The Kerala crime branch on Sunday arrested Padma awardee Sundar Menon, the founder of Heewan Finance and Heewan Nidhi, two finance companies operating out of Thrissur, for allegedly defrauding investors Rs7.78 crore.
Menon had reportedly promised investors that their investments will be doubled on maturity but failed to return even the principal amount when time came.
This is the latest instance of financial fraud where the lure of getting double as rich drives hapless investors into a trap of fraudulent schemes promising astronomical returns. Although the amount at stake in the Menon case is relatively small compared with similar cases reported in recent past, the trend and modus operandi of the scheme is largely the same.
Such companies lure investors with unrealistic returns in a short period of time often promising to invest in stock markets or in real estate. They often operate without required legal permits and in collusion with local politicians. In the Heewan drama, too, the script is largely the same.
This isn’t the first such case in Kerala. In August 2021, the Enforcement Directorate had arrested top executives of Popular Finance, another Kerala-based company, for defrauding investors for about Rs 2,000 crore.
The Popular Finance promoters operated 1,760 accounts across different banks, had investments in several countries to which the money raised from local investors was routed, and illegally ran many subsidiaries.
In August, 2021, a group of investors in Goa were conned by a former bank manager on the promise of 2-5 percent monthly returns on their investments from the stock market. The perpetrator duped HNIs by promising them high returns from derivative instruments like Index Stock Option Funds.
Later, he diverted a significant chunk of the money for personal gains, using forged documents. Again, in January 2023, a case was reported in Kerala where a couple sourced Rs 100 crore from several investors, including doctors, high net-worth individuals (HNIs) and actors, promising returns as high as 20-40 percent on their investments from the stock market and later diverted the money.
In a way, such cases are much like a song playing on loop. Biting the bait of higher returns, gullible, if not greedy, investors hand over their hard-earned money to the finance company, only to find that their money was gone. It has been happening with alarming regularity but that doesn’t seem to deter people.
As per the RBI data, even among regulated entities, the number of reported frauds have been on the rise. The number of frauds in the banking sector went up to 36,075 in 2023-24 from 13,564 a year back, but the money involved went down to Rs 13,930 crore from Rs 26,127 crore.
As this column has been highlighting, there are a few lessons for investors form such financial scams.
The first and foremost is do not put all your money in a single firm, no matter how big the promised returns are. Financial institutions are susceptible to industry whirlwinds and massive frauds. It makes sense to invest across asset classes and different companies to lower the risk.
Second, check the credentials and make sure the company is doing business as permitted by the regulatory approvals. A background check can be done by approaching registered financial advisors or by visiting websites of the concerned regulators or authorities.
Third, be wary when someone approaches you with promises of unusually higher returns in a short time. If it is too good to be true, it probably is. Regulators, both the Reserve Bank of India and the Securities and Exchange Board of India, have repeatedly reminded investors to be cautious but few pay heed.
Fourth, keep in mind that return of capital is even more important than return on capital at a time when the financial market fights an unprecedented crisis, liquidity issues and asset-quality problems. The numbers of frauds have been going up in RBI-monitored commercial banks.
Remember, in most such cases where fraudulent activities are involved, it takes a long time for the investors to get their money back. Often it involves a long investigations and asset sales. Hence, it is in the interest of such investors to stay away from such firms. Individuals or institutions promising too-good-to-be-true returns lure investors into a deadly trap. Always look at promises of unrealistic returns with caution.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
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