How to identify and report investment fraud

Learn how to identify and report investment scams that are worrying Indian investors. From Ponzi schemes disguised as high-return mutual funds to fake cryptocurrency exchanges, understand how fraudsters manipulate the financial system. If you are an investor, financial advisor, or aspiring securities lawyer, this guide will be invaluable.

Introduction

“Remember that investment opportunity I told you about last month? The one promising 36% annual returns with zero risk?”

My colleague, Krutik, a securities market enthusiast, cornered me at an office party, his voice barely above a whisper. By now, I can recognise his particular tone of dread.

“The Wealth Multiplier Fund? What about it? You seemed pretty excited about their guaranteed returns and that fancy office in Bandra-Kurla Complex.”

“That office was rented for just three months. The fund has vanished overnight with Rs. 847 crores of investor money. My entire savings are gone.”

For context, Krutik understood finance better than most people.

“But wait, they have SEBI registration too, right? What about all those testimonials from satisfied investors on their website?”

“All fake. The SEBI registration number was fabricated. Those ‘investors’ giving testimonials? Paid actors. The mutual fund they claimed to invest in? Does not exist. This is what securities lawyers call investment fraud, and it is destroying middle-class families across India every single day.”

How come you did not find the higher returns suspicious?, I asked. 

“Because they did not start with 36% returns. They began with 12%, which was barely above the rate of fixed deposits. After six months of regular payments, they gradually increased the promised returns. By then, we trusted them completely. They even encouraged us to bring in family and friends.”

This conversation opened my eyes to something disturbing. As a lawyer with decent exposure to securities law, I would always be focused and intrigued by the high-profile frauds. But I realised that smaller, more personal investment frauds were destroying common men who had no idea how to protect themselves.

The terrifying reality? When investment fraudsters steal your money, recovery is often impossible. Families lose homes, children drop out of college, and dreams get shattered forever overnight.

In this article, I will walk you through everything you need to know about investment fraud: how to spot it, what to do if you are scammed, and which authorities can help you get your money back.

What exactly is investment fraud?

Picture this: You are sitting at your study table, calculator in hand, planning your family’s financial future. Every rupee matters. You have worked hard and saved. You know the golden rules by heart:

Your financial safety net:

• Spread the risk: The golden rule is to never put all your money in one place.
• Check credentials: Only trust verified, registered professionals. 
• Accept reality: All investments carry some risk; that is just life. 
• Trust your gut: When something promises the moon, it is usually selling you air. 

These are not just rules, they are your family’s shield against financial downtime. You have seen neighbours lose everything, and heard stories of relatives getting cheated. Not you. You are too smart for that.

Then your world shifts in one conversation.

Your brother calls, excitement bubbling in his voice: “I found something incredible! This Wealth Multiplier Fund guy came to our office today. Thorough professional, genuine certificates, the works. He is promising to double our money in six months, completely risk-free!”

He continues: “The Sharmas from our building have already invested Rs. 20 lakhs. Mrs. Gupta got her first payout last month: Rs. 50,000 profit on her Rs. 5 lakh investment. This is our chance!”

Suddenly, your carefully built defences start crumbling. The returns sound incredible. People you know are benefiting. What if you are being too cautious? What if this is the real deal, and you will regret missing out forever?

Against every instinct, you write that cheque for Rs. 8 lakhs.

The first three months feel like magic. Regular payments arrive. Your brother treats the family to dinner with his “profits.” You start calculating how you will use the doubled money, maybe a bigger house, and your education abroad is fully secured.

Then silence.

Calls go unanswered. The office address leads to an empty room. The “profitable” neighbours you heard about? They were actors, paid to create fake success stories. Your Rs. 15 lakhs; gone. Your brother’s money vanished. Mrs. Gupta’s “profit”? It was just recycled money from new victims like you.

What happened here?

This was not just theft; it was a psychological battle. The fraudster did not just steal your money; they weaponised your:

• Fear of missing out (seeing others “benefit” created urgency)
• Hope for a better future (the promise aligned with your dreams)
• Trust in community (familiar faces made it seem safe)

The devastating truth:

Every rule you followed for years was systematically dismantled in one conversation. The fraudster knew exactly which emotional buttons to push, which fears to exploit, which dreams to hijack.

Your new reality check:

Financial hygiene is not just about spreadsheets and regulations, it is about protecting your emotional vulnerabilities. Before handing over your hard-earned money, pause and ask:

• “Would I invest in this if my brother had not called?” (Remove emotional influence)
• “Can I verify this independently, without their ‘proof’?” (Check SEBI registration yourself)
• “Am I investing or gambling with my family’s future?” (If it sounds too good, it is)

Remember: Real investments grow slowly, like trees. Fraudulent schemes promise instant forests but deliver scorched earth.

The choice is simple: momentary greed or lifelong security. Choose wisely.

Glimpse of the statutory framework of investment fraud 

Here is what protects you under Indian law:

A. Primary securities laws

a. Securities and Exchange Board of India Act, 1992

• Covers: All investment products, including stocks, mutual funds, bonds, and derivatives. 
• Powers: SEBI can freeze assets, arrest fraudsters, and ban them from carrying out any business in the capital markets. 
• Key provision: Investor protection is SEBI’s primary mandate. 

b. Companies Act, 2013

• Covers: Public deposits, share issues, and corporate governance.
• Mandatory: All public companies must disclose financial information truthfully.
• Powers: The Serious Fraud Investigation Office (SFIO) can investigate and prosecute. 

c. SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003

• Covers: Market manipulation, insider trading, and misleading investors
• Violations: Include spreading false information and operating unregistered investment schemes
• Penalties: Both civil and criminal liability

d. SEBI (Prohibition of Insider Trading) Regulations, 2015

• Covers: Trading on unpublished price-sensitive information (UPSI) and breach of fiduciary duties by insiders and connected persons. 
• Violations: Include trading by company insiders, tipping off others with UPSI, front-running, and violation of trading window restrictions during blackout periods. 
• Penalties: Monetary penalties up to Rs. 25 crores or three times the profit/loss avoided, disgorgement of unlawful gains, ban from the securities market, and criminal prosecution. 

C. Specialised investment protection

a. Foreign Exchange Management Act (FEMA), 1999

• Covers: Forex trading scams and unauthorised foreign investments
• Mandatory: All forex transactions must go through authorised dealers
• Violations: Can lead to penalties up to three times the amount involved

b. Prize Chits and Money Circulation Schemes (Banning) Act, 1978

• Covers: Ponzi schemes, pyramid schemes, and chain marketing
• Complete ban: Makes it illegal to promote or participate in such schemes

Before we move to the next part, let us understand:

Pyramid schemes are fraudulent investment models where returns are paid using new investors’ money rather than legitimate profits.

Similar to a pyramid scheme, chain marketing involves bringing in others to join and buy products or memberships, with earnings tied more to recruitment than actual sales..

D. Criminal provisions

a. Bharatiya Nyaya Sanhita, 2023

• Section 318-322: Cheating and fraud 
• Section 61: Criminal conspiracy in investment fraud
• Section 336: Forgery of investment documents

b. Information Technology Act, 2000

• Section 66C: Identity theft for investment fraud 
• Section 66D: Cheating through online investment platforms

If terms like Ponzi scheme or forex scam sound unfamiliar, do not worry, everything is explained in the next segment.

What does investment fraud look like?

Let me walk you through the most common ways fraudsters steal your money:

1. Ponzi scheme

How it works: Uses money from new investors to pay returns to earlier investors, creating an illusion of legitimate profits while the operator diverts funds for personal use. The scheme inevitably collapses when new investor recruitment slows or withdrawal demands exceed new deposits, leaving most participants with total losses.

Red flags: Consistent high returns, pressure to reinvest, recruitment bonuses

Real example

The Saradha Group scam in West Bengal collected over Rs. 2,500 crores from small investors, promising 24% annual returns. The scheme operated like a traditional Ponzi, using new investor money to pay earlier investors while promoters siphoned off funds for personal use. When it collapsed in 2013, over 1.7 million investors lost their life savings.

2. Fake mutual funds 

How it works: Fraudsters create fictitious investment schemes that mimic legitimate mutual funds, collecting money from investors with promises of high returns and professional management. They either never invest the money or invest in high-risk ventures while fabricating performance reports, eventually disappearing with investor funds when the scheme becomes unsustainable.

Red flags: Unverified AMC registration, guaranteed returns, no daily NAV updates

Real-world example:

In 2019, the Karvy Stock Broking scandal involved unauthorised use of client securities worth Rs. 2,300 crores. The company pledged client shares to raise funds for proprietary trading, violating SEBI regulations. When the scheme unravelled, thousands of investors discovered their securities had been illegally used as collateral.

3. Crypto scams

How it works: It typically involves fake cryptocurrency exchanges, fraudulent ICOs, or pump-and-dump schemes where scammers create worthless tokens or promise guaranteed returns on crypto investments. They exploit the complexity and lack of regulation in crypto markets to steal investor funds through fake platforms, phishing attacks, or by abandoning projects after raising money.

Red flags: Guaranteed returns, unregulated platforms, withdrawal restrictions

Real example

The GainBitcoin Ponzi scheme, operated by Amit Bhardwaj, collected over Rs. 2,000 crores from investors promising monthly returns of 10% through bitcoin mining and trading. The scheme collapsed in 2018 when investigators found no actual mining operations or trading activities. Thousands of investors, many from middle-class families, lost their savings.

4. Insurance mis-selling 

How it works: Agents or companies deliberately misrepresent insurance products by hiding critical terms, exaggerating benefits, or selling inappropriate policies that do not match the customer’s needs or his/her financial capacity. They often target vulnerable populations with complex products, earning high commissions while leaving customers with inadequate coverage or policies they cannot afford.

Red flags: Guaranteed returns promises, pressure tactics, hidden terms

Real example

Just sometime early this month, the Karnataka State Consumer Disputes Resolution Commission ordered HDFC Life to refund Rs. 40 lakh and pay Rs. 10.25 lakh as compensation for mis-selling. An agent had sold a pension plan under the guise of a fixed deposit, making false promises to lure the consumer. 

5. Real estate frauds

How it works: Involves selling non-existent properties, multiple sales of the same property, or projects without proper approvals and clearances. Developers collect money from buyers through false promises of prime locations or guaranteed returns, then either deliver substandard properties with unclear titles or disappear without completing construction.

Red flags: Below-market prices, full upfront payment, missing approvals 

Real example

The Amrapali Group case involved over Rs. 3,000-4,000 crores of investor money across multiple real estate projects. The Supreme Court found that the group diverted home buyers’ money to other ventures and failed to complete promised projects. Thousands of families who had invested their life savings in dream homes found themselves with no property and no refund. 

6. Deposit schemes 

How it works: Operators collect public deposits promising abnormally high returns (often 20-30% annually) without regulatory approval or legitimate business backing. They pay initial investors using new deposits to build credibility and attract more victims through word-of-mouth referrals. The scheme inevitably collapses when withdrawal demands exceed new collections, leaving depositors with a total loss of their savings.

Red flags: Above-market interest rates, no RBI registration, door-to-door agents

Real example

The Rose Valley chit fund scam in eastern India collected over Rs. 15,000 crores from small investors through agents who went door-to-door in rural areas. The company promised returns of 20-24% annually through various schemes. When it collapsed in 2013, over 10 million investors, mostly from economically weaker sections, lost their savings.

7. Forex trading

How it works: Fake platforms promising guaranteed forex profits
Red flags: Guaranteed forex returns, offshore operations, crypto payments

Common Pattern: Fraudsters create fake trading platforms showing artificial profits, collect money from investors promising high returns from forex trading, then disappear when withdrawal requests increase. Most operate from outside India using cryptocurrency to avoid detection. 

What is the impact of investment fraud?

No discussion on investment frauds in India would be complete without mentioning the infamous Harshad Mehta case. Let us delve into this landmark scam to analyse and understand the far-reaching consequences of investment fraud.

The setup: India’s “Big Bull” of Dalal Street

In the early 1990s, Harshad Mehta was hailed as the “Big Bull” of India’s stock market. This charismatic stockbroker from a middle-class family had transformed himself into a market wizard, driving the Sensex from 1,000 to nearly 4,500 points. His lavish lifestyle, complete with a fleet of luxury cars and a sprawling Worli apartment, made him the poster boy of India’s economic liberalisation.

The promise: Easy money in a booming market

Mehta’s strategy appeared brilliant: he identified undervalued stocks and pumped massive funds into them, creating bull runs that generated spectacular returns. Banks and financial institutions lined up to give him money, trusting his golden touch. His followers believed they were riding the wave of India’s economic transformation under the new liberalisation policies.

The reality: A Rs. 5,000 crore web of deception

Mehta’s success was built on a complex web of fraudulent transactions involving government securities and bank receipts. He exploited loopholes in the banking system to illegally divert funds from banks into the stock market, using fake Bank Receipts (BRs) and Ready Forward (RF) deals.

The mechanism:

• Banks would give Mehta money to buy government securities. 
• Instead of buying securities, he diverted funds to pump specific stocks.
• He used fake bank receipts as collateral for more money.
• The inflated stock prices created paper profits that attracted more investors. 

The collapse and lasting impact

In April 1992, journalist Sucheta Dalal exposed the scam in The Times of India. Scale: Rs. 5,000 crore fraud. 

Immediate financial devastation

• Stock market crash: Sensex plummeted from 4,467 to 2,713 points
• Banking crisis: Multiple banks faced severe liquidity problems
• Investor losses: Thousands of small investors lost their life savings
• Market confidence: Complete erosion of trust in Indian capital markets

Transformative regulatory changes

The scam forced India to completely overhaul its financial system:

• SEBI empowerment: The Securities and Exchange Board of India received enhanced powers to regulate markets.
• Dematerialisation: Introduction of electronic trading and demat accounts to eliminate physical share certificates.
• Banking reforms: Stricter controls on inter-bank transactions and treasury operations. 
• Disclosure norms: Mandatory disclosure requirements for listed companies and market intermediaries. 

Right after the scam, what changed in the Indian financial system?

The Harshad Mehta scam remains India’s most transformative financial fraud because it:

• Modernised indian markets: Forced adoption of electronic trading and better oversight
• Created investor awareness: Educated retail investors about market risks
• Strengthened institutions: Led to the creation of a solid regulatory framework
• Changed banking practices: Introduced stricter treasury management in banks

Now, coming to the point, what was its impact? 

The Harshad Mehta case illustrates how investment fraud creates ripple effects that extend far beyond immediate financial losses:

1. Systemic market Impact

• Market volatility: Fraud schemes artificially inflate asset prices, creating bubbles that inevitably burst and cause market-wide instability. When fraudulent schemes collapse, they often trigger broader sell-offs as investor confidence evaporates.
• Liquidity crises: Large-scale frauds can freeze credit markets as banks and institutions become reluctant to lend, fearing hidden exposures to fraudulent activities.

2. Individual investor consequences

• Wealth destruction: Investors lose not just their principal investment but also potential future returns, severely impacting retirement planning and financial goals.
• Trust erosion: Fraud victims often become permanently risk-averse, avoiding legitimate investment opportunities and settling for lower returns, which can hinder long-term wealth building.
• Psychological impact: Financial fraud creates lasting emotional trauma, leading to anxiety, depression, and relationship strain among victims.

3. Broader economic effects

• Reduced capital formation: Investment fraud discourages savings and investment, reducing the pool of capital available for legitimate business growth and economic development.
• Regulatory costs: Governments must invest heavily in oversight and enforcement, costs that are ultimately borne by taxpayers and market participants through fees and compliance requirements.
• Innovation stifling: Excessive caution following fraud cases can sometimes hinder financial innovation and legitimate new investment products.

As a victim of investment fraud, whom should you approach?

Here is a list of authorities and law enforcement agencies that you may approach: 

1. Securities and Exchange Board of India (SEBI)

• Portal: scores.sebi.gov.in 
• For: Securities fraud, mutual funds, stock market manipulation, broker misconduct
• Jurisdiction: All securities-related investments and market intermediaries

2. Reserve Bank of India (RBI)

• Portal: cms.rbi.org.in 
• For: Banking fraud, NBFCs, payment systems, unauthorised money collection
• RBI advises registering complaints with local police/cybercrime authorities for fictitious offers 

3. Ministry of Corporate Affairs (MCA)

• For: Company-related fraudulent schemes, illegal deposit schemes
• Portal: MCA21 portal for company violations

4. Economic Offences Wing (EOW)

• For: High-value financial frauds, organised investment scams
• File FIR for criminal aspects under Bharatiya Nyaya Sanhita 2023 

5. Cyber Crime Police

• The Ministry of Home Affairs established the National Cyber Crime Reporting Portal for financial fraud reporting 
• Portal: cybercrime.gov.in 
• For: Online investment frauds, digital payment frauds

6. Serious Fraud Investigation Office (SFIO)

• Handles serious corporate frauds and complex financial crimes 
• For: Large-scale corporate fraud cases

7. Financial Intelligence Unit (FIU-IND)

• Guidelines available for filing complaints/grievances, FIU-India
• For: Suspicious financial transactions, money laundering aspects

8. Consumer Commissions

• District/State/National levels
• For: Service deficiency, unfair trade practices
• Under the Consumer Protection Act 2019

9. National Payments Corporation of India (NPCI)

• For complaints regarding payment system transactions, register a Complaint
• For: UPI, digital payment frauds. 

How to file a complaint against fraud?

If you have encountered investment fraud in India, here are the key steps to file a complaint:

1. Primary regulatory bodies
2. Securities and Exchange Board of India (SEBI)

• File complaints online through SEBI’s SCORES portal (scores.sebi.gov.in)
• For securities-related fraud, mutual funds, and stock market manipulation
• Handles complaints against brokers, investment advisors, and listed companies

Filing Steps:

1. Visit scores.sebi.gov.in and create an account
2. Provide PAN, email, and mobile number for verification
3. Complete KYC with Aadhaar or other ID proof
4. Select complaint category (broker, mutual fund, company, etc.)
5. Choose the entity you are complaining against from SEBI’s database
6. Fill in complaint details with incident date, amount involved, and description
7. Upload supporting documents (max 2MB per file, PDF/JPG format)
8. Submit and note your complaint reference number
9. Track status online 

      2.   Reserve Bank of India (RBI)

• Use RBI’s CMS portal (cms.rbi.org.in ) for banking and financial service complaints
• For fraud involving banks, NBFCs, and payment systems

Filing steps

1. Visit cms.rbi.org.in without registration required
2. Select complaint type (banking service, NBFC, payment system)
3. Fill in entity details, complaint category, and description
4. Upload documents and submit
5. Banks have 30 days to resolve; escalates to the RBI ombudsman if unresolved

      3. Ministry of Corporate Affairs (MCA)

• For complaints against companies involved in fraudulent schemes
• File through the MCA portal

     B. Law enforcement

1. Economic Offences Wing (EOW)

• File FIR at your local police station or directly with EOW
• For the criminal aspects of investment fraud

2. Cybercrime police

• If fraud occurred online or through digital platforms
• Many states, such as Maharashtra and Karnataka, have dedicated cybercrime reporting portals

    C. Additional steps

1. National Consumer Disputes Redressal Commission

• If you are treated as a consumer, file under the Consumer Protection Act, 2019

2. Financial Intelligence Unit (FIU-IND)

• They track suspicious financial transactions

3. Legal notice

• Send a legal notice to the fraudulent entity as the first step

What should be your strategy to draft a complaint against investment fraud? 

Whether you are filing a complaint before the SEBI or RBI, or the Consumer Commission, or all, here is how you should approach drafting the complaint: 

1. Language strategy:

• Use clear, factual language without emotional outbursts
• Include specific dates, amounts, and names
• Avoid legal jargon unless necessary
• Write in active voice for clarity

2. Chronological narrative:

• Start from the first contact/advertisement 
• Detail each interaction and promise made
• Show the progression of the fraud scheme
• Highlight any red flags you noticed later

3. Key elements to include:
4. Fraud classification:

• Specify type: Ponzi scheme, unauthorised investment advice, fake trading platforms, etc.
• Mention regulatory violations (unregistered entity, false licensing claims)

2. Modus operandi:

• Explain how they approached you
• Detail their promises and guarantees
• Describe their tactics (urgency, fake testimonials, pressure)

3. Financial impact:

• Break down investments made with dates
• Show expected vs. actual returns
• Calculate total loss, including opportunity costs

4. Regulatory violations:

• Highlight SEBI registration issues
• Point out misleading advertisements
• Note any unauthorised use of licensed entity names

5. Relief sought:

• Be specific about desired outcomes
• Request interim relief if needed
• Ask for an investigation into the broader scheme
• Seek a compensation methodology

6. Evidence collection:

• Gather all transaction records, receipts, and bank statements
• Collect promotional materials, brochures, or advertisements used to lure you
• Save all communication records (emails, WhatsApp chats, call recordings if legal)
• Take screenshots of websites, social media posts, or apps
• Document any witnesses or other victims
• Mindfully, integrate evidence in the body of the complaint 

Final thoughts

Investment fraud is not just a financial crime; it is an attack on dreams, families, and futures. As we have seen through cases from the Harshad Mehta scam to modern cryptocurrency frauds, these schemes destroy more than money; they shatter trust and can set families back by decades. The sophistication of today’s fraudsters is alarming, but knowledge is power. 

By understanding warning signs: unrealistic returns, pressure tactics, unverified credentials, and following basic principles like verifying SEBI registration, diversifying investments, and remembering that legitimate investments come with risks, you can protect yourself and your loved ones.

If you do become a victim, time is critical. Immediate action across multiple channels offers the best chance of recovery. Do not let fear of fraud prevent you from legitimate investing. India’s financial markets offer genuine opportunities when approached with proper knowledge and caution. The goal is not to avoid all risk, but to distinguish between calculated investment risks and fraudulent schemes. 

Stay informed, stay sceptical, and remember: if it sounds too good to be true, it almost certainly is. Your financial security depends not just on what you invest in, but on what you choose to avoid.

FAQs

1. Can I get my money back if I have been cheated by an investment scheme?

Recovery depends on how quickly you act and how much money the fraudsters have left. Naturally, if you file complaints within 30 days, recovery chances increase, and as months pass, they drop. The key is immediate action across multiple channels: police, SEBI, consumer courts, and civil courts simultaneously.

2. My friend invested in a scheme and got good returns for 6 months. How do I know if it is legitimate?

This is classic Ponzi scheme behaviour. Fraudulent schemes often pay initial investors using money from new investors to build credibility. Ask your friend to try withdrawing their entire principal amount: legitimate investments allow this (subject to clear lock-in terms), while fraudulent schemes will create obstacles. Also, verify the scheme’s SEBI registration independently.

3. What should I do if a SEBI-registered firm is acting suspiciously?

Even registered firms can violate regulations. File a complaint with SEBI immediately, providing specific details of suspicious behaviour. SEBI takes violations by registered entities very seriously and can conduct surprise inspections, freeze accounts, and revoke registrations. Being registered does not guarantee ethical behaviour; continued vigilance is necessary.

4. Can investment fraud cases be filed if I voluntarily gave money to the fraudsters?

Yes, absolutely. Fraud is about deception, not force. If you were misled about how your money would be used, promised false returns, or given fake documentation, it is fraud regardless of whether you voluntarily transferred money. The key is proving that you were deceived through false representations.

5. How do I verify if an investment advisor advising on social media is legitimate?

Check SEBI’s Investment Adviser database at sebi.gov.in using their exact name and registration number. Legitimate advisors must display their SEBI registration number prominently. Be extremely cautious of advisors who:

• Promise guaranteed returns.
• Do not disclose their fees.
• Pressure you to invest immediately.
• Ask for money to be transferred to personal accounts. 

6. What is the difference between civil and criminal cases for investment fraud?

Criminal cases: Filed by police/government, aim to punish fraudsters with jail time, do not directly get your money back, but help freeze assets.

Civil cases: Filed by you, aim to recover your money through court orders, faster than criminal cases, can be filed in consumer courts for amounts up to Rs. 2 crores.

Strategy: File both simultaneously. Criminal cases help with asset freezing, while civil cases focus on money recovery. Do not wait for one to complete before starting the other. 

7. What questions should I ask before investing?

A list of must-ask questions before you invest in any schemes is as below:

• Is this registered with SEBI/RBI?
• Can I verify the company independently?
• Are the returns realistic for the risk?
• Can I withdraw money easily?
• Do they provide clear documentation?
• Am I being pressured to decide quickly?