India is no stranger to investment scams. From schemes which promise exceptionally high returns to fake share trading companies which are not registered, gullible investors are lured almost every other day. In the light of the recent Stockguru India scam, this article creates awareness among investors to watch out for such fraudulent companies and avoid losing one’s hard earned money.

Stockguru India (SGI) – The Modus Operandi

Stockguru India, claiming to be India’s premier financial consultancy firm, has allegedly duped investors to the tune of Rs. 1,000 crores. It offered investors investment advisory services, portfolio management services, trading solutions in equity and derivatives, insurance, mutual funds and IPO. Yet this firm was not registered with SEBI or RBI. It has now left thousands of investors in the lurch.

SGI floated a scheme promising high returns for a minimum investment of Rs. 10,000(plus registration fee of Rs. 1,000). For the first six months it offered returns of 20% per month. The principal amount would apparently be returned after six months. Post dated cheques for the repayment of the monthly interest plus a promissory note as security was given to investors on registration. Such huge returns, at volatile market conditions, are definitely impossible, which brought it under the scanner of authorities. SGI’s promoter Lokeshwar Dev Jain is now absconding.

Why do People Fall into the Scam Trap

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”.

Yet, unregistered trading companies still manage to thrive and lure gullible investors. The prime reason for this lies in the fact that many small investors fall into the temptation of earning quick money. Without checking on the background or credibility of such schemes, investors blindly jump into such schemes to make money the easy way and in turn burn their fingers.

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/

Recent Investment Scams

Ø Kanak Dhara Investment Scheme

Delhi based Pavi Overseas Pvt Ltd have duped investors to the tune of Rs. 120 crores, through their investment scheme called Kanak Dhara. Floated by a father son duo, the company was started as a multi level marketing company in 2007. Investors were promised high returns through their pyramid- type scheme. At the earlier stages, investors were allowed to make gains to attract more innocent investors into the scheme. Investors were also additionally promised a margin on each new investor they would bring into the company. After accumulating close to Rs. 120 crores, the two went absconding. A complaint was registered against them by the Economic Offences Wing in 2010, following which they were arrested.

Ø Citibank Staff Fraud

Recently a mid level relationship manager at Citibank’s Gurgaon branch allegedly carried out a fraud to the tune of Rs. 400 crore. He lured his High Net worth Individual (HNI) clients, into investment schemes which in reality never existed. To ensure the entire transaction looked real, he used forged bank documents and a forged notification of Securities & Exchange Board of India. The fraud came to light when one of the customers had raised a complaint to the bank, about a scheme floated by the employee. Nearly 40 clients, including a few big corporates have been affected by this fraud.

Investor Precautions

• Do not fall for schemes that promise high, guaranteed risk free returns. An investment which promises an exceptionally high return must be investigated upon. Remember the higher the returns offered the risk involved increase as much.
• All legitimate investments must have proper legal 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.
• Check on the company’s credibility. Does it have a credit agency rating? Also, the company must be registered with SEBI or RBI.
• Do not be pressurized to invest in schemes. Common statements such as “become a crorepati in 6 months” or “last few days to earn high returns, etc… should clearly not be a reason to choose an investment.
• As far as possible deal with a certified financial planner, AMFI certified distributor or IRDA certified insurance agent. Do not hesitate to check the identity card of the person with whom you are dealing.

Written by Ramya Ramachandran

Read more investment and financial planning articles