Abstract
Innumerable unorganized collective investment schemes' fraud cases have surfaced over time in India. However, there exists minimal descriptive literary text divulging these scams and frauds, which have drowned away the hard-earned money of millions of people. This chapter has been contributory in identifying the working models, administration, and organization of unorganized collective investment schemes (UCIS), where UCIS frauds remain the keystone of groundwork concerning the cases that have transpired over the last decade in India. The chapter aims to interpret the UCIS working models concerning UCIS fraud cases in India by exploring the various models of frauds adopted by UCIS organizers.
Top1. Introduction
Network marketing or direct selling techniques have captured great attention, in less than two decades; it has provided huge self-employment opportunities and is now perceived to provide scope for creating self-dependencies especially for women (Bhattacharjee, 2016). Unorganized Collective Investment Scheme (UCIS) associations are similar to network marketing associations and “word of mouth” (WOM) is the biggest tool of success for such associations. Investor’s decisions are vigorously influenced by WOM since people undoubtedly trust their peers and relatives-the social network, in fact, these human tendencies are so strong that they are codified as a marketing strategy called “word-of-mouth” marketing (Trusov, Bucklin & Pauwels, 2009). WOM marketing strongly influences what people know, feel, and do and therefore, has a powerful effect on behavior (Buttle, 1998). WOM tends to be an efficient tool for UCIS marketers in view of the fact that it produces low cost on their part and effective for the reason that it yields widespread payoffs. Significant media coverage on UCIS frauds in the last one decade in India led us to the selection of this problem for our study.
1.1 Objective of the Study
The purpose of this study is to interpret UCIS working modes in relation to UCIS fraud cases in India by exploring the various models of frauds adopted by UCIS organizers. A critical examination of trapped UCIS investors’ demographics is also proposed in this chapter.
2. Background
Innumerous dubious schemes have floated in India since decades proclaiming stellar returns. Many times, these entities get registered under companies act to gain investors' trust by depicting to be under the government's supervision. The Saradha Group financial scandal which had over 100 firms registered with the Registrar of companies made headlines in 2013 for duping 1.7 million investors with its multi-crore Ponzi scheme. Agents were hired to collect money from the investors & in turn, were promised commission ranging from 15-20 percent. Stellar returns such as a flat or a piece of land in return became key contributors that pulled investors to this fraud (Farooqui & Nisa, 2017). Abnormally high guaranteed returns become the key factor that attracts investment from the less aware public. However, when the occasion for fulfilling promises comes, these entities vanish into thin air. The conventional definition of a CIS is “an arrangement whereby a group of investors pools in a definite sum of money with a CIS manager, who in turn invests this corpus for the purpose of generating returns which are then distributed back to the investors in the proportion of their invested sum”. The Securities and Exchange Board of India (SEBI) defines CIS as any scheme or arrangement, which satisfies the conditions of subsection (2) of section 11AA of the SEBI Act and covers any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilized with a view to receive profits, income, produce or property, and is managed on behalf of the investors. Investors do not have day-to-day control over the management and operation of such schemes or arrangements (Dhar, 2012). They are organized schemes which are managed by a collective investment management company which is incorporated under the provisions of the Companies Act, 1956 and registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999. As per SEBI act, 1992, section 11AA (3) CIS includes those schemes under which deposits are acknowledged under section 74 of the Companies Act, 2013. It is obligatory that every CIS must be registered as per CIS regulations. Only a Collective Investment Management company that has obtained a registration certificate under CIS regulations shall carry on, sponsor, or launch a CIS. CIS differs in terms of their legal form despite the fact that they are shared investment arrangements. Thompson & Choi, (2001) stated legal forms Collective Investment Schemes (CIS): First is the corporate form: The investors act as shareholders and the CIS association is deemed to be a separate corporate entity. Second is the trust form: as the name suggests, the CIS association is established as a trust and third is the contractual form: Under this, the functioning of CIS is similar to that of a contract where the funds of investors are managed by a CIS manager.
Key Terms in this Chapter
Collective Investment Scheme: A Collective investment scheme is any scheme or arrangement, which satisfies the conditions, referred to in sub-section (2) of section 11AA of the SEBI Act. Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilized with a view to receive profits, income, produce, or property, and is managed on behalf of the investors is a CIS. Investors do not have day-to-day control over the management and operation of such schemes or arrangements (SEBI).
Unorganized Collective Investment Scheme (UCIS): Similar to the Collective Investments Schemes (CIS) but not comes under SEBI preview and offered by associations which may or may not be registered.
Victim Investors: The investors who have invested in a scheme of UCIS association and have later been duped by organizers of such schemes.
Rotating Savings and Credit Association (ROSCA): A rotating savings and credit association (ROSCA) is a group of individuals who agree to meet for a defined period in order to save and borrow together, a form of combined peer-to-peer banking and peer-to-peer lending.
Information Cascade: A phenomenon that leads to a series of same decisions, wherein individuals guide their decisions based on the actions/decisions of others simultaneously neglecting their personal knowledge/information.
Committees: An unorganized association wherein investors pool in a predefined sum of money on a monthly basis that is auctioned at the end and given to the member who makes the lowest bid for the accumulated corpus.
Kitties: A fund of money for communal use, made up of contributions from a group of people.
Word of Mouth: WOM can be simply defined as the passing of information, facts, statements or beliefs whether true, deceptive, misleading, or imaginary, produced intentionally or unintentionally about a product, service, or event from one individual to another.
Multi-Level Marketing (MLM): Multilevel marketing (MLM) is a strategy some direct sales companies use to encourage existing distributors to recruit new distributors who are paid a percentage of their recruits' sales. The recruits are the distributor's “downline.” Distributors also make money through direct sales of products to customers. Amway, which sells health, beauty, and home care products, is an example of a well-known direct sales company that uses multilevel marketing (Investopedia).
UCIS Chains: Chain of investors fabricated with the help of Network Marketing, Word of Mouth Marketing, and Pyramid schemes. These tactics when executed through agents leads to the widening of the UCIS investor base.
UCIS Associations: An illegal entity set up by an individual or a group of people organized for a joint purpose. Kitty associations and committees are the most common form of UCIS associations in India.