Ponzi schemes Current Affairs
The Union Government has issued model guidelines for states to regulate direct selling and multi-level marketing businesses to protect consumers from Ponzi frauds.
These model guidelines titled the Direct Selling Guidelines 2016 framework was released by Union Food and Consumer Affairs Minister Ram Vilas Paswan in New Delhi.
Key features of guidelines
- The direct selling has been clearly defined as marketing, distribution and sale of goods or providing of services as a part of network of direct selling.
- The legitimate direct selling is differentiated from pyramid and money circulation schemes in order to help investigating agencies identify fraudulent players.
- Money Circulation Scheme has the same meaning as defined under Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
- It bars direct selling companies from charging any entry fee from agents or compelling them to buy back unsold stocks.
- These entities will have to enter into an agreement with direct sellers or agents, and give full refund or buy-back guarantee for goods and services sold to them.
- It also mandates direct sellers to constitute a grievance redressal committee to protect consumers’ right.
- It lays down remuneration system for the person engaged in direct selling firms on sharing of incentives, profit and commission.
- Adds provision for appointment of monitoring authority at both Union and state level to deal with the issues related to direct selling.
- Ponzi schemes 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 is also not having the regulatory purview of Ponzi schemes.
- These newly issued guidelines will allow states to make some change in their guidelines as per their localised requirements.
- These guidelines are necessary for better growth of the direct selling business. It will also help protect consumers as direct sellers can now be identified, and goods exchanged.
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.