The recent Saradha scam or Saradha Group financial scandal, which has been surfaced in West Bengal disrupted the political equation of the state when CBI enquiries and newspaper reports published the names of a good number of MPs, MLAs, Ministers and prominent personalities attached with the ruling TMC government. Saradha Group, a consortium of over 200 private companies that was believed to be running a wide variety of collective investment schemes or popularly referred to as chit fund in Eastern India leveraged its apparent proximity to political and bureaucratic power centres to rapidly build up an image of a successful and trustworthy financial organisation among its investors. Saradha Group revolves around a total sum of Rs 2,460 crore with 80 per cent of the depositors' monies still remaining unpaid, a latest investigation report has revealed. The report also states that the arrested Saradha chairman Sudipta Sen was in "total control" of all deposits made by his group companies, which are under the scanner for having perpetrated the alleged fraud. Four companies of the Saradha Group, the report said, used to mobilise money through three schemes - 'fixed deposit', 'recurring deposit' and 'monthly income deposit' - which lured innocent depositors with promises of either "landed property or a foreign tour" as incentive returns.
A joint investigation report of West Bengal police and Enforcement Directorate (ED), in possession of PTI, stated that, "the summary report (of the group) for the years 2008-12 revealed that the four companies of Saradha Group had mobilised an amount of Rs 2,459.59 crore through issuance of their policies. "The investors were paid an amount of Rs 476.57 crore. "As of April 16, 2013, the principal amount to be paid to the investors stood at Rs 1,983.02 crore," the report added.
Sleuths found that the four Saradha Group companies, namely, Saradha Realty India Ltd, Saradha Tours and Travels Pvt Ltd, Saradha Housing Pvt Ltd and Saradha Garden Resort and Hotels Pvt Ltd were in the business of mobilising money from gullible investors. A total of 560 complaints have so far been filed with West Bengal police by duped investors, the report stated.
Describing the working of the scam, which broke early this year, the classified report stated that the "investigation so far carried out revealed that Sen had floated various companies, through numerous branch offices in West Bengal as also in Odisha, Assam, Jharkhand and other states to mobilise deposits from the public".
The group collected the money from over 1.7 million depositors before collapsing in April 2013.
In the aftermath of the scandal, the State Government of West Bengal, where the Saradha Group and the majority of duped investors were based, instituted an inquiry commission to investigate the collapse and also set up a fund to ensure that low-income investors are not bankrupted. The Union Government through the Income Tax Department and Enforcement Directorate also launched a multi-agency probe to investigate the Saradha scam, as well as other similar Ponzi schemes. In May 2014, the Supreme Court of India citing inter-state ramifications, possible international money laundering, serious regulatory failures and alleged political nexus transferred all investigations in the Saradha Scam and other Ponzi schemes to Central Bureau of Investigation, the federal investigative agency.
A joint investigation report of West Bengal police and Enforcement Directorate (ED), in possession of PTI, stated that, "the summary report (of the group) for the years 2008-12 revealed that the four companies of Saradha Group had mobilised an amount of Rs 2,459.59 crore through issuance of their policies. "The investors were paid an amount of Rs 476.57 crore. "As of April 16, 2013, the principal amount to be paid to the investors stood at Rs 1,983.02 crore," the report added.
Sleuths found that the four Saradha Group companies, namely, Saradha Realty India Ltd, Saradha Tours and Travels Pvt Ltd, Saradha Housing Pvt Ltd and Saradha Garden Resort and Hotels Pvt Ltd were in the business of mobilising money from gullible investors. A total of 560 complaints have so far been filed with West Bengal police by duped investors, the report stated.
Describing the working of the scam, which broke early this year, the classified report stated that the "investigation so far carried out revealed that Sen had floated various companies, through numerous branch offices in West Bengal as also in Odisha, Assam, Jharkhand and other states to mobilise deposits from the public".
The group collected the money from over 1.7 million depositors before collapsing in April 2013.
In the aftermath of the scandal, the State Government of West Bengal, where the Saradha Group and the majority of duped investors were based, instituted an inquiry commission to investigate the collapse and also set up a fund to ensure that low-income investors are not bankrupted. The Union Government through the Income Tax Department and Enforcement Directorate also launched a multi-agency probe to investigate the Saradha scam, as well as other similar Ponzi schemes. In May 2014, the Supreme Court of India citing inter-state ramifications, possible international money laundering, serious regulatory failures and alleged political nexus transferred all investigations in the Saradha Scam and other Ponzi schemes to Central Bureau of Investigation, the federal investigative agency.
Law and Legalities
A chit fund is a kind of savings scheme practiced in India. A chit fund company is a company that manages, conducts, or supervises a chit scheme—as defined in Section of the Chit Funds Act, 1982. According to Section 2(b) of the Chit Fund Act, 1982: "Chit means a transaction whether called chit, chit fund, chitty, kuree or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount".
The companies that made up Saradha Group were incorporated in 2006. 95% of the fund was collected in the last three years of the scam. Initially, the front-line companies collected money from the public by issuing secured debentures and redeemable preferential bonds. Under Indian Securities regulations and section 67 of the Indian Companies Act (1956), a company cannot raise capital from more than 50 people without issuing a proper prospectus and balance sheet. Its accounts must be audited and it must also have explicit permission to operate from the market regulator Securities and Exchange Board of India (SEBI).
SEBI first confronted Saradha Group in 2009. Saradha Group adapted by opening as many as 200 new companies to create more cross-holdings. This created an extremely complex tiered corporate structure in order to confound SEBI by hampering their ability to consolidate blame. SEBI persisted in its investigation through 2010. Saradha Group reacted by changing its methods of raising capital. In West Bengal, Jharkhand, Assam and Chhattisgarh, it began operating variations of collective investment schemes (CIS) involving tourism packages, forward travel and hotel booking timeshare credit transfer, real estate, infrastructure finance, and motorcycle manufacturing. Investors were rarely informed about the true nature of their investments. Instead, many were told only that they would get high returns after a fixed period. With other investors, the investment was fraudulently sold in the form of a chit fund. Under the Chit Fund Act (1982), chit funds are regulated by state governments rather than SEBI.
SEBI warned the state government of West Bengal about Saradha Group's chit fund activities in 2011, once again prompting Saradha Group to change its methods. This time it acquired and sold large numbers of shares of various listed companies, and then embezzled the proceeds of the sale through accounts which as of September 2014 have not yet been identified. Now, it is to be verified that whether the Saradha Group started laundering a large portion of its funds to Dubai, South Africa and Singapore.
By 2012, SEBI was able to classify the group's activities as collective investment schemes, and not chit funds— and demanded that it immediately stop operating its investment schemes until it received permission to operate from SEBI. Saradha Group did not comply and continued to operate until its collapse in April 2013.
Whose money and who are involved
Like all Ponzi schemes, Saradha Group promised astronomical returns in fanciful but credible investments. Its funds were sold on commission by agents who were recruited from local rural communities. As much as 25–40% of the deposit was returned to these agents as commissions and lucrative gifts to quickly build up a wide agent pyramid. To evade regulators, the group used a nexus of companies to launder money. The group collected the money from over 1.7 million depositors before collapsing in April 2013.
For building its brand it invested heavily on non-financial businesses. Saradha invested in high visibility sectors, such as the Bengali film industry. The group went on a spree of acquiring and establishing local television channels and newspapers. By 2013 it employed over 1500 journalists and owned eight newspapers printed in five languages and one FM radio station.
To further etch itself in the socio-cultural milieu of Bengal, Saradha Group invested in football rivals and the best known football clubs in Bengal, viz., Mohun Bagan and East Bengal. The group also generously sponsored various Durga Puja celebrations organised by local political leaders.
Target – Rural and sub-urban working people
India has a large low-income rural and sub-urban population with low access to formal banking facilities. A web of parallel informal banking arose to fill the vacuum. At its centre were moneylenders, who used to charge exorbitant rates of interest. To curb this practice several Moneylenders Acts were enacted by the state governments by the 1950s. However failure to replace the role of moneylenders gave rise to fly-by-night financial operators who ran these chit funds in various disguises.
The relatively prosperous rural economy of West Bengal had previously relied on small savings schemes run by Indian Postal Service. However, low rates of interest in the 1980s and '90s encouraged the rise of several Ponzi schemes in speculative ventures such as Sanchayita Investments, Overland Investment Company, Verona Credit and Commercial Investment Company. Together, these scams eliminated close to 100 crore rupees. The continuing decline in interest rates, rapid financialisation of household savings, lack of financial literacy and investor awareness, political patronage, absence of adequate legal deterrence, and regulatory arbitrage encouraged the growth of similar companies. These companies either raised their funds through legitimate channels such as collective investment schemes, non-convertible debentures and preference shares, or illegitimately through hoax financial instruments such as teak bonds, potato bonds or fictitious ventures in agro-export, construction, manufacturing, etc. As of 2013, 8 out of every 10 multi-level marketing and finance schemes against which complaints have been received are based in West Bengal, giving the state the sordid title of 'Ponzi capital of India'. It is estimated that these Ponzi funds have altogether amassed around 1000 crores of rupees from unsuspecting depositors in Eastern India.
Losers and Gainers
Rural and sub-urban working masses are the main losers of their deposited money. These huge funds invested to take a control over the people on behalf of the bourgeois political parties and also gave a clear concentration of capital in the form of land, agro market and industry and the media houses. These capitals will now wait for further concentration to the hands of more large and multinational companies.
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