Saradha Group financial scandal
The Saradha Group financial scandal was a major political scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over 200 private companies that was believed to be running collective investment schemes popularly but incorrectly referred to as chit funds in Eastern India.
The group collected around 200 to 300 billion from over 1.7 million depositors before it collapsed in April 2013. In the aftermath of the scandal, the State Government of West Bengal where the Saradha Group and most of its investors were based instituted an inquiry commission to investigate the collapse. The State government also set up a fund of to ensure that low-income investors were not bankrupted.
The central government through the Income Tax Department and Enforcement Directorate launched a multi-agency probe to investigate the Saradha scam and similar Ponzi schemes.
In May 2014, the Supreme Court of India, due to inter-state ramifications, possible international money laundering, serious regulatory failures and alleged political nexus, transferred all investigations into the Saradha scam and other Ponzi schemes to the Central Bureau of Investigation, India's federal investigative agency. Many prominent personalities including politicians were arrested for their alleged involvement in the scam including two Members of Parliament - Kunal Ghosh and Srinjoy Bose from the Trinamool Congress, former West Bengal Director General of Police Rajat Majumdar, a top football club official Debabrata Sarkar, Sports and Transport minister in the Trinamool Congress government Madan Mitra.
The scam has often been compared to the Sanchayita investment scam, a multi crore rupees scam that occurred in West Bengal in the 1970s, complaints related to which led to the formation of the Prize Chits and Money Circulation Schemes Act of 1978.
Background
India has a large, low-income, rural population with limited access to formal banking facilities. This leads to the absence of two major helplines for poorer people - that of placing their money safely in deposits and secondly of being able to borrow money for their needs which may be as simple as buying seeds for the next crop or their children's marriage. The second aim is achieved instead by a web of parallel, informal banking in the form of money lenders who have existed in India for a few centuries. At its centre are moneylenders, mostly unregulated, often also wealthy landlords or now politicians, used to charging exorbitant rates of interest. To curb this practice, several Moneylenders Acts were enacted by the State governments of India by the 1950s. However failure to replace the role of moneylenders gave rise to unscrupulous financial operators that operated Ponzi schemes. Some commentators place the blame for these kinds of Ponzi schemes on greed rather than exclusion from formal banking systems.However, this does not address the former issue of being able to save their money easily, keep it in safekeeping and invest it so that it grows. While post offices have tried to address this through postal savings banks, people are often lured by Ponzi schemes that promise much higher returns.
The relatively prosperous rural economy of West Bengal had previously relied on small savings schemes run by the Indian Postal Service. However, low rates of interest in the 1980s and 1990s 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 in investor wealth.
Despite a history of Ponzi schemes, the growth of similar companies was encouraged by 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. 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 and manufacturing., 80% of multi-level marketing and finance schemes against which complaints have been received are based in West Bengal, giving the state the title of "Ponzi capital of India". It is estimated that these Ponzi funds have amassed around from unsuspecting depositors in Eastern India.
Modus operandi of Saradha
Key people
Sudipto Sen was the chairman and managing director of the Saradha Group. Sen was described as a soft-spoken, charming, and forceful orator. At the time of his arrest, he was in his mid-50s. In his youth, he was known as Shankaraditya Sen which he later changed to Sudipto Sen and may have had plastic surgery sometime in the 1990s, after which he became associated with land development projects in South Kolkata. The land bank he formed in around 2000 became the catalyst for enticing early customers into his Ponzi scheme.Debjani Mukherjee was one of the executive directors of Saradha Group who could sign cheques on behalf of the group. She was arrested together with Sudipto Sen. At the time of her arrest Debjani was in her early 30s. She had studied at the St. John's Diocesan Girls' Higher Secondary School, and the Sivanath Sastri College. She trained as an air hostess. Mukherjee originally joined Saradha Group in 2010 as a receptionist, and rose rapidly to be the group's executive director. A story in India Today described her as a person with a reputation for generosity to her community.
Financial operations
The companies that were comprised by Saradha Group were incorporated in 2006. Its name is a cacography of Sarada Devi, the wife and spiritual counterpart of Ramakrishna Paramahamsaa nineteenth-century mystic of Bengal. This duplicitous association gave Saradha Group a veneer of respectability. Like all Ponzi schemes, Saradha Group promised astronomical returns in fanciful but credible investments. Its funds were sold on commission by agents recruited from local rural communities. Between 25 and 40% of the deposit was returned to these agents as commissions and lucrative gifts to quickly build up a wide agent pyramid. The group used a nexus of companies to launder money and evade regulators.Initially, the frontline 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, 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 first confronted Saradha Group in 2009. Saradha Group adapted by opening up to 200 new companies to create more cross-holdings. This created an extremely complex tiered corporate structure 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 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 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, 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, again prompting Saradha Group to change its methods. This time, it acquired and sold large numbers of shares of various listed companies then embezzled the proceeds of the sale through accounts which as of 2014 have not been identified. Meanwhile, 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 rather than chit fundsand demanded that it immediately stop operating its investment schemes until it received permission to operate from SEBI. Saradha Group did not comply with this ruling and continued to operate until its collapse in April 2013.
Building brand and non-financial businesses
Like previous Ponzi schemes such as Anubhav teak plantations, Japanlife, and Speakasia, Saradha Group invested heavily in the building of its brand. With enormous funds at its disposal, Saradha invested in high visibility sectors, such as the Bengali film industry, where it recruited actress and Trinamool Congress Member of Parliament Satabdi Roy as its brand ambassador. Bollywood actor and TMC MP Mithun Chakraborty was brought in as the brand ambassador of Saradha Group's media platform.Saradha Group also enlisted Kunal Ghosh, another TMC MP, as the CEO of the media group. Under Kunal Ghosh, the group acquired and established local television channels and newspapers, investing around in the media group. By 2013, it employed over 1,500 journalists and owned eight newspapers printed in five languages: Seven Sisters Post and Bengal Post, Sakalbela and Kalom, Prabhat Varta, Ajir Dainik Baturi, Azad Hind and Parama. It also owned Bengali news channels Tara Newz and Channel 10, Bengali general entertainment channels Tara Muzic and Tara Bangla, Punjabi general entertainment channel Tara Punjabi, an international channel aimed at the Indian diaspora, TV South East Asia and one FM radio station. Author Aparna Sen was made the editor of Parama.
In 2011, Saradha Group bought Global Automobiles, a heavily indebted motorcycle company as a front for the latest version of its Ponzi scheme. Global Automobiles immediately stopped most production but kept 150 workers on its payroll who "pretended to work whenever truckloads and busloads of prospective depositors of Saradha Realty visited the plant for a first-hand check before investing". It also bought similar shell companies like West Bengal Awadhoot Agro Private Ltd, located in North 24-Parganas, and Landmark Cement in Bankura to showcase them to agents and depositors and convince them that the Saradha Group had diversified interests.
As part of its corporate social responsibility program, Saradha Group donated motorcycles to the Kolkata Police. On 19 July 2011, it persuaded Mamata Banerjee, the Chief Minister of West Bengal, to use its ambulances and motorcycles for the Jangalmahal area of West Midnapore. 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: Mohun Bagan A.C. and East Bengal F.C.. The group also sponsored various Durga Puja celebrations organised by local political leaders.