Yes, you read the title right. The title may offend a few or should I say most of the people who read this article but if you read the rest of the article fully, I am pretty sure you will understand what I am trying to say. India is no stranger to scams. Harshad Mehta, Telgi, 2G, Coal-Gate, Cow-Fodder etc etc... You name something that can be sold in India, we can practically find a scam surrounding it. But, the intent of this article is not to analyze all those thousands of scams. We are going to talk about the recent StockGuru Scam which ripped off close to 1000 Crores from more than 2 lakh investors across India.
Schemes which promise exceptionally high returns lure investors almost every other day. If one scam pops up from Chennai this month, one more from Hyderabad will come up next month and one more from a different city the next...
The purpose of this article is to analyze how the so called "Smart" and "Risk Averse" Investor population of India got duped to the tune of 1000 crores. The Irony is, this isnt the first Investment Scam in India and am pretty sure this wont be the last. Every year one or more such Ponzi schemes get highlighted and Investors lose their hard earned money. We will cover the "Why" part shortly!!!
The StockGuru India Scam:
Stockguru India, was a company that claimed to be India's premier financial consultancy firm. It offered investors investment advisory services, portfolio management services, trading solutions in equity and derivatives, insurance, mutual funds and IPO. Technically - A full spectrum financial services firm. But, the crazy fact which none of the 2 lakh investors failed to check is that:
"This firm was not registered with the SEBI (Securities and Exchange Board of India, the stock market regulator) or RBI (Reserve Bank of India, the banking regulator)"
Can a company providing financial services in this country run without registering itself with either of these 2 regulators?
The Result: More than 2 lakh investors have lost close to 1000 crores of their Hard Earned Money. This works out to an average of Rs. 50,000/- per individual who invested in this scheme. Unless money is growing in my backyard, I will investigate and analyze the company thoroughly before investing that kind of money in any scheme.
How did they Cheat these investors?
The idea was simple - They floated an investment scheme which promised unbelievable returns in an unbelievably short time span.
You invest Rs. 11,000/- today (Rs. 10,000 Investment + Rs. 1,000 Registration fee). The guys at StockGuru will give you 6 postdated cheques for Rs. 2000/- each which can be encashed every month for the next 6 months totaling up to Rs. 12,000/- plus they give you a promissory note stating that your original investment of Rs. 10,000/- will be refunded to you at the end of 6 months.
How would they manage to pay us all this money? - By investing the money in the stock market and making profits.
So, if you invest Rs. 10,000/- today, you will get a total of Rs. 22,000/- at the end of 6 months. A little over "Double" your investment in 6 months. There was no upper limit on the amount one can invest. If I Invest 10,000/- I get 22,000/- and if I invest 1 lakh I will get 2.2 lakhs.
On top of this - Investors who recommended this scheme to their friends would earn a 3% referral bonus on the amount invested by their friends.
Why were they (Guys from StockGuru) doing all this? - For the Rs. 1,000/- fee you paid them. Plus they were Good Samaritans who wanted to make India a Wealth Nation. Isnt it?
Did People get paid?
The answer is - YES and NO.
The Initial bunch of lucky guys got a few of their cheques cashed which gave them confidence in the scheme and they ended up recommending this scheme to everyone they knew. So, in about 6 months when StockGuru promoters collected a huge amount of money (can I say 1000 crores as huge???) cheques stopped getting honored and then eventually the result was:
"StockGuru India's Promoter Mr. Lokeshwar Dev Jain went absconding along with his wife and all the money they collected through this scheme"
What is the Current Status?
Lokeshwar Dev Jain was recently arrested along with his wife who was a co-conspirator in this scam. Police Investigation leads us to believe that, this wasnt even their original name and they had accounts with multiple banks with multiple names and they emptied them all before skipping town. Now, this case will run for years and nobody will get a penny. Plus, this guy will serve a few years jail sentence and come out to splurge himself with this 1000 crores of money which he has cleverly hidden somewhere.
Why do people fall into such traps?
To put the answer bluntly - GREED!!!
The fact of the matter here is, we all work very hard and when there is an opportunity to earn quick money, not many of us want to pass up on the opportunity. So, without checking the background of the company or the credibility or should I say feasibility of such staggering return schemes, Investors blindly invest in them and ending up losing money.
Can we Spot such Fakes?
Of Course YES. It is extremely Easy. Just remember the following tips:
1. If something feels like "Too Good To Be True" It probably isnt.
2. Dont buy investment products in a haste
3. Every Stock Market related instrument carries a RISK - A Risk of Loss. If some stock market related instrument promises you guaranteed returns with no chances of losses - It is practically not possible.
4. Any Scheme that asks you to refer more people and promises a share of their profit is most probably a fake. It is a scheme that says "I got fooled, it would be a good idea if you get fooled too". I have seen too many good friendships get spoilt because of such I refer you kind of schemes.
As yourself this simple question - Can someone really give us this kind of returns? If so, why arent they actually doubling/tripling their own money instead of asking us to invest our money?
Think of it this way, If I knew the next breakthrough stock that is going to double in One months time, will I go around asking people to give me money so that I can share the profit with them? I will probably pool up my money and invest in it. Plus, I might give this recommendation to my close friends and family so that they too can profit from it. Definitely I wont be sharing it with the general public. Isn’t it?
A Real Life Story:
When I was working in TATA Consultancy Services in 2007 (A time before I actually started blogging) a good friend of mine (lets call him X) in TCS came to me with an Investment proposition which was as follows:
* I Invest Rs. 50,000/- in a "Gold - Pyramid" Scheme and in return they will give me 12 grams of antique gold coin
* For every person I recommend to join this scheme I get Rs. 5,000/-
* For every person that 1st level connection recommends I will get Rs. 2,000/-
It was clear that this was an "Amway" like Multi-Level-Marketing scheme. The first thing I asked the guy who was selling me this fantastic multi-level-marketing product was - All this is fine. But, if I give you 50,000 rupees, shouldnt you be giving me something that is worth that much regardless of whether I can make 10 others join this scheme? Common sense – wasn’t it?
At that time gold was around 2000 rupees per gram and so, the 12 grams worth of gold wasnt worth even 50% of what I was being asked to pay-up which made me extra cautious.
Do you know what that guys response was?
Why do you care? All you have to do is, get 10 guys to join the scheme and you get your money back, plus - you get to keep an antique piece of gold.
I told him that, just because I am getting my money-back doesnt mean I will sell crap to my friends and left the place. X actually introduced a few more of my colleagues to this seller guy and a couple of them (lets call them Y and Z) even ended up buying this so-called "Antique" gold coin. Do you want to guess what happened?
X and Y were unable to secure 10 people under them and ended up with a gold coin that was not "Antique" in the first place and not worth even 50% of what they paid for. They both stopped talking to X who introduced them to the Multi-Level-Marketing seller. X ended up earning Rs. 10,000/- at the expense of his two friends but lost something much more valuable than money.
Do you want to end up like X and lose your friends and family to earn a commission?
Has SEBI Done anything?
Yes. The SEBI Act 1992 has mandated the following guidelines:
No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act.
In spite of this, unregistered and illegal trading companies still manage to thrive and lure gullible investors on a regular basis.
The SEBI website now has a list of entities registered with it. Investors are thus advised to take due diligence and pause to check if the company is registered with SEBI on the site http://investor.sebi.gov.in/. On top of this, based on customer complaints, they catch and penalize such criminals who cheat investors. Unfortunately the problem here is - Unless the Investors are careful and cautious while investing their money, a market regulator cannot guarantee that such scams and ponzi schemes wont happen.
Some Precautions You can Take
The following are a few precautions investors MUST and I mean MUST take to avoid falling into such bogus schemes and frauds:
1. Dont fall for schemes that promise unusually high returns esp. if they are guaranteed and risk free. Any Investment that promises exceptionally high returns must be investigated thoroughly. Remember - Higher the returns, the higher the risk will be. No low risk instrument can offer staggering returns.
2. All legal or valid investments will have proper documentation. The scheme must have a registered prospectus, and should be able to furnish clear details about its investment strategy without being vague or ambiguous.
3. Check the SEBI and RBI Website and see if the company is registered with them. Also check the company's credibility. Use Google and search for the company. Chances are that, if people have grievances about the company, they would’ve voiced it in public forums and websites on the internet.
4. Check if the investment instrument has a credit agency rating. If it doesn’t, then be doubly cautious before buying the product.
5. Dont let personal preference cloud your judgment. Just because a close friend or a relative has invested in some scheme, it does not mean that you need to do as well. If someone is trying to sell you something, no matter who is selling it, take a pause, think through and then invest your money.
6. Dont fall for the "Once in a life time opportunity" or "Never before, never again - only for 3 days" kind of advertisements. If someone can offer such a huge discount for 3 days, they can probably do it always.
The Last thing in this list would be:
Expect Realistic Returns. The Indian Stock Market or any other country's stock market has the potential to provide returns of around 25 or even 30% in a single year but it does not always do that. The Stock Market comes with a Risk of loss and there is a good chance that the money you invest may end up being halved or even go to zero. So, Any instrument that can give you returns of around 10-12% with a decent amount of Risk would be a good option. Dont go in search of "Double your money in 6 months or 1 year" kind of schemes. There is a 99.9999999999999999999999% probability that it is a fake scheme.
Some Reasonable or should I say Realistic Rate of Returns and the Risk Level for the various Investment Products currently in India could be:
|Savings Account||4%||Very Low Risk|
|Fixed Deposits||8 to 9%||Very Low Risk|
|Corporate Bonds||8 to 12%||Low to Medium Risk|
|Government Bonds||8 to 10%||Low Risk|
|Equity Mutual Funds||15% or More||High to Very High Risk|
|Balanced Mutual Funds||12 to 15%||Medium to High Risk|
|Debt Mutual Funds||10 to 12%||Low to Medium Risk|
|Direct Equities||30% or more||Very High Risk|
|Gold||12 to 15%||Medium to High Risk|
Note: All numbers above are indicative and average only. The actual returns may depend based on the type of Instrument being bought and the returns offered by the actual instrument.
Direct Equity purchase is the riskiest of them all. The higher the risk you take, the better the reward you will reap out of the investment.
Stay Safe - Happy Investing!!!