Ponzi apps could soon be the focus of regulatory action with the government mulling a clampdown on such fraudulent apps promising unrealistic returns.
Jatin Grover explains what Ponzi apps are, what their business models are, how people come across such apps and the steps the government is taking to protect people from these
What are Ponzi apps
Ponzi apps are apps from firms which run investment schemes with promises of high returns at a low risk, based on the principle behind Ponzi schemes. The apps use investments of new investors to give returns on the investments of earlier investors. The term ‘Ponzi’ is borrowed from Charles Ponzi, the promoter of the first such scheme. He was exposed in the 1900s.
Ponzi schemes work like a chain, in which a person convinces another to join with a promise of higher returns. These are marketed through word of mouth. Earlier, they were run in the physical mode; now, with the evolution of the digital ecosystem, there are apps fulfiling the purpose. The schemes eventually stop paying the returns promised — and even returning the invested amount —once new members stop joining.
The business model
The possibility of a less risky investment giving high returns is very, very low, say experts. The business model of Ponzi apps is based on false assurances to investors that they will get a higher return on their investments without any risk. Persuaded by this argument, the investors decide to park their money in such schemes through these apps. To illustrate, if a person invests Rs 100 in such a scheme and is promised returns as high as 20% per annum (simple interest) for a period of five years, then that person will get `20 annually for five years. Now, the scheme operators will use that Rs 100 to pay interest to other investors — they will keep their own incomes aside also from the Rs 100 invested.
They will only be caught once the new investors stop joining and existing ones realise that the promoters have run away with the money. This is usually the case.
Mode of exposure to such apps
Usually, people come across these apps via their contacts who have invested in such schemes. Moreover, operators hire sales-people to convince retail investors. These apps are listed on app stores and are often marketed on social media as well.
The returns promised by these apps are higher than the legal investment options available in the country.
Signs of a Ponzi scheme
Investors must analyse the scheme thoroughly before making investments. Ponzi schemes offer high returns while pitching it as a low-risk investment. Companies operating such apps or schemes are not licensed by the government.
They offer consistent returns even if there are uncertain economic conditions. However, they will lower the returns significantly when no new members are added or people start withdrawing their money.
Regulation in India
Ponzi schemes are illegal around the world. In India too, there are certain penalties, including imprisonment. However, with everything going digital, the apps running such schemes are being operated without any regulation or scrutiny by the government.
Last week, finance minister Nirmala Sitharaman said that the finance ministry is working with the ministry of electronics and information technology (MeitY) and the Reserve Bank of India (RBI) to curb the menace of such apps.
“(We can’t allow) those Ponzi apps taking away peoples’ hard-earned money,” Sitharaman had said.
People affected by the fraudulent schemes can take legal remedies like filing a police complaint and going to the courts. According to experts, people usually do not report any such incidents for the fear of being mocked. What the government must do, apart from coming up with a regulatory structure, is work on spreading more awareness about Ponzi apps or schemes, their modus operandi, tell-tale signs of Ponzi marketing and sales-pitch, apart from making the complaint filing simple and transparent, experts said.