Monday, 21 November 2011

PPF interest rate increase. Ponzi Alert! Like Social Security? (Part II)

Here is a picture of Charles Ponzi, carrying a gold handled cane and a diamond stickpin from August 1920 in New England, USA.  In my earlier post, I had shared with you the story of Mr. Charles Ponzi, who started as a small time con artist, and grew to become one of the most notorious, and certainly the earliest large scale swindler of all time. 

By the late 1920's, Charles was living the big life, with his business scheme seemingly unstoppable as more and more investors poured in their money to participate in his highly profitable business activities.  However, the banking authorities were beginning to get suspicious about this time, about the nature of his business, particularly since he seemed to spend very little time managing his business, and almost all of his energy talking about it and advertising it in the local newspapers. 

When the government authorities requested to review his business books, they began to realise that Mr. Ponzi's company hardly kept any business records.  Other than the name and addresses of his investors, there was precious little in terms of financial accounting, investments, profits earned etc.  Naturally since there was no real business, there were no business records either!  The only recourse they had was to question his investors, and Charles cleverly gave them the names of his early investors who had no cause for concern, since they had indeed received their money back, including the promised profits. 

Charles' downfall really started with a publicity agent he hired to help spread the word about his business.  This publicity agent got a close look at how Charles was siphoning off money from the newer investors to pay his earlier customers without making any actual profits, or even running a real business.  He wrote an article in the leading newspaper of the time, about how Ponzi's business we robbing people by taking money from many, and re-distributing it to some.  This caused a massive panic among the populace, with everyone asking for their money back and making a run on his business.  Ponzi tried to return as much money as he could, but that was just a tiny fraction of what he owed to his thousands of investors.  Early investigations by the bank authorities found that he owed USD $7 million, to his investors.  The federal authorities swooped in quickly and arrested Charles.  Further audits of his finances revealed that he owed about USD $20 million (remember these are in 1920's dollars) to his investors.  Most of his unfortunate investors were wiped out, receiving less than 30 cents on the dollar.  Charles was arrested, indicted and convicted on counts of fraud and larceny, and spent several years in prison.  He was not finished with his swindling methods, and found ways to continue his nefarious activities after being released from prison. 

His main claim to infamy however continues to be his first large scale scheme that he ran, and all subsequent business schemes where the crux of the strategy is to pay early investors by collecting money from newer investors, have since then been called Ponzi Schemes

The Public Provident Fund Scheme or PPF, was issued vide Government of India, notification No. GSR1136 dated 15th of June 1968, and further amended from time to time.  It is a savings scheme that also serves as a retirement planning tool for many who do not have a structured pension plan covering them.  Individuals and HUFs can open a PPF account. A person can have only one account in his name.  The initial PPF account has a maximum tenure of 15 years, and your investment is ideally locked in for the entire tenure.  This rule is in place to encourage long term savings behavior from investors, with a penalty system in place for early withdrawals.  Investors can choose to extend the scheme beyond the 15years, in blocks of 5years each.  The PPF scheme is probably the most popular savings and tax management schemes for small investors in India.  The first thing that most salaried employees (and for that matter self employed businessmen) do, once they start earning a regular income, is to open a PPF account and start saving and investing for the future.  The PPF scheme is backed by the Government of India, and thus there is no risk of the scheme failing.  Since your money is so safe in this investment avenue, millions of Indians are invested in the PPF scheme, and the new generations since 1968 are taught by our elders to compulsorily invest in the PPF scheme, as a safe means to accumulate and grow your corpus in preparation for retirement. 

Next time, more about the PPF scheme, and some amazing similarities to Mr.Ponzi!

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