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Former type Privately owned
Industry Financial services, infrastructure management, automobiles, manufacturing
Genre Deposit mobilising company
Fate Allegations that this consortium of companies is a Ponzi scheme
Founder(s) Sudipto Sen
Defunct April 2013
Headquarters Kolkata, West Bengal, India
Key people Sudipto Sen, Chairman & MD
Debjani Mukherjee, Director
Kunal Ghosh, CEO, Media Div.
Employees 5000+
Divisions Saradha Realty
Saradha Exports
Global automobileso
Saradha media group
Website saradhagroup.biz

The Saradha Group financial scandal is a financial scam that was caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of Indian companies that was believed to be running a wide variety of collective investment schemes (popularly but incorrectly referred to as chit fund)[1][2][3] in Eastern India.[4] The group collapsed in April 2013, causing an estimated loss of INR 200–300 billion (US$4–6 billion)[5][6] to over 1.7 million depositors.[7] In the aftermath of the scandal, the state government of West Bengal set up an inquiry commission to investigate the collapse[8] and also set up a fund of INR 5 billion (92 million USD) to ensure that low-income investors are not bankrupted.[9] The Union Government through the Income Tax Department also launched a multi-agency probe along with the CBI to investigate the Saradha scam, as well as other similar Ponzi schemes.[10]

Background[edit]

India has a large low-income rural population with low access to formal banking facilities.[11] 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 1950s.[12] However failure to replace the role of moneylenders gave rise to fly-by-night financial operators who ran Ponzi schemes in various disguises.[13] However some commentators place the blame for these kinds of Ponzi schemes on greed rather than exclusion from formal banking systems.[14][15][16]

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 10 billion INR in investor wealth.[17][18]

In spite of this history of Ponzi schemes, 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.[19] 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'.[20] It is estimated that these Ponzi funds have altogether amassed around INR 10 trillion (short scale) (200 billion USD) from unsuspecting depositors in Eastern India.[21]

Modus operandi of Saradha[edit]

Financial operations[edit]

The companies that made up Saradha Group were incorporated in 2006. Its name is a cacography of Sarada Devi, a highly revered spiritual icon of the region and the wife and spiritual counterpart of Ramakrishna Paramahamsa, a nineteenth-century mystic of Bengal.[22] This association gave Saradha Group a veneer of respectability.[23]

Like all Ponzi schemes, Saradha Group promised astronomical returns in fanciful but credible investments.[24] 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.[25] To keep ahead of regulators, the group used a nexus of companies to launder money.[26]

Initially, the front-line companies collected money from the public by issuing secured debentures and redeemable preferential bonds.[27] However, 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. It must also have explicit permission from the market regulator Securities and Exchange Board of India (SEBI).[28]

SEBI first challenged Saradha Group in 2009. Saradha Group responded by opening as many as 300 new companies to create more cross-holdings. This created an extremely complex tiered corporate structure which made it difficult to pin blame on any one company.[29]

However, SEBI persisted in its investigation through 2010.[30] In response, Saradha Group changed its methods of raising capital. In West Bengal, Jharkhand, Assam and Chattisgarh, it now ran variations of collective investment schemes (CIS), such as tourism packages, forward travel and hotel booking timeshare credit transfer, real estate, infrastructure finance, and motorcycle manufacturing.[31][32] The investors were rarely informed about the true nature of the investments. Instead, many investors were told only that they would get high returns after a fixed period.[33] To other investors, the investment was fraudulently sold as a form of 'chit fund'. Under the Chit Fund Act (1982), chit funds are regulated by state governments rather than SEBI.[34]

After SEBI warned the state government of West Bengal about Saradha Group's apparent chit fund activities in 2011,[35] Saradha Group changed its methods again. This time, it acquired and sold large numbers of shares of various listed companies, siphoning off the proceeds of the sale to accounts which have not yet been identified.[36]

By 2012, SEBI was able to identify the group's activities as CIS, not chit fund, and demanded that it immediately stop operating its investment schemes until it received proper permission from SEBI.[35] However, Saradha Group ignored SEBI, and continued to operate in the same manner until it collapsed in April 2013.[37]

Building brand and non-financial businesses[edit]

Like previous Ponzi schemes, Saradha Group invested strongly in building its brand.[38] With enormous funds at its disposal, Saradha invested in high visibility sectors, such as the Bengali film industry,[39] where it recruited famous actress and Trinamool Congress (TMC) Member of parliament Satabdi Roy as its brand ambassador.[40]

Saradha Group also recruited Kunal Ghosh, another Trinamool Congress Member of parliament, to act as the CEO of the media group.[40] Under Kunal Ghosh, the group went on a spree of buying and establishing local television channels and newspapers. By 2013 it employed over 1500 journalists and owned eight newspapers in five languages: Bengal Post, Seven Sisters Post (English dailies), Kalom (Bengali daily), Prabhat Varta (Hindi daily),[41] Ajir Dainik Baturi (Assamese daily),[42] Sakalbela, Azad Hind[43] and Parama (Bengali dailies). It also owned two Bengali news channels (Tara Newz and Channel 10), two Bengali general entertainment channels (Tara Muzic and Tara Bangla)[44] and one FM radio station.[45]

In 2011, Saradha Group bought Global Automobiles, a heavily indebted motorcycle company, to front the latest version of its Ponzi scheme. Even though the company immediately stopped most production, it kept 150 workers on 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."[46] It also bought similar shell companies like West Bengal Awadhoot Agro Private Ltd 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.[47]

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 launch its ambulances and motorcycles for the Jangalmahal area of West Midnapore.[48]

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. (INR 18 million in 2010–11) and East Bengal F.C. (INR 35 million since 2010).[49][50] The group also generously sponsored various Durga Puja celebrations organised by local political leaders.[51][52]

Political patronage[edit]

Several political leaders received financial support from Saradha Group, including several Trinamool Congress Members of Parliament. Trinamool Congress is the incumbent ruling party of West Bengal.[24]

Member of Parliament Kunal Ghosh drew a salary of INR 1.6 million per month from Saradha Group. Member of Parliament Srinjoy Bose, son of Swapan Sadhan Bose, was directly involved with the media operations of Saradha Group.[53] Transport Minister Madan Mitra headed the employees' union of Saradha Group, and publicly encouraged people to invest their savings with the company.[54] Sudipto Sen reportedly spent Rs 18.6 million to buy paintings by Mamata Banerjee, whose government later issued a notification that public libraries should buy and display newspapers of Saradha group.[55] The group also had financial dealings with Ganesh Dey, the confidential assistant of the finance minister of the earstwhile Left Front government.[56]

Politicians also benefited from Saradha Group outside West Bengal. The Health and Education Minister of Assam, Himanta Biswa Sarma, may have profited personally from the Ponzi scheme.[57][58] Some commentators also state that this Ponzi scheme only survived for so many years because of its heavy political patronage.[59][60]

Key people[edit]

  • Sudipto Sen was the chairman and managing director of the Saradha Group. He was arrested in Kashmir on 23 April 2013, after having been on the run for over a week.[61]
Sen was described as a soft-spoken, charming, yet forceful orator. At the time of his arrest he was in his mid-50s. In his youth, he had a different name, Shankaraditya Sen, and was part of the Naxalite movement in West Bengal. He changed his name to Sudipto Sen and may have had plastic surgery sometime in the 1990s,[62] after which he became associated with land development projects in South Kolkata. The land bank he formed at the turn of the century became the initial vehicle for enticing early customers into his Ponzi scheme.[63]
At the time of her arrest Debjani was in her early 30s. Her early training was as an air hostess. Although she originally joined Saradha Group in 2010 as a receptionist, she rose rapidly to be the 'number two' in the group hierarchy.[67] She was well known locally for her generosity to her community.[68]

Collapse and unravelling of the scam[edit]

The earliest public warnings about the reckless and fradulent CIS in West Bengal started in 2009, from members of parliament Somendra Nath Mitra and Abu Hasem Khan Choudhury and West Bengal Consumer Affairs Minister Sadhan Pande.[69] However, apart from the SEBI investigation, no executive actions were taken at this time.

On 7 December 2012, RBI governor Duvvuri Subbarao stated that the West Bengal government should initiate suo motu action against companies that were indulging in financial malpractice.[70] By that time, the Saradha Group Ponzi scheme was already beginning to unravel.

In January 2013, the cash inflow of Saradha Group was less than its cash payouts for the first time. This outcome is inevitable in a Ponzi scheme that is allowed to run full course. Although Sudipta Sen tried to calm uneasy depositors and agents,[71] the tide had irrevocably turned.

In a letter dated 6 April 2013, Sudipto Sen wrote a 18-page confessional letter to the Central Bureau of Investigation, in which he admitted that he had paid large sums of money to several politicians.[72] He also stated that TMC leader Kunal Ghosh had forced him to enter into money-losing media ventures and blackmailed him into selling one of his channels at below market price.[73] After posting this letter on 10 April, Sen fled.

In his absence, the Ponzi scheme unravelled into a full-blown crisis. On 17 April, approximately 600 collection agents claiming to be associated with Saradha Group assembled at the headquarters of TMC and demanded government intervention.

The mood of despondency quickly spread across Bengal. As described by a Times of India interviewee, "'The entire Dakshin Barasat today looks like it was hit by a cyclone. Every home has a bankrupt depositor or a fugitive agent. People who were friends have turned enemies. Happy households have become miserable. Students have stopped going to school. Traders have lost interest in opening shutters. There is a sense of treachery that has replaced the warmth of a neighbourhood. Suddenly everything has become vicious."[71] By this time, the Saradha Group financial scandal had colloquially become known as "Bonzi", a portmanteau of the words Ponzi and Bengal.[74]

On 18 April, an arrest warrant was issued for Sudipto Sen.[75] By 20 April, the news of potentially the largest Ponzi scheme ever seen in India had become ongoing headline news in West Bengal, and then front-page news nationally.[76][77][78] After a massive manhunt, Sudipto Sen, Debjani Mukhopadhdhay, and Arvind Singh Chauhan were arrested in Sonmarg, Kashmir on 23 April 2013.[79] On the same day, SEBI stated that both chain marketing and forward contracts are forms of CIS, and officially asked Saradha Group to immediately desist from raising any further capital and return all deposits by three months.[35][80]

Aftermath and reactions[edit]

State government reaction[edit]

West Bengal government[edit]

On 22 April 2013 the West Bengal government announced that a four-member judicial inquiry commission headed by Shyamal Kumar Sen, retired Chief Justice of the Allahabad High Court, would probe the scam. Mamata Banerjee was reported to have commented "ja gechhey ta gechhey" (whatever has gone has gone).[81] On 24 April 2013, Mamata Banerjee announced a controversial Rs 500-crore relief fund for the low income depositors of the Saradha Group, introducing a 10 per cent additional tax on tobacco products to raise the money and in jest asked smokers "to light up a little more" to quickly fill up the requisite fund,[82][83] a comment that displeased anti-tobacco groups.[84] The propriety of the fund was later questioned by the Governor of RBI.[85] The West Bengal government also set up a Special Investigation Team (SIT), with officers drawn from WB CID and Kolkata Police, to expeditiously probe the criminal investigation.

The state government decided to repeal an existing bill passed by the Left Front Government in 2009, which has not received the approval of the President of India.[86][87] On 30 April 2013 the new Bill titled, The West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013, has been passed in a two-day special session of the West Bengal Legislative Assembly, having provisions for retrospective effect, search and seizure, enhanced penalties, establishment of special courts, confiscation of property.[88][89][90] On 2 May 2013, after complaints from depositors, state government ordered police to conduct search and seizure at offices of two companies MPS Greenery Developers Ltd and Prayag Infotech Hi-Rise Ltd, both of whom were running unregistered collective investment schemes similar to Saradha group.[91][92] By 6 May 2013 police had also arrested directors of two more similar Ponzi companies ATM group[93] and Annex Infrastructure Pvt Ltd[94] on charges of defrauding depositors.

On 8 May 2013, Mamata Banerjee stated that West Bengal was actively considering setting up a government backed small savings fund to encourage small depositors to invest in it rather than in Ponzi scams.[95] However doubts have been raised if a cash starved state with high debt burden has the financial acumen or political will to independently administer such a fund.[96]

On 23 May 2013, Chief Minister, Mamata Bannerjee indicated the willingness of West Bengal government to take over Saradha owned television channels Tara News and Tara Muzic, which had earlier been sent under administration by Calcutta High Court.[97]

Assam government[edit]

On 4 April 2013, the Assam Legislative Assembly unanimously passed the Assam Protection of Interests of Depositors (in Financial Establishments) (Amendment) Bill, 2013 to enhance the protections available to depositors and curb fraudulent financial schemes.[98] Soon after the Saradha scam, Assam Government sent the bill to Governor for his approval so that the bill may be forwarded to President of India for his assent.[99] On 22 April 2013 Assam Police sealed five offices of Saradha Group amid protests by depositors, agents and employees and accusations that a minister, a former DGP and government officials had facilitated the group's business ventures in the state of Assam.[100] Unlike in West Bengal where the probe is based on FIRs filed by defrauded depositors, the Assam Government suo motto registered 222 cases against 128 companies including Saradha Group, Rose Valley, Unipay 2U, Jeevan Suraksha, Prayag, Abyss Assam Group Co, Basil International Ltd., Alliance Vision Marketing Pvt. Ltd and Daffodils Group of Companies after widespread protests rocked Assam. In 17 cases, charge sheets have been filed against 42 persons belonging to 15 companies while altogether 303 persons have been arrested for swindling public money. The government had also seized nearly Rs 9.4 million in cash from the arrested and 106 bank accounts with total deposit of Rs 240 million have been frozen while a number of plots totalling more than 99 bighas, besides buildings, have been identified and necessary steps are being taken for their attachment.[99] On 6 May 2013 Assam handed over the investigation of the scam to CBI.[101]

Odisha government[edit]

On the basis of complaints filed by over 6000 depositors (mainly from districts adjoining Bengal), the Economic Offence Wing (EOW) of the Crime Branch of Odisha Police registered criminal cases against Sudipto Sen and Saradha Group; on 3 May 2013 Odisha police had seized documents and sealed the local offices of Saradha group.[102][103][104]

Sikkim government[edit]

On 4 May 2013, based on complaints filed by depositors/investors under Sikkim Protection of Interests of Depositors Act, Sikkim Police conducted raids on Gangtok office of Kolkata-headquartered Rose Valley Group, which was also running unregistered collective investment schemes similar to Saradha group.[105][106]

Tripura government[edit]

On 9 May 2013, the Government of Tripura handed over all the cases involving deposit-collecting companies in the state to CBI and the Income Tax Department.[101]

Central government reaction[edit]

In March 2013, Union corporate affairs minister Sachin Pilot said in the Lok Sabha that his ministry has received complaints against West Bengal's Chakra Infrastructure, icore E-Service, MPS Group, Prayag Group, Rose Valley Group, Tower Infotech, Vibgyor Group, URO Group, Saradha Group and many others for their involvement in Ponzi or multi-layer-marketing schemes.[18] However no action was taken, it was only after the unravelling of the scam that a host of measures were announced. On 25 April 2013, Income Tax department and Ministry of Corporate Affairs started separate investigation into Saradha Scam and the other similar Ponzi funds masquerading as NBFCs or CIS.[107] On the same day the Enforcement Directorate (ED) registered a money laundering case, under the provisions of the Prevention of Money Laundering Act (PMLA), at its Guwahati office as the Assam police has registered an FIR against the Saradha group to probe the allegations of financial irregularities by numerous depositors against it.[108] On 1 May 2013, commenting on the regulatory loopholes, the Chairman of SEBI remarked that 'there should be one single regulator for entire collective investment schemes.'[109]

On 7 May 2013, the Union Government set up an inter-ministerial group with members from corporate affairs ministry, SEBI, Reserve Bank of India and officers from the Income Tax Department. The group is supposed to unify the regulations of investment schemes by NBFCs, banks and companies, which at present are governed by different laws and regulations leading to regulatory loopholes etc.[110]

In light of the scam, SEBI requested sweeping powers to investigate and prosecute any fraudulent collective investment schemes.[111] In August 2013, Central Government amended the SEBI Act and gave SEBI powers to search and seize without prior magisterial permission to crack down on illegal money collection schemes.[112][113]

Political reactions and protests[edit]

There have been ongoing street protests around West Bengal, sometimes it has resulted in ransacking of offices of various Ponzi funds.[114] The crash of the Ponzi scheme and the publication of the letter written by Sudipto Sen led to a barrage of cross party accusations, CPM accused TMC of hobnobbing with the 'chit fund', TMC on the other hand alleged that Union Minister of Finance's wife Nalini Chidambaram had taken lawyers fee from Saradha Group to incorporate its companies and should be investigated,[115] TMC also blamed CPM for letting Ponzi funds grow in Bengal.[116] CPM demanded that the investigation should be done by CBI as many TMC leaders are involved in the scam thus an independent probe by state agencies is impossible.

As per news media at least fifteen agents/depositors[114][117][118][119][120][121][122][123][124] and six executives/directors of various money pooling companies have committed suicide in the aftermath of the scandal.[125][126][127]

Judicial reactions[edit]

On 22 April 2013, Public Interest Litigation (PIL) was filed in Guwahati High Court, by RTI activist Akhil Gogoi against Saradha and other such chit funds and in Calcutta High Court by advocate Basabi Roy Chowdhury seeking CBI investigation against the Saradha Group and other chit-fund companies.[128] On 25 April, responding to the PIL, a division bench of Calcutta High Court comprising Chief Justice Arun Kumar Mishra and Justice Joymalya Bagchi said that since the ramifications of the scam included other states, a central agency would, perhaps, do justice to the investigation. However it gave state government one week to submit its investigation report to see if the probe is conducted in a fair manner.[129]

On 7 May 2013, Calcutta High Court appointed a three member administrator group to run Tara News and Tara Muzic.[130]

Macroeconomic and microeconomic effects[edit]

Graph shows the fall of savings in government schemes with the rise of Ponzi funds (figures on y axis are in Crores INR)

Companies illegally mobilising deposits diverted considerable funds (estimated to be around INR 240 billion in the last three years) from small savings funds promoted by state government. Official data show a steady slide in small-savings deposits and a spurt in withdrawals, which left a thin slice for the state government to borrow from to make ends meet. This had ripple effect on the overall macroeconomic situation of the state, as because instead of being used by government for public purpose the money went into Ponzi schemes which either were siphoned off to foreign locations or were put to use for private gains.[131]

On microeconomic front it is feared that legitimate Non-banking financial companies and micro finance institutions would be stigmatised and would lead to a vicious cycle of low depositor trust, higher interest rates, lower lending and a localised credit crunch.[132] Furthermore as the majority of the depositors in Saradha group came from the lowest economic strata, the loss of the investment would result in a further decrease in social mobility.[133] On the positive side, the scam has drawn attention on similar illegal deposit mobilising companies which are facing increasing regulatory heat.[134][135] Many such companies which have been following variations of time share travel schemes on which there are little clear regulations[136] are trying to register as cooperative societies to continue their financial operations.[137]

Criminal prosecution and ongoing investigations[edit]

FIR has been filed against Sudipto Sen and Kunal Ghosh.[138] Around 6 officials from Saradha Group have been arrested. Numerous others from various illegal ponzi funds have also been arrested in several districts of West Bengal.[139] The investigation is being headed by detective department of Bidhannagar police. The general ambit of investigation has also widened to include other Ponzi funds which has scripted rags to riches stories for their promoters.[140] Kunal Ghosh along with other Ponzi fund officials from Saradha are being questioned by police to determine the true assets of the company and other facets of the fraud.[141]

On 30 April 2013, Central Bureau of Investigation (CBI) started investigation into the scam in Assam at the request of the state government.[142][143] It has been indicated by Chief Minister of Tripura that Tripura may also order CBI probe into Saradha chit fund scam.[144] The Government of Odisha ordered the Crime Branch of Odisha Police to start investigation on the Saradha scam.[145]

Justice Shyamal Sen Commission[edit]

By mid-August 2013, Justice Sen Commission finished its initial compilation of the list of claimants. Around 1.74 million depositors filed claims with the Commission. Out of which 83 per cent invested Rs 10,000 or less.[146] The Commission recommended the state government to sell the assets of the company and proportionally distribute it among duped investors.[147]

References[edit]

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