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Ponzi. Ponzi. Ponzi.

Ponzi. Ponzi. Ponzi.

By Payal Mitra

Edited by Liz Maria Kuriakose, Associate Editor, The Indian Economist

Of lately, the Saradha Chit fund scam in West Bengal has received its fair share of media coverage. One, as gullible as me, would think this was a scam that had recently come to light. But on the contrary, the group had collapsed in April 2013, causing multi-crore losses to investors. Election season opens up marvels for public awareness.

So what exactly was this scam? How do market regulators like SEBI figure in money laundering and Ponzi scams?

The Saradha Chit fund scam was a Ponzi scheme (Name Courtesy: Charles Ponzi, who started a similar franchise in 1920). A Ponzi scheme is one in which investors are lured into investing in fraudulent schemes with the promises of abnormally high profits. However, no investments are actually made by the investment firm. Early investors are paid returns with the investment capital received from subsequent investors. The system eventually collapses and investors do not receive their promised dividends and lose their initial investment.The Saradha conglomerate under multiple names, with an army of fund collection agents sought people to invest in their franchise. The schemes were simple and attractive. An investor could invest as little as 100 rupees and there was no upper limit. Saradha promised returns unheard of – 15 per cent to 50 per cent. It also promised land and fancy holidays, with the assurance that if it failed to deliver, it would pay back cash.

A classic ponzi scheme! With the money collected, Saradha didn’t create the promised assets, but instead used the cash to pay off subsequent investors. The scam worth billions of rupees cheated over a million small investors of their life’s savings and destroyed many lives. Sadly, this racket wasn’t discovered until it was too late. Early whiffs were caught on by the West Bengal Consumer Affairs minister in as late as December 2012, and as a follow up, RBI warned the state to get hard on financial malpractices, even though the scam had already unravelled and was awaiting its demise. When Chairman Sudipta Sen could no longer sustain the group, he wrote an 18 page confessional letter to the CBI and then fled, following which he was arrested. Then, the market regulator Securities and Exchange Board of India (SEBI) ordered the Kolkata-based Saradha Realty India to close all its collective schemes and refund the money it collected from investors within three months. It also barred the Saradha group and it’s Managing Director Sudipta Sen from re-entering the securities markets till the company wound up all its chit fund schemes and refunds the entire money to their investors. Several TMC workers were said to be related to the scandal. Unfortunately, this was a case which went unnoticed until the avalanche effect began. By that time, a majority of the households of Bengal housed either a bankrupt depositor, or a fugitive agent.

Abdulla Laskar, who had to flee his village in Diamond Harbour, some 47 km south of the city, said “From being an agent of finance company, I have been reduced to a street hawker… I cannot face my depositors although I have sold property to refund Rs. 20 lakh to the depositors.” The SC slammed market regulators like SEBI and RBI, stating that the Saradha scam may not have occurred at all had the bodies maintained adequate vigil. Hence, the infamous Sahara-Subrata Roy scandal comes into the news. Though the arrest took place after a Supreme court order, the RBI and SEBI had been fighting a four year long, tedious and applause worthy battle against the Sahara conglomerate. This is a peculiar case. Subrata Roy’s story is a classic ‘from rags to riches’ tale. In 1978, he joined Sahara India, a struggling financial company that ran a chit fund. He took over and turned it around, taking the company which took as low as Re 1 investments from its depositors to become the largest conglomerate in India.

Two of its firms, Sahara Housing Investment Corporation and Sahara India Real Estate Corporation, started offering OFCDs (optionally fully convertible debentures) to millions of small investors, mostly from rural areas and small towns, and thus collected Rs 24,000 crore. But since 2008, SEBI, to protect the interests of millions of investors, spotted irregularities in its functioning and the violation of norms set for OFCDs, imposed a string of constraints and legal measures to rein them in. They ordered Sahara to stop taking in new investors and asked them to refund all their customers with 15% interest, and the deposits of all untraceable investors would go to the governing body. Thus started a cat and mouse game; of issuing deadlines, missing deadlines and then issuing some more. Sahara argued that their OFCD scheme was a private placement and hence didn’t fall under the jurisdiction of SEBI, which only regulated listed companies. To which, SEBI pointed out that a venture was no longer a private investment when it exceeded 50 investors, and this particular scheme involved millions. The SEBI went through all receipts and stacks of documents which Sahara sent in truckloads, though according to Sahara, some of the subsequent trucks were not allowed to enter the SEBI premises. SEBI reportedly also conducted a random ‘4-people test’; in which 4 investors were randomly picked up for verification, upon which two didn’t exist, and the two that did, had nothing to do with Sahara. Further inspection dug up records of odd sorts. There was, for instance, an investor known as Kalawati. The document related to her didn’t list the names of her father or husband. Her address didn’t include a number, street or locality. The name of her agent was given as Haridwar. The Supreme Court order expressed its bemusement at some of these inexplicable gaps. “In India, names of the cities do not ever constitute the basis of individual names. One will never find Allahabad, Agra, Bangalore, Chennai or Tirupati as individual names,” the court order observed.

After a string of meetings, RBI made Roy agree to conduct an audit as it would ostensibly help Sahara prevent fraud, a probability as KYC norms hadn’t been followed. KPMG then audited Sahara India Financial. In one of the Delhi branches, it was found that a Bihar politician had at least 200 accounts of Rs.19,500 each with Sahara India Financial. It was one of many such accounts. Under the norms, up to Rs.20,000 can be kept in cash with a financial intermediary. Unaccounted money kept this way can’t be detected as there are no cheque transactions. Though the KPMG report wasn’t accepted without a thorough follow-up and validation by the RBI; as it was a multinational company that wasn’t affiliated to the RBI, it brought to light how Sahara was also used by several politicians who weren’t interested in returns on investment, and interest payments, but only wanted a way to hide their excess funds. Following several such pieces of evidence, and on non-compliance with pre-fixed deadlines, as per the order of the Supreme Court, Subrata Roy was finally arrested this year, until he gave the court assurance of his plans to repay his investors.The Sahara group is trying to raise Rs 24,000 crore, plus additional interest payments through various means. The latest being a proposal of selling two of its overseas hotels to raise 10,000 crore. Another report said that Sahara’s agents are in the process of raising money under various schemes of the Sahara Credit Cooperative Society—a space that’s not regulated by RBI or SEBI.

These are two amidst many such other scams which stem out of lack of adequate financial inclusion and dearth of employment opportunities, which have made rural areas a happy hunting ground for the scamsters.  But with a more vigilant, and now more powerful SEBI, and media, let’s hope for a scam-free India.

Payal is a second year student at St. Stephen’s College, Delhi, pursuing a Bachelor of Science degree in Physics. When she is not trying to make sense of endless equations and the most complex theories, she is an avid reader who likes to believe that she has a strong liking for the world outside physics too. She has a knack for finding problems, and fervently prays for a brainwave to their solutions someday. She hopes to help reflect change in society, wherever possible. For any comment, please email her at: [email protected]

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