MONEY still doesn't grow on trees, but some enterprising businesses are promising just that. Well, almost.
Investment schemes that sound too good to be true are fast mushrooming, offering to more than double your money by investing it in the retail, car leasing, resorts and cruise segments.
This is when even top-rated fund managers are struggling to eke out measly returns in markets ravaged by the financial meltdown, and investors the world over are coming to terms with the after effects of the Madoff scandal, in which one of Wall Street's top investment firms — the Bernard L Madoff Investment Securities — was exposed as a giant Ponzi operation.
But Shree Om Sainath, City Group and Metro Cruise, three 'investment companies' that ET had a close look at, seem unfazed.
With Shree Om Sainath, you can place an order for a brand new Tata Indica for just Rs 1.25 lakh. You will get your car only after five years, but until then, the company will pay you Rs 3,435 every month. Regulators yet figure out how to monitor Ponzi schemes
FOR a deposit of Rs 1.39 lakh, City Group, which has a dozen or so businesses, including City Limouzines, City Realcom and City Hospitalities, will give you Rs 8,800 every month for five years. Metro Cruise's retail plan promises even higher returns: invest Rs 1.05 lakh, and collect Rs 12,517 every month for five years.
As part of its realty schemes, the company is also promising to issue Metro Cruise preferential shares worth Rs 50,000-95,000 depending on the scheme. According to a marketing executive, the company has about 10,000 customers, and it offers 6% commission to anyone who gets a new client to invest in its schemes. As many of these schemes do not technically take public deposits, they escape the stringent guidelines of the Reserve Bank of India (RBI). But then, just how do these firms cook up such steaming returns out of nowhere?
"We cannot give the recipe of our mutton curry to everybody," says SM Masood, chairman of City Group. His marketing executive claims that the company has about one crore investors from across the country. Market experts fear that many of these schemes promising super returns may turn out to be so-called Ponzi schemes, named after 20th century US fraudster Charles Ponzi, where cash from new customers is used to meet demand from existing ones.
And it's not just the recipe, but the entire menu that needs to be closely monitored, add experts. But they are divided on who should be the one to monitor them.
According to an RBI official, these companies do not fall under the central bank's purview.
Sharad Abhyankar of ANS Law Associates says that only public limited companies — and not private limited companies — are allowed to accept or invite deposits from public. "If any company is offering shares (equity or preference), debentures, or other securities, to the general public, such offers, or invitations, to subscribe would constitute prospectus, or offer document," he says.
"Most of these schemes that offer huge returns are Ponzi schemes. Hefty returns are not possible," says Hinesh Doshi, vice-president of The Investors' Grievances Forum (IGF), adding that the regulators need to step in to find out how these companies can generate higher returns.
"Our company is not an investment company, and we are not accepting any investments or deposits from the public," Shree Om Sainath said in its response to an questionnaire emailed by ET.
"We are in the sale of membership of our company-owned resorts, hotels and apartments across the country, developed or under development," the company added.
But a call to the company had a marketing executive pitching for two schemes. One was the car scheme involving the Indica, while the other — investment in a resort — offered a return of Rs 8,040 per month for five years on an initial investment of Rs 1.25 lakh.
A similar call to Metro Cruise, with a reporter from ET posing as a prospective client, had the company's marketing executive detail three plans in retail, real estate and car leasing segments.
At the City Group, super returns of four times the principal amount in five years is from investing in a sector like real estate, which is going through its worst patch in years. The regulators are still establishing where the responsibility of policing these companies lies.
A Sebi official, who didn't want to be named, says: "Is it an nonbanking finance company (NBFC), collective investment scheme (CIS), or is it raising fixed deposits under the Companies Act? If it doesn't come under Sebi, then we can discuss the matter with the appropriate regulatory body and take action accordingly."
Meanwhile, these companies continue to press ahead with their marketing, with advertisements that promise assured returns and handsome profits. The ads claim that the money will be invested in various businesses, but do not give details of the schemes and the exact returns to avoid the scrutiny of regulators. From the time an investor puts in the money, the company starts issuing cheques to build confidence. This prompts the investor to rope in more investors, with some firms even offering commissions for bringing in relatives and friends.
ET Mumbai 15-05-2009
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