How to Identify Companies Which Dupe Investors?

Hope all is fine and you have no outstanding from the Shardha Group of Cheating Companies. If yes than, my heartfelt condolences. Although the West Bengal politicians want that the residents of the state to smoke more (strong contender for case study at London school of Economics) and pay for lapses but all said and done it will be a long process by which you can get a part of your investment back.

One bad decision, one bad advice, one bad selection and one bad result. These so called investment avenues called by legal names and working under the legal framework of Collective Investment Schemes” such as Chit Funds, Multi-level Marketing or Deposit Raising companies have eroded the common man’s wealth and then also people fall prey… again and again.

Why does a scheme defaults?

1)      It is made to cheat and siphon off money from general public. The promoters of the company have no business plan but they know that if they can mock a business plan they can get investors and then they can exit taking cash and other assets.

2)      The company started with a plan but could not settle and planning failed. Promoters do not want to accept failure or they have their credibility, brand or other business at stake so they do not consider winding up legally instead prolong the affairs by window dressing books, media play and false commitments.

The type 2 is easy to know as they are established companies going a down fall. The information regarding these companies is wide spread as they have been operating for good amount of time. Sometime these companies have sister concerns listed in stock exchanges and the financial data is known to general public. By studying these data and a bit a research from market experts can be helpful to know about the real motives of the promoters.

How to identify a Runaway Bride?

It is tough to identify the type 1 companies. Although difficult but there are few ways and parameters to identify a scheme which is going to default or run away. These ways are:

1)      Over the market returns:

These companies offer over the market returns. Returns act as stimulus to greed. You offer a rate which is 4-5 % of bank fixed deposit rate, people find it attractive. Even the retiring uncle will be tempt to put 20% of his retirement kitty in these companies, explaining himself that the company won’t run and even if it runs away I will be ruined by 20% of net worth only and that will be a god willing event. Just ask question to yourself that when Banks are flooded with liquidity, why doesn’t the company take a bank loan and pay interest which will be less in comparisons to what they paying to public. The reason is simple that bank has access to financial information and credit worthiness of the company and they are not willing to take a risk. But public has high appetite of risk. Isn’t it.

2)      Over the market middleman’s commission:

These companies offer very lucrative commission ranging from 2-6% as per target achievement. The agents also get freebies like holidays on resorts, vehicles like cycles to car, gadgets and achievement awards nights (read: free alcohol drenched parties often presided by Bollywood’s B grade actresses, handing over shining trophies). Also in rural areas normally an influential person like teacher or village headman is appointed as agent so that people get influenced by the person also.

3)      Business Plan:

These companies normally do not have a business plan or may have one or two unit operating on small scale to cover up for the existing business. An upcoming  hotel & resort chain, a media house, a precious commodity which only few can bring underneath the land, a thousand of acre of land near Mumbai, sudden demand of some green herb in US or Europe are some examples of the business objective that are displayed in general public. The idea will be that the line of business will have low awareness, so most people believe what is told since they lack questions and facts. Sometime play is made around cost also that company is making and X product in 50 percent less cost in comparison to competition hence benefit is passed to the stakeholders. As Warren Buffett said, do not invest what you don’t understand. Stick to this basic rule.

4)      Strong nonexistence guarantees:

When an investor question the risks involved the agent or the company lay false guarantees in form of cash reserve, gold reserves or the land bank in the name of the company. They make the size of your investment to peanuts and make you believe that company has lakhs of depositors investing crores of rupees and they are paying each one of them since so many years. Guarantees are often perceived guarantees when celebrities are brought (read: bought) in to inaugurate the company offices. Respected people or politicians are used as board members or called chief guest in functions. The brochure and wall of the company offices will full of such photographs specially clicked for these purposes.

5)      Dubious in where about:

When you ask about the company office the first response is that company has offices in every main city of the country. The address provide are either nonexistent or belong to group companies. The real promoters do not come in open very often and let key employees handle the affairs. There addresses and verifications are usually wrong and sometimes foreign addresses are provided so that it becomes difficult to trace. Even the assets which company says belong to them are not specified. The promoters also may have shoddy past and seem to be changing business very frequently. After Shraddha instance, my eyes too blinked when I came to know that promoter’s father also ran same kind of cheating business and to avoid connection he went for a plastic surgery!

6)      Modus operandi:

The business starts with full fanfare. No stone is left unturned- glossy brochures, website, employees all things are lined up. Initial investors and agents are rewarded in ceremonies. The big cheques of interests and commissions are paid in front of media to establish a brand. Big advertisements appear to appoint agents and franchisees. Company pays dues for few years through the Ponzi mechanism and they wait till the debt book swells to millions. Then all of sudden the cheques are dispatched late, then they are dishonored by the banks for insufficient payments. And before media and public make noise, the promoters get themselves under ground or leave India. Agents surround offices to shift blame of their foolishness and greed on company only. The investor as usual cribs on his luck (not on his irrationality and ignorance). Finally the lawmen arrives and a long legal battle starts to get the money back,  or at least a part of it.

Returns are dependent on Risk taken.
But is the risk of this nature worth to be taken to earn a some more returns?
~
Source : tflguide