A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors
Evaly has once again made the headlines by announcing that local conglomerate Jamuna Group is going to invest Tk1,000 crore into the controversial e-commerce company.
But fund injection is unlikely to be a solution since the problem lies in the business model that Evaly follows — one which seems like a retail version of a Ponzi scheme.
This is different from a regular Ponzi scheme, as the people who stand to lose the most from this are the customers, not actual investors.
It is also different from a pyramid scheme, which usually offers a victim the opportunity to make money by recruiting more people into the scam. As the membership pool expands exponentially, further recruiting becomes impossible and the business becomes unsustainable.
A Ponzi scheme, on the other hand, is a fraudulent investing scam promising high rates of return with little risk to investors, according to Investopedia.
And high rates of return is what Evaly seems to be all about. It offers consumers all sorts of lucrative deals, with “cashback” offers going up to 100 to 150%. Then there are massive discounts, gift cards and a whole plethora of offers which make shopping from the platform very attractive.
The risk in this case, at least the one that Evaly hints to customers, is that deliveries might take longer than usual — about 45 days, officially.
But based on the complaints from customers, the delivery periods often stretch for months and even when customers do get refunds, those are through post-dated cheques, which means they have to wait for an even longer period.
Ponzi schemes also usually generate returns for earlier investors with money taken from later investors.
A recent inspection report by the Bangladesh Bank recently found that Evaly's liabilities to customers and merchants have risen to Tk403.80 crore while its current assets are only Tk65.17 crore.
Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), said that there is doubt if Evaly will be able to pay off its liabilities even if it is allowed to operate longer for that reason.
“Suppose its liability is Tk90 and it has Tk10. Will it be able to recover such a huge gap with only what it currently has?” he explained.
The Bangladesh Bank also noted that the company, in its statement, has shown that it spent Tk3.57 per sale for an income of Tk1, but no satisfactory explanation has been found for this unusual expenditure.
Moreover, companies that engage in Ponzi schemes also focus all of their energy into attracting new clients to make investments. In Evaly’s case, that would be its aggressive marketing method, which saw the company run a host of promotional activities, starting from investing in movies to hiring celebrity brand ambassadors.
Ponzi schemes also rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart.
And Evaly may have come very close to that flow running out until Jamuna Group came to its rescue.
However, that fund injection may not be enough as the initial investment is of Tk200 crore. Even with its available assets, how will the company pay over Tk100 crore in liabilities?
Of course with the remaining Tk800 crore that Jamuna Group is slated to invest in the platform, Evaly will be able to pay off its liabilities. But that will depend on how soon the rest of the funds are injected.
Then there is the problem of the business model. No matter how much funds Evaly gets from outside sources, if it always keeps offering exorbitant discounts by taking money from new customers, the funds are bound to run out at some point.
Late deliveries, undelivered orders and post-dated refund cheques could also result in the company ultimately losing customers. And once new customers stop investing, how does Evaly fulfil the deliveries of older customers?
The injection of new funds also does not answer another important question: What happened to the Tk338.62 crore paid by customers in advance to Evaly?
This amount has yet to be traced by the authorities and Evaly is currently being investigated by the Anti-Corruption Commission for embezzlement.
Speaking to Dhaka Tribune, Barrister Tanjib Ul Alam said the business activities of Evaly in Bangladesh are deceptive.
“All their activities should be brought under the law and stopped at this moment. Otherwise, consumers and merchants will not get back their money. It is not possible for Evaly to operate a sustainable business through the offer campaigns, so it can be said that since it is not sustainable, it is a Ponzi scheme,” he explained.
Alam noted that these types of companies know from the beginning that the business model will not be viable and at some point, they have to close shop.