A few months ago, I found myself sitting inside the office of a Bangladeshi investment company I will not name. I was accompanying a relative of mine who went to claim funds she had invested in this “e-commerce” company two years ago.
Needless to say, she never got more than one interest repayment, and now her entire investment is locked up in the company bank account seized by the government over a year ago.
First let me tell you the story of the company.
This particular company started its operations in Bangladesh in 2009. Apparently, it is an “e-commerce” company generating funds from “software.” Private investors buy stakes in the company, which promises annual interest rates of over 20%, well above the 12% annual rate on most deposit accounts of local commercial banks.
The company operated well for a while which suddenly brought in an influx of small private investors (mostly from middle-income families) from all over Bangladesh. Then, as is often the case, the company started performing badly and soon the government “realised” the scam and “took necessary action.”
At present, the management officials are on the run while one of the directors is behind bars, pending trial. The investors have formed their own organisation dedicated to recovering their lost investments by selling company assets (of which there are hardly any apart from a five-storey office building) and government seized bank accounts. Sources say that the company owes about Tk4,500m to its investors.
This, in a nutshell, is the story I heard from one of the members of the investor-formed organisation dedicated to rescuing their investment funds.
This story of one of several similar scams raised several questions in my mind.
1. How did such a “shady” company even get permission to begin operation in Bangladesh from the Registrar of Joint Stock Companies?
2. How did it so quickly expand its operation across Bangladesh?
3. Why did so many small, private investors invest their life savings in a company with sketchy “e-commerce” activities.
The answers to these questions hold the key to understanding such fraud and stopping such scams in the future.
Firstly, the private sector regulation and supervisory infrastructure of the government is extremely weak. Bribing government officials to open companies is almost an open secret in a country fraught with corruption.
Hence, one of the solutions is to inevitably develop a more strong regulation and supervision framework to monitor the private sector, typically during the first few years, when these companies expand their activities.
I believe this would drastically bring down the rate of such scams as most company founders and management look to make as much money as possible initially (a myopic approach) before vanishing into thin air.
So, the more the framework can keep a check on their activities, the less they can conjure such money-making scams; inevitably, the incentive decreases with reduced profit prospects in the near future.
The answer to the question is rather simple. Most private, small investors rely on words or recommendations from other private investors who are typically family, friends, relatives or acquaintances. The company concerned had a good track record in the first year, which instantly pulled in small investors.
Now, you might wonder how the company did well initially? Firstly, such company founders bring in investment of their own to pay the initial investors.
When investment starts flooding in, new investment funds are inevitably used to pay older investments (much like how government pays sovereign debts). Of course, once the new investments start drying up, the companies start performing badly before failing. By that time, the management has already made huge a amount of money, most of which most likely goes offshore or remains inside the country as black money.
To prevent such scams, investors need to closely monitor and understand the company activities at least for as long as three years before investing cautiously. One should not invest in a company whose business models s/he does not understand.
If the management says company activity is sound but complicated, and beyond the comprehension of investors, it is a clear warning. Avoid such companies at all cost if you do not want to lose your hard earned money.
At the same time, do not rely on words of others when making investment without doing your fair share of research. Otherwise, you should prepare yourself for a disaster as you might witness the unfolding of such scams.
Over 90% of the investors barely understood the activities or operations of the company I was initially talking about. They only knew that it was some “e-commerce” business paying over 20% return on investment.
Ultimately, safe investing in Bangladesh boils down to three things. First, the government needs to drastically improve its regulation and supervisory framework, especially at the initial stages.
Second, private investors should not make large investments without understanding the company operations or business model.
And finally, investors should only invest gradually after personally observing the company operations for a while.
Source: Dhaka Tribune