Unlicensed sellers

One of the simplest checks before you hand over money is also one of the most overlooked: is the person or firm actually licensed to do this?

The workbook is direct about it. State securities laws require investment professionals and firms to be licensed or registered, and most Ponzi schemes involve unlicensed individuals or unregistered firms. The people running these schemes rely on you not checking, because the moment you do, the scheme cannot survive.

This sits alongside the workbook's other Ponzi-scheme warning signs — abnormally high or unusually consistent returns, and investments not registered with any regulator — as one more question you can ask before you invest.

The workbook treats unlicensed sellers as one of several tips for spotting a Ponzi scheme, alongside high returns with little or no risk, overly consistent returns, non-transparent disclosure and difficulty receiving payments. Its own reasoning for why registration matters: registration gives investors access to information about the company's management, products, services and finances — an unregistered or unlicensed operator has skipped exactly that scrutiny.

On the securities-market side specifically, the workbook goes further: it is illegal to act as an Investment Adviser without SEBI registration under the SEBI (Investment Advisers) Regulations, 2013. SEBI is described as making concerted efforts to stop this illegal activity, because some entities never register at all, or register and then ignore the Code of Conduct.

The workbook's own remedy is simple to state: check the list of SEBI-registered entities on www.sebi.gov.in before dealing with anyone claiming investment expertise.

Ganesh is offered two investment opportunities in the same month.

The first is run by an individual who cannot produce any registration certificate when asked, and brushes off the question by saying "everyone here trusts me, I don't need paperwork." That refusal is, in the workbook's own words, the profile of most Ponzi schemes — an unlicensed individual, avoiding exactly the scrutiny registration would bring.

The second is offered by a SEBI-registered Investment Adviser, who shows Ganesh a valid registration certificate and whose name Ganesh separately confirms on www.sebi.gov.in.

Ganesh deals only with the second. He has applied, without realising it, the workbook's own "Do's" checklist — always deal with SEBI-registered advisers, and check for the registration number on SEBI's website — and avoided exactly the entity type the workbook says most Ponzi schemes rely on.

Put numbers on it. The unregistered seller wants Rs 2,00,000 and promises 24% a year paid monthly — Rs 4,000 every month, guaranteed in writing. The registered intermediary offers a mutual fund with no guarantee at all.

Ganesh checks the SEBI register before deciding. The first name is not on it, so he walks away and keeps the Rs 2,00,000. The fixed 24% was the tell: a guaranteed return far above anything a regulated product offers is the most reliable marker of an unlicensed seller.

Chapter 11 (Caution against Ponzi Schemes and Unregistered Investment Advisers) lists unlicensed sellers as one of its named warning signs, immediately after "unregistered investments", and separately explains the illegality of acting as an unregistered Investment Adviser. Expect a scenario question describing an unlicensed or unregistered operator and asking which Ponzi-scheme warning sign it illustrates.

• "Unregistered investments" and "unlicensed sellers" are two separate warning signs in the same list — one is about the product or scheme not being registered, the other is about the person or firm selling it not being licensed.
• Registration matters because it gives access to information — about management, products, services and finances — not because registration alone guarantees good returns.
• It is illegal to act as an Investment Adviser without SEBI registration, and the workbook states this as a flat rule, not a best practice.
• Checking SEBI's website for a registration number is the workbook's own recommended check — it names www.sebi.gov.in directly.
• Do not assume a licensed, registered adviser cannot still mis-sell — the workbook separately lists malpractices, such as mis-selling without regard to a client's risk profile, reported against registered advisers too.