Addressing ponzi schemes: the three parts of the solution strategy

There is a great deal of moral outrage about ponzi schemes. Parliament is being asked to "do something!". We have seen this movie in India before. Laws are enacted as a knee-jerk response to an event. Quick and dirty responses are poorly thought through, which perpetuates the cycle of underperformance in public administration [example: IRDA/SEBI ordinance, example: MFI bill; example: Lok Pal Bill;].



Laws are the DNA of government, and the drafting of laws should be done with extreme care. The drafting of law should:

• Be rooted in adequate technical expertise from four fields: in the subject matter, in public administration, in law and in public economics.


• Reflect diverse viewpoints and interests


• Be rooted in a consultative process


• Reflect an understanding of international experience


• Be forged out of a sophisticated debate about alternative design choices.

All too often, in India, we rush in to offer a legislative response while cutting corners on these six requirements.

In the field of finance, the process of policy reform began with a committee process from 2005 to 2011 which mapped out the big ideas for policy reform through a series of expert committee reports. This led up to the establishment of the Financial Sector Legislative Reforms Commission (FSLRC) which worked for two years. A cast of 146 participated in the work of FSLRC, which has drafted the Indian Financial Code. In addition, hundreds of people participated in the committee process that led up to FSLRC. If this full process of policy analysis, from 2005 to 2013, had not been undertaken, the solutions at hand would be a lot inferior.

With this knowledge in hand, it is possible to isolate the three elements of dealing with ponzi schemes, which are in the three blog posts that I just put up on this blog:

1. The first issue is the question of jurisdiction: Is X a regulated activity and who is the regulator in charge? (By Smriti Parsheera and Suyash Rai).


2. The second issue is about regulatory strategy, and the Indian Financial Code has three elements that would impinge on ponzi schemes: micro-prudential regulation, resolution and consumer protection. (By Suyash Rai and Smriti Parsheera). The approach is, of course, more general and applies to all savings/investment schemes. But it's interesting and important to understand how this approach addresses the immediate problem that we face today.


3. The third issue is that of the investigation and enforcement process, where certain maladies have afflicted existing approaches. (By Shubho Roy).

Also see The law that can kill ponzis, once and for all by K. P. Krishnan, Smriti Parsheera and Suyash Rai in the Economic Times.