The Union Cabinet has banned unregulated deposit schemes. The Bill will help tackle the menace of illicit deposit taking companies which have been exploiting regulatory gaps and lack of strict administrative measures to dupe poor and gullible people of their hard-earned savings.
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.
Since there was no explicit law banning such deposit taking activities, many companies had exploited it to their advantage at the cost of well-regulated financial products such as mutual funds.
We spoke to a few industry experts to understand if the move would benefit mutual funds.
Sunil Subramanian, MD and CEO, Sundaram Mutual Fund believes that many investors will look at other investment avenues such as mutual funds to seek better risk-adjusted returns. Another positive impact is that investors will now have realistic returns expectation from their investments. He, believes that industry can bring these investors to the mutual fund fold through financial awareness.
A Balasubramanian, CEO, ABSL Mutual Fund said that if the industry can highlight importance of investing in regulated entities, mutual funds will certainly be one of the beneficiaries.
Recalling the past, Odisha IFA Sudhanshu Sekhar Mohapatra said that between 2009 and 2014, many investors used to believe that mutual funds were similar to Ponzi schemes. “I still remember how Ponzi scheme operators have poached my employees to market their products.”
He further said that the complete ban on such schemes would make well-regulated schemes like mutual funds popular among masses.
West Bengal IFA Tuhin Jana point out that Ponzi scheme became popular when there were no or little awareness about mutual funds. “Now that people are more aware, such fraudulent activities are less likely to happen. Also, the move coupled with ‘mutual fund sahi hai campaign’ would help investors not fall prey to such schemes and explore mutual funds to achieve financial goals.”
However, Jana pointed out that over the years, Ponzi scheme operators have also evolved. For instance, a few fraudsters have been accepting gold and silver instead of cash for their deposit schemes.
Currently, the existing law does not prohibit companies from doing multi-level marketing or chain marketing. In fact, many fake companies distribute FMCG products through multilevel marketing.
While this bill is a step in the right direction from a regulatory framework perspective, policymakers may need to walk a mile to ensure gullible investors choose the right product for investments like mutual funds.
