds, then the person who bids for the lesser amount becomes eligible for bidding. The rest of the money is distributed among the other customers.
