The investment preferences of Indian investors can seem bewildering at times. One on hand, they perceive highly regulated mutual funds and stocks to be too risky for investment because they're subject to market volatility. But on the other, they are willing to risk their very principal with collective investment and 'deposit' schemes from unregulated entities that make hardly any disclosures.
In a mega clean-up drive, the Securities Exchange Board of India (SEBI) has been pulling up dozens of private firms and unlisted entities across the country that were running illegal deposit and money-pooling schemes, in recent weeks.
How these schemes have managed to mop up crores of rupees from hundreds of unsuspecting investors makes for interesting reading.
One set of unlisted firms raised sums amounting to crores through informal 'private placements' of fancy instruments such as redeemable preference shares or non-convertible debentures. These offered a fixed interest with the instrument redeemable after a period of say 3 or 5 years. Obviously, these 'offers' were not accompanied by filing of thick prospectuses that are mandatory for public offers. The issuers claimed that these were not 'securities' regulated by SEBI and that they were not made to the actual 'public'.
Another set of entities raised 'deposits' for investing in a variety of ingenious business ventures. One such venture collected money in SIP-like instalments from the public for buying tea. Another, following the modus operandi of Saradha Realty, offered an instalment scheme to invest in parcels of land or property. Yet another one allowed investors to buy livestock through instalments.
All these schemes, running for 3 to 6 years, conveniently allowed investors to opt for hard cash instead of tea, land or livestock, at the end of the maturity period. If they opted for cash, investors would get a fixed maturity amount, that translated into an annualised return of anywhere from 12 to 24 per cent on their investments. In both cases, when the maturity date arrived, the issuers had already fled, prompting a few investors to lodge complaints with SEBI.
But why have investors flocked to these schemes in the first place, when there are more transparent, regulated avenues such as bank deposits, post office schemes and mutual funds available to them? Access could be one reason. Most of these schemes have been flourishing in the smaller cities, towns and villages where access to these financial instruments, even bank accounts, is limited. This makes it quite easy for sharp regional operators to hire a set of local 'agents' who make tall promises and hard-sell these schemes to locals.
Celebrity endorsements for these 'brands' have also helped lure in the unwary. Let's not forget that the Sahara group, until recently, was the sponsor of the Indian cricket team and Rose Valley, which SEBI has hauled up, the patron of Kolkata Knight Riders.
But the real secret sauce for the success of all these schemes seems to lie in their 'assured' returns.
Despite all the investor awareness initiatives where mutual funds and policymakers try to convince small investors that they should put their money in transparent investments that offer market-linked returns, a large number of Indian investors don't seem to buy into that argument. What they want is the simplicity of a fixed return. No matter if the 'guarantee' isn't worth the paper it is printed on and may actually put their capital at risk.
Therefore, one solution for this ponzi scheme epidemic could be for the fund industry, partnering with SEBI, to launch a nationwide education campaign warning investors of the modus operandi and the risks of these so-called assured return schemes.
But this is also the cue for the fund industry to take a hard look at its own fixed income offerings and see where they are lacking. The current set of debt mutual funds, with all their talk of maturities and yield curves, are simply not intelligible to most investors, even urban ones.
The mutual fund industry is now two decades old and now manages myriad, nuanced products across debt, equity, gold and even offshore asset classes. Surely, it can't be so difficult for it to come up with a simple product that can meet the investors' most basic need - that for a regular, fixed income?