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 mainly rely on a constant flow of new investments to provide returns to older investors. When this flow runs out, the scheme falls apart.
Why in news?
SEBI’s reply to SC:
- 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.