A number of Ponzi schemes have come to light in recent years. All of them typically involve legal wrangling with regulators, on public assurances by company officials that they are being unfairly targeted and every investor will get her money back. Eventually, the inevitable happens – hapless millions are parted with their life’s savings. Yet, people continue to flock to such schemes, with the Rose Valley caper currently being the latest one making the headlines.
The government is said to be seriously looking for solutions – and top officials engaged in the exercise say that some of them can be found abroad. The finance ministry’s department of financial services (DFS) has obtained information about industry and regulatory practices from around the world in order to amend laws relating to ponzi- like, multi-level marketing pyramid schemes. Some of the inputs received from the Indian missions abroad are being incorporated in the proposed Prize Chits and Money Circulation Schemes (Banning) Act that is being finalised in the DFS in consultation with all the stakeholders.
At a meeting chaired by Jayant Sinha, Union minister of state for finance, and attended by top officials of enforcement, investigative and intelligence agencies, the Australian model of detecting and curbing the unauthorised deposit and money collection schemes was singled out for praise. Officials point out that Australia has a good model called ‘fusion’ that brought various agencies together to detect and prevent such types of schemes. Implemented by the Australian Crime Commission since July 2010, the ‘fusion’ capability provides for an information and intelligence sharing centre that brings together over 20 agencies to build the intelligence picture to respond to serious and organised criminal threats including investment frauds.
But experts believe that the solution to this problem should be homegrown and should strike at the root of the problem. They believe that the answer to the problem actually lies in the high inflation that has prevailed in the county since 2008. Till low crude prices subdued consumer inflation recently, the consumer price inflation and food inflation was greater than 10 per cent. In this scenario, the returns on offer on fixed income investments have been lower than the rate of inflation. Hence, people have had to look at other modes of investment, in order to protect the purchasing power of their accumulated wealth.
A lot of this money has found its way into real estate and gold. And some of it has also found its way into Ponzi schemes. Experts add that this is where one needs to ask why India’s fixed income instruments offer returns lower than inflation. And the answer lies at the doorsteps of the state. The government of India
since 2007-08 has been able to raise money at a much lower rate of interest than the prevailing inflation.
How has the government managed to do this? Currently, banks need to invest ^22 out of every ?100 they raise as deposits, in government bonds. Over and above this, Indian provident funds like the employee provident fund, the coal mines provident fund, the general provident fund, etc, are not allowed to invest in equity. Hence, all the money collected by these funds ends up being invested in government bonds.
As the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework points out: “Large government market borrowing has been supported by regulatory prescriptions under which most financial institutions in India, including banks, are statutorily required to invest a certain portion of their specified liabilities in government securities and/ or maintain a statutory liquidity ratio (SLR).”
This ensures that there is huge demand for government bonds and the government can get away by offering a low rate of interest on its bonds. “The SLR prescription provides a captive market for government securities and helps to artificially suppress the cost of borrowing for the government, dampening the transmission of interest rate changes across the term structure,” an expert committee report points out.
The rate of return on government bonds becomes the benchmark for all other kinds of loans and deposits. The government has managed to raise loans at much lower than the rate of inflation since 2007-08. And if the government can raise money at a rate of interest below the rate of inflation, banks can’t be far behind. Hence, the interest offered on fixed deposits by banks and other forms of fixed income investments has also been lower than the rate of inflation over the last few years. This also explains why so much money has found its way into Ponzi schemes, despite not offering unbelievable returns.
♦ RAKESH JOSHI firstname.lastname@example.org