If it is too good to be true… it probably isn’t.
That’s the stock phrase often unhelpfully handed out after someone is a victim of fraud.
With all the jargon, it’s easy to understand why some people fall for scams. Partly because they doubt their own financial knowledge, but also because con artists and fraudsters can be very good at convincing people to part with their money.
But there are also some basic steps that investors can take to better protect themselves.
Two frauds recently came to light that saw thousands of investors, including non-resident Indians (NRIs), duped into handing over INR34bn ($463m; £359.6m; €394.9m).
20% returns
Mumbai-based brokerage firm Anugrah Stock and Broking Pvt Ltd and its associates were running a Ponzi scheme that defrauded nearly 40,000 investors, including NRI investors, to the tune of INR14bn.
Though licensed to act as a stock broker, the company attracted deposits by promising assured returns up to 20%.
As there were not enough profits to give away the promised returns, the company started paying its early customers from the funds received from new investors and by selling the shares of other clients.
A bolt came out of the blues, however, when the regulator banned broking firms from using clients’ shares for their own trade and the cycle was broken.
The company kept its investors in the dark by sending false account statements.
Only when some clients checked their holdings with the depository, was it revealed that their shares were missing.
Though the case is under investigation by the regulators and enforcement agencies, investors are unlikely to get back their money.
Popular Finance fraud
The promoters of Popular Finance, a gold loan and microfinance company based in south Indian state Kerala, are on the run after duping thousands of investors, including NRIs, out of around INR20bn.
Popular Finance, set up in 1965 as a non-banking financial company (NBFC) offering gold loans, was forced to stop business in 2014 by the Reserve Bank of India after accepting fixed deposits without authorisation.
The company bypassed the ban by setting up 15 partnership firms as shell companies and tricked investors into buying their shares as fixed deposits, promising high returns.
The promoters, who also collected a huge quantity of gold ornaments received against gold loan, re-pledged the gold and properties with banks.
The company diverted funds to overseas locations, while paying early investors in the scheme with money received from new customers.
Everything was running smoothly until a large number of depositors started withdrawing money due to the pandemic-induced financial crisis.
When there was a run on the 274 branches, the company chose to close them, thus creating a panic and leaving thousands of depositors in the lurch.
The absconding promoters have been caught by the police, but the investors may not get any relief.
Ignored regulations
Such scams were not new to the Indian market.
High-profile illegal schemes have defrauded investors of more than INR1trn; including Saradha Chit Fund, Sahara Financial, Rose Valley and several other frauds.
None of the above cropped up in a single day or were run by fly-by-night operators; which begs the question, should people not have seen the warning signs?
Investment advisers say there has been no shortage of regulation or warning by the authorities, but investors continue to walk into the trap guided by greed and ignorance.
In the case of Popular Finance, investors ignored central bank action cancelling its licence, but invested their money in fixed deposits that promised incredibly high returns.
Whenever the rate of return being promised is higher than a fixed deposit, investors need to understand that the risk will also be higher.
Similarly, investors in Anugrah brokerage scheme should have checked their holding position with the depositories when the company was offering high returns.
Read the warnings
Sajith Kumar PK, chief executive, IBMC International, Dubai-based consultancy, says the regulators have been alert and have come up with timely warning and strong regulatory framework to protect the investors from cheating.
“For example, India’s securities market regulator Securities and Exchange Board of India (Sebi) has taken steps that will make misuse of shares of clients or their money difficult.
“The new norms on margin pledging are expected to reduce misuse of clients’ shares lying in demat accounts. The focus of auditing is on the possible misuse of clients’ funds and securities. These steps are expected to reduce the probability of scams in future,” said Kumar.
He advises that investors should check the monthly statement that comes from the depositories such as NSDL or CDSL.
Harilal Ramakrishnan, managing partner, Lal Quila Investor Services, Dubai-based consultancy, says any investment that promises returns greater than what the markets are able to generate should immediately sound alarm bells.
If they promise to double or triple your money in a short period, that itself should be an immediate cause for concern and a clear signal to back off.
He suggests due diligence by investors before buying any product. “But all investors are not qualified or knowledgeable. It is advisable to seek the help of financial professionals to vet the products.”
