Banned Ponzi schemes not under regulatory purview: SEBI
The Securities and Exchange Board of India (SEBI) told the Supreme Court that banned Ponzi schemes do not fall under its regulatory purview.
This announcement was made after the apex court had asked government and SEBI, the stock market regulator about measures undertaken by them to check the menace of ponzi schemes.
SC had asked for their response while hearing on PIL filed against menace of ponzi scheme running across the country in various forms which robbed the poor and small investors of their hard-earned money.
The PIL was filed by NGO ‘Humanity Salt Lake’ alleging inaction on the part of the government in regulating chit funds (Ponzi schemes) which has resulted in multiple scams across country.
- Ponzi schemes do not fall under the regulatory purview of SEBI and the state government concerned is the enforcement agency.
- They are banned under the Prize Chit and Money Circulation (Banning) Act, 1978. Though it is a Central Act but the respective State governments are the enforcement agency of this law.
- SEBI also mentioned that only Collective Investment Schemes (CIS) are under its jurisdiction and these too can be stopped if not registered.
What is Ponzi scheme?
- A Ponzi scheme is an investment fraud where clients are promised a large profit in short term at little or no risk at all.
- Companies engaged in a Ponzi schemes mainly focus all of their energies into attracting new clients to make investments.
- This new investments (income) are used to pay original investors their returns, marked as a profit from a legitimate transaction.
- Ponzi schemes working mainly rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart.