An unregistered portfolio management service (PMS) entity, which seems to be based in Punjab, has been using a pyramid scheme to lure clients and reward them with expensive gifts in return for bringing in more customers.
Bansun Stocks Trading has been collecting money from people, promising to "multiply" their investments "very fast." While it is like any of the scores of unregistered PMS companies that have mushroomed across the country, it also has an element of multi-level marketing (MLM), or a pyramid marketing scheme.
Simply put, it asks its clients to convince more people to subscribe to the service in return for a share of the profit that the new clients make.
This reporter reached out to Bansun as an interested client and was promised a 5 percent monthly return from the profit and extra income from bringing in more people as clients.
Moneycontrol has sent a mail to Bansun for comments and is awaiting a response.
Experts said Bansun's operations were illegal on two counts.
"This is outright illegal, violating at least two regulations. One is the PMS Regulations, and the other is the Collective Investment Scheme Regulations. To manage funds/securities/portfolio, an entity needs to be registered as a PMS, and to pool money towards a common goal, it needs to be registered as a CIS," said Ravishekhar Pandey, a principal associate at Agama Law Associates, who represents the market regulator in various cases.
Bansun does not feature in the list of PMS entities registered with the Securities and Exchange Board of India, the market regulator. Neither is it included in the list of registered collective investment management companies.
Also read: SEBI warns investors of fraud trading schemes offered by entities posing as FPIs
Structure of the pyramid
According to Bansun's advertising material, which Moneycontrol accessed, a person is encouraged to rope in others and is promised a percentage of the trading profit these people make.
For example, if A convinces B to invest, then A can earn his/her trading profit and a percentage of B's trading profit. Bansun offers 10 percent of the trading profit at level 1.
If B brings in C, then A can hope to make a percentage of the profits at two levels - level 1 would be from 10 percent of B's profit and level 2 would be 8 percent of C's profit.
There are 15 such levels in this pyramid scheme, with level 15 giving A 1 percent of the client's profit.
To start a level, a new client must bring in a minimum of Rs 50,000, according to the advertising brochure. However, this reporter was told a level could be started even with Rs 25,000.
There are other ways in which a person is rewarded. Depending on the business brought in, a client could hope to win anything from a trip to an "exclusive" location, a laptop worth Rs 25,000, a motorcycle, a hatchback, a luxury sedan and even a house.
A client bringing in Rs 15 lakh worth of business will be rewarded with a trip to Thailand. For Rs 30 crore worth of business, the reward is a luxury sedan, and for generating Rs 50 crore, the reward is a Rs 1 crore house.
However, the rewards don't include papers of vehicles such as registration certificates and insurance documents.
To encourage people to build networks quickly, an extra 1 percent of the trading profit is promised if the client brings in two people within 48 hours of joining.
Also read: SC issues notice in Chitra Ramakrishna's plea in against penalty in 'dark fiber' case
What the law allows
Registered PMS companies have to follow various rules for distribution. Bansun's MLM structure, which rewards people for distributing the service, goes against the code of conduct prescribed for registered PMS distributors.
According to the master circular issued for portfolio managers in March 2023, all distributors should ensure that commission or incentive shall never form the basis for recommending portfolio management services.
Portfolio managers are also required to ensure that distributors have certification from the National Institute of Securities Markets (NISM) by passing the NISM-Series XXI-A: Portfolio Management Services (PMS) Distributors Certification Examination.
When this reporter called Bansun as an interested client, the representative made clear the incentives that could be expected for roping in more clients but did not mention any requirement about NISM certification.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
