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Chit Funds and Ponzi Schemes : Mass Fraud

Published on Tuesday, September 01, 2015
Hardly, nobody say no to invest his money if it doubles in one year or even less than that. Everybody hops in the bandwagon when it comes to earn easy money.
ponzi scheme

Well, in this world nothing comes for free; one has to pay a price to pocket one’s wish. Let’s not get into preaching facts which are well known to all. Still educated gullible people get entrapped in the fraud schemes which can get them easy money in no time.


My money will double in one year if I invest it in some kind of Ponzi schemes.


Any financial institution which deals with public deposits can’t make profit overnight. Invested sum of money takes time to accrue be it in volume or in value. One has to collect the basic information pertaining to the background of a financial company or a bank in which one is going to put all of his
hard earned money for one’s security.

Normally, banks and other financial outfits accept deposits from public and make advances to various companies with those deposits at a reasonable interest rate. Companies seek loans from financial outfits to ward off any issues relating to credit inflow to their projects.

In a nutshell, once the borrowers of a bank start repayment which certainly takes some time, the value of the deposits in the bank will start accruing. Ponzi schemes are more like “robbing Peter to pay Paul”.

N.B. – One should not to get confused chit funds with Ponzi schemes.

Chit fund

companies are regulated by respective state governments under Chit Fund Act 40/1982 where they are operating. Due to lackadaisical attitude of govt. these chit fund companies eventually transfigure themselves to dubious companies with Ponzi schemes. It is neither regulated by RBI nor SEBI.

Following is the laundry list of companies and their respective regulators.

Category of Companies
Banks and NBFCs Reserve Bank of India
Chit Funds Respective State Governments
Insurance companies IRDA
Housing Finance Companies NHB
Venture Capital Fund / SEBI
Merchant Banking companies SEBI
Stock broking companies SEBI
Nidhi Companies Ministry of corporate affairs, Government of India

Ponzi or Pyramid scheme

Ponzi scheme is a scam investment designed to separate investors from their money. It is named after Charles Ponzi, who constructed one such scheme at the beginning of the 20th century, though the concept was well known prior to Ponzi. Small investors should stay away from various ponzi schemes which promise very high returns in a short duration.

Modus Operandi
: - Charles Ponzi was paying early investors using the investments of later investors, a practice known as "robbing Peter to pay Paul”. While this swindle predated Ponzi by several years, it became so identified with him that it now bears his namesake. His scheme ran for over a year before it collapsed, costing his "investors" $20 million.

How do Ponzi Schemes operate?

Ponzi Schemes are quite basic but can be extraordinarily powerful. The operating mechanisms are as follows:

1. Convince a few investors to park their money into an investment.

2. After a specified time, return the invested money to the investors plus the specified interest rate or return.

3. Pointing to the historical success of the investment, convince more investors to park their money into the system. Typically the vast majority of the
earlier investors will return. Why would they not? The system has been providing them with great benefits.

4. Repeat steps 1 through 3 a number of times. During step 2 at one of the cycles, break the pattern. Instead of returning the investment money and paying the promised return, decamp with the money and start a new exquisite life.

5. The above mechanism which I mentioned is a serious financial crime or irregularity in the court of law.

However, parliament has passed an act in 1978 in order to curb the menace pertinent to Ponzi schemes. The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 was enacted on 12th December, 1978. The act aims to ban the
promotion and circulation of prize chits and money circulation. But little has done in this regard. It needs more amendments to put a stranglehold on these
chit companies.

Simple Advice (It’s free): -

Do not park your hard earned money in schemes of companies which have unreliable antecedents. Always invest your money in financial companies or banks which are regulated by regulators in which powers are delegated by govt. of India.

Written and Compiled By:-

Rohan Anand

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ramandeep singh

Ramandeep Singh is a seasoned educator and banking exam expert at BankExamsToday. With a passion for simplifying complex concepts, he has been instrumental in helping numerous aspirants achieve their banking career goals. His expertise and dedication make him a trusted guide in the journey to banking success.

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