Tuesday, May 7, 2013

MANAGING GREED- Chit Funds and other pickpocketing schemes

The latest financial scam where people lost money (the Saradha Chit fund of West Bengal) proves just two points: i) There is still a lot of financial illiteracy; and ii) Those who are literate find it difficult to curb greed. We can assume that some of the investors had no idea about anything other than bank deposits and were simply lured by high profile selling tactics of the neighbourhood agent and lost their moneys. Surely, there will also be a large bunch, who were lured in to it by what they thought was “easy money “. Today, there are thousands of schemes floating out there that will leave you poorer. Whether it is a gold deposit scheme or a booking scheme in some real estate project or a MLM scheme or a fixed deposit scheme with fancy returns, each one of them is fraught with risks of the unknown. Almost all of them have exhausted their legitimate ways of raising money and are banking on the gullible Indian to lend them money. It is possible that a few of them may not have bad intentions. They may genuinely believe in their project which may be dependent on too many things going right and exactly as per their expectations. Let us do some logical thinking. If a bank deposit can give us, say, nine percent per annum for a three year period, some else can give us nor more than two or three percentage points more than that. If they are willing to offer you, say, eighteen percent per annum, it means that after all expenses; they should be able to earn more than that. There are very few businesses that earn this kind of money and those businesses are unlikely to need or borrow money. This has to be your starting point. Find out what are they going to do with the money they take from you. Often, you will get stories of your money getting invested in land or property. This is the biggest risk and there are no guarantees that the price will rise and one can sell it in time to repay any money. The other thing you will notice is that none of these borrowers and fund raisers will tell you how many legal and illegal entities they run, what are the financials, who are the directors etc. It generally means that the only business of the borrower is to raise money and keep on doing it till the whole thing collapses. And most of them will never give you a full picture of who the promoter is, what his background is, what success he has achieved in any domain of business etc. There are salesmen who push these schemes at you. They get very high commission rates. They may be called agents or some such designations. Apparently this is the only income that person may be having. If someone comes, ask him directly about what commission he gets. You will never hear the truth and get some evasive answers. Real estate bookings are another area for you to lose money. The company, again, will not show you any balance sheet. One plot of land in a far away location, perhaps one model house and no government permissions in place but asking you for money is another sure road to losing money. Most likely, you will end up with a piece of land that will never be saleable at any price. Similarly, booking apartments is another high risk game. I had personally booked an apartment in a property called “Estancia” by a builder called Arun Excello near Chennai. The handing over is delayed by five years and what appreciation I hoped for is a mirage. The best of builders cannot withstand a slow down or a delay. So if you are investing in property, go for ready property in prime location. I would urge people to make a checklist of a few questions they should ask before they invest money: i) Who are the promoters? Any track record? ; ii) Their latest accounts are a must; iii) What are group companies? Any record of success? iv) What business is it that earns more money than the interest it promises to pay you? v) Why can it not get money from a bank and is approaching you? vi) Is there a way to know how much money they have raised? Will raise? vii) What is the entity that is borrowing? If it is not a listed company, the chances of losing are so much higher. Not because listing gives any guarantee but because there are some regulators and there is disclosure. viii) Do not lend or invest money in proprietary, partnership, cooperative or private limited entities. ix) Never invest money in a scheme where the name of the borrowing entity is not disclosed; x) If they accept cash, stay away. You will lose your money for sure. xi) Invest only if it is a scheme like a FD or Debenture that has a credit rating in the public domain xii) Be sceptical about everything and everyone when it comes to money. Ideally, one should keep away from all these schemes designed to transfer wealth from your pockets to someone else’s.

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