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==Background== ==Background==
{{See also|Banking in India}} {{See also|Banking in India}}
India comprises of mainly low income rural population with low access to formal banking facilities.<ref>{{cite web|url=http://articles.economictimes.indiatimes.com/2013-04-23/news/38763419_1_financial-inclusion-mobile-banking-banking-system|title=Ponzi schemes show failure of formal banking|date=23 April 2013|publisher=The Economic Times|accessdate=29 April 2013}}</ref> This financial exclusion created a web of parallel informal banking with web of moneylenders etc. who charged exorbitant rates of interest, this was greatly curbed by various Moneylenders Act promulgated by state governments in the 1950s. However broader failures in India’s banking sector to replace the moneylender gave rise to fly by night operators who mostly turned out to run ponzi schemes in various disguises.<ref>{{cite web|url=http://www.aljazeera.com/indepth/features/2013/04/2013427155533920295.html|title=Indian Ponzi scheme pushes many to penury|last=Chaki|first=Deborshi|date=28 April 2013|publisher=AlJazeera|accessdate=29 April 2013}}</ref> India comprises of mainly low income rural population with low access to formal banking facilities.<ref>{{cite web|url=http://articles.economictimes.indiatimes.com/2013-04-23/news/38763419_1_financial-inclusion-mobile-banking-banking-system|title=Ponzi schemes show failure of formal banking|date=23 April 2013|publisher=The Economic Times|accessdate=29 April 2013}}</ref> This financial exclusion created a web of parallel informal banking with ] at the centre who charged exorbitant rates of interest, this was greatly curbed by various Moneylenders Act promulgated by different ] in the 1950s. However broader failures in India’s banking sector to replace the moneylender gave rise to fly by night operators who mostly ran ponzi schemes in various disguises.<ref>{{cite web|url=http://www.aljazeera.com/indepth/features/2013/04/2013427155533920295.html|title=Indian Ponzi scheme pushes many to penury|last=Chaki|first=Deborshi|date=28 April 2013|publisher=AlJazeera|accessdate=29 April 2013}}</ref>
] with a relatively prosperous rural economy had largely relied on small savings schemes run by ], however the low rates of interest in these savings schemes had in 1980s and 90s given rise to ponzi scandals in pseudo profit making and speculative ventures like Sanchayita Investments, Overland Investment Company, Verona Credit and Commercial Investment Company, Shanchayani Investment Company etc. which wiped off close to 1000 crores INR in investor wealth.<ref>{{cite web|url=http://www.indianexpress.com/news/mamata-banerjee-vows-to-repay-depositors-of-saradha-groups-sudipta-sen/1108090/|title=Mamata Banerjee vows to repay depositors of Saradha group's Sudipta Sen|date=26 April 2013|publisher=Indian Express|accessdate=29 April 2013}}</ref><ref>{{cite web|url=http://articles.economictimes.indiatimes.com/2013-04-24/news/38790645_1_collective-investment-schemes-ponzi-tower-infotech/2|title=The fall of Saradha group revives old ghosts of ponzi schemes going bust|last=Ray|first=Atmadip|date=24 April 2013|publisher=The Economic Times|accessdate=29 April 2013}}</ref> However in spite of a history of ponzi scams in Bengal, in the last decade a steadily decreasing interest rates in the small saving schemes, lack of financial literacy and investor awareness, political patronage, absence of adequate legal deterrence and regulatory arbitrage led to a mushrooming of companies which raised public money through channels like collective investment schemes, non-convertible debentures and preference shares, or hoax instruments such as teak bonds or potato bonds. Data collated by the government shows that more than 8 out of 10 multi-level marketing and finance schemes against which authorities in India have received complaints are run out of West Bengal, giving the state the sordid title of 'Ponzi capital of India'.<ref>{{cite web|url=http://www.hindustantimes.com/business-news/WorldEconomy/Is-Bengal-the-Ponzi-capital-of-India/Article1-1051771.aspx|title=Is Bengal the Ponzi capital of India?|last=Sharma|first=Nagender|coauthors=Gaurav Chaudhury|date=28 April 2013|publisher=Hindustan Times|accessdate=29 April 2013}}</ref> It is estimated that these ponzi funds have all-together amassed around Rs.10 lakh crore (200 billion USD) from unsuspecting depositors in Eastern India.<ref>{{cite news|url=http://www.business-standard.com/article/current-affairs/60-firms-like-saradha-operating-in-bengal-113042500411_1.html|title=60 firms like Saradha operating in Bengal|date=25 April 2013|work=Business Standard|publisher=IANS|accessdate=29 April 2013|location=Kolkata}}</ref> ] with a relatively prosperous rural economy had largely relied on small savings schemes run by ], however the low rates of interest in these savings schemes had in 1980s and 90s given rise to ponzi scandals in pseudo profit making and speculative ventures like Sanchayita Investments, Overland Investment Company, Verona Credit and Commercial Investment Company, Shanchayani Investment Company etc. which wiped off close to 1000 crores INR in investor wealth.<ref>{{cite web|url=http://www.indianexpress.com/news/mamata-banerjee-vows-to-repay-depositors-of-saradha-groups-sudipta-sen/1108090/|title=Mamata Banerjee vows to repay depositors of Saradha group's Sudipta Sen|date=26 April 2013|publisher=Indian Express|accessdate=29 April 2013}}</ref><ref>{{cite web|url=http://articles.economictimes.indiatimes.com/2013-04-24/news/38790645_1_collective-investment-schemes-ponzi-tower-infotech/2|title=The fall of Saradha group revives old ghosts of ponzi schemes going bust|last=Ray|first=Atmadip|date=24 April 2013|publisher=The Economic Times|accessdate=29 April 2013}}</ref> However in spite of a history of ponzi scams in Bengal, in the last decade a steadily decreasing interest rates in the small saving schemes, lack of financial literacy and investor awareness, political patronage, absence of adequate legal deterrence and regulatory arbitrage led to a mushrooming of companies which raised public money through channels like collective investment schemes, non-convertible debentures and preference shares, or hoax instruments such as teak bonds or potato bonds. Data collated by the government shows that more than 8 out of 10 multi-level marketing and finance schemes against which authorities in India have received complaints are run out of West Bengal, giving the state the sordid title of 'Ponzi capital of India'.<ref>{{cite web|url=http://www.hindustantimes.com/business-news/WorldEconomy/Is-Bengal-the-Ponzi-capital-of-India/Article1-1051771.aspx|title=Is Bengal the Ponzi capital of India?|last=Sharma|first=Nagender|coauthors=Gaurav Chaudhury|date=28 April 2013|publisher=Hindustan Times|accessdate=29 April 2013}}</ref> It is estimated that these ponzi funds have all-together amassed around Rs.10 lakh crore (200 billion USD) from unsuspecting depositors in Eastern India.<ref>{{cite news|url=http://www.business-standard.com/article/current-affairs/60-firms-like-saradha-operating-in-bengal-113042500411_1.html|title=60 firms like Saradha operating in Bengal|date=25 April 2013|work=Business Standard|publisher=IANS|accessdate=29 April 2013|location=Kolkata}}</ref>


==Modus operandi of Saradha== ==Modus operandi of Saradha==

Revision as of 20:05, 29 April 2013

Saradha Group financial scandal is a financial scam caused by collapse of a ponzi scheme run by Saradha Group, a consortium of Indian companies running a wide variety of collective investment schemes (popularly but incorrectly referred in rural India as chit fund) in Eastern India. The group collapsed in April 2013 causing an estimated loss of between INR 20,000 - 30,000 crores (4 - 6 billion USD). In the aftermath of this financial scandal the State government of West Bengal set up an inquiry commission to investigate the collapse and have also announced setting up a fund of INR 500 crores to ensure that low income investors are not bankrupted. The Union Government also mobilised its resources and launched a multi agency probe to investigate Saradha scam as well as other similar ponzi schemes.

Background

See also: Banking in India

India comprises of mainly low income rural population with low access to formal banking facilities. This financial exclusion created a web of parallel informal banking with moneylenders at the centre who charged exorbitant rates of interest, this was greatly curbed by various Moneylenders Act promulgated by different state governments in the 1950s. However broader failures in India’s banking sector to replace the moneylender gave rise to fly by night operators who mostly ran ponzi schemes in various disguises. West Bengal with a relatively prosperous rural economy had largely relied on small savings schemes run by Indian Postal Service, however the low rates of interest in these savings schemes had in 1980s and 90s given rise to ponzi scandals in pseudo profit making and speculative ventures like Sanchayita Investments, Overland Investment Company, Verona Credit and Commercial Investment Company, Shanchayani Investment Company etc. which wiped off close to 1000 crores INR in investor wealth. However in spite of a history of ponzi scams in Bengal, in the last decade a steadily decreasing interest rates in the small saving schemes, lack of financial literacy and investor awareness, political patronage, absence of adequate legal deterrence and regulatory arbitrage led to a mushrooming of companies which raised public money through channels like collective investment schemes, non-convertible debentures and preference shares, or hoax instruments such as teak bonds or potato bonds. Data collated by the government shows that more than 8 out of 10 multi-level marketing and finance schemes against which authorities in India have received complaints are run out of West Bengal, giving the state the sordid title of 'Ponzi capital of India'. It is estimated that these ponzi funds have all-together amassed around Rs.10 lakh crore (200 billion USD) from unsuspecting depositors in Eastern India.

Modus operandi of Saradha

Financial operations

Companies belonging to Saradha Group were incorporated from 2006, the group name is a cacography of the name of one of the most revered spiritual icon of the region Sarada Devi, the wife and spiritual counterpart of Ramakrishna Paramahamsa, a nineteenth century mystic of Bengal. The 'association' with the name of a revered icon gave the group a veneer of respectability. Like an archetypal ponzi scam, Saradha group promised astronomical returns in fanciful but credible investments; it recruited rural youth who had influence and good reputation in the community to act as agents who would collect funds from various localities. It thus created a complex agent pyramid and enticed them by giving away between 25%-40% of the deposit collected to the agents as commission fee and other lucrative gifts. To keep ahead of regulators, the group frequently changed its strategy and used a nexus of companies to launder money. Initially the numerous companies were used to collect money from public by issuing secured debentures and redeemable preferential bonds. However under Indian Securities regulations and section 67 of Indian Companies Act, enforced by market regulator Securities and Exchange Board of India (SEBI), a company cannot raise capital from more than 50 persons without issuing proper prospectus accompanied with balance sheet, audited accounts and taking proper permission from SEBI. On being challenged by SEBI, in around 2009, the group started opening numerous companies (over 300 by some estimate) to create more cross-holdings etc. and have tiered corporate structure to make it difficult to pin blame on any one company. However by 2010 under relentless investigative pressure from SEBI, the group changed its modus operandi and started to raise capital in various states like West Bengal, Jharkhand, Assam and Chattisgarh under variations of collective investment schemes (CIS) like tourism packages, forward travel and hotel booking credit transfer, real estate, infrastructure finance, motor cycle manufacturing etc. The investors were rarely informed about the true nature of the investments and were instead told that they would get high returns after a fixed period, at other times the investment was mis-sold as a form of 'chit fund', as chit funds were regulated by state government under the Chit Fund Act, 1982, SEBI warned the state government of West Bengal to take appropriate steps. Later in 2012, SEBI realised that these were not chit funds but are actually CIS and asked Saradha Group to immediately stop operating these forms of investment schemes without taking prior permission from SEBI. However Saradha group continued flouting SEBI instruction and carried on its financial schemes till its eventual collapse in April 2013.

Building brand and non-financial businesses

Like other historic ponzi funds (for example Russian MMM), Saradha group invested heavily and meticulously in building its brand. With enormous funds at its disposal Saradha invested in high visibility sectors like Bengali film industry, where it roped in famous actress and Trinamool Congress Member of parliament Satabdi Roy as its brand ambassador. Saradha group also recruited Kunal Ghosh another Trinamool Congress Member of parliament to act as the CEO of the media group. Under Kunal Ghosh the group went on an unprecedented spree of buying and establishing local television channels and newspapers. By 2013 it employed over 1500 journalists and owned seven news papers in four languages: Bengal Post, Seven Sisters Post (English dailies), Kolom (a Urdu daily), Sakalbela, Prabhat Varta, Parama (Bengali dailies) and Azad Hind (a Hindi daily); two Bengali news channels Tara News and Channel 10 and two Bengali general entertainment channels: Tara Muzic and Tara Bangla. In 2011, the group bought Global Automobiles, a heavily indebted motor cycle company. The company stopped production in 2011, yet kept 150 workers on payroll who would 'pretended to work whenever truckloads and busloads of prospective depositors of Saradha Realty visited the plant for a first-hand check before investing.' As part of its corporate social responsibility program, Saradha group donated motorcycles to the Kolkata Police and pulled off a public relations coup when 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. To further etch itself in the socio-cultural milieu of Bengal, Saradha Group invested in both Mohun Bagan A.C. (INR 1.8 crore in 2010-11) and East Bengal F.C. (INR 3.5 crore since 2010), the best known Bengal football clubs and bitter city rivals. The group also generously sponsored or funded various Durga Puja celebrations organised by political leaders.

Political patronage

Several political leaders belonging to Trinamool Congress, the incumbent ruling party of West Bengal like members of Parliament Kunal Ghosh (who drew a salary of INR 16 lakhs per month from Saradha Group) and Srinjoy Bose (also the owner of Bengali daily Sangbad Pratidin), son of Swapan Sadhan Bose were directly related to media operations of Saradha group. Its legislator and transport minister Madan Mitra headed the employees union of Saradha group and is on record publicly praising the company and appealing people to deposit their savings with the company. Himanta Biswa Sarma, Health and education minister of Assam was also alleged to have profited from the scam in lieu of political support and protection. It has been alleged that the ponzi scheme survived for so long because of continued political patronage.

Key People

Sudipto Sen is the Chairman and managing director of the Saradha Group. Very little is known about Sudipta Sen. He is in his mid-fifties, a reclusive man, described as a soft spoken, charming yet forceful orator. Some say he is the son of a man called Bhudeb Sen, who used to run a chit fund called Sanchayani in the 1980s and which went bust 10 years ago. He was originally known as Shankaraditya Sen and in 1970s took part in the Naxalite movement in West Bengal, later in 1990s he changed his name, alleged to have undergone plastic surgery and became associated with land development projects in South Kolkata fringes. The land bank he formed at the turn of the century became the initial vehicle for enticing early customers into his ponzi scheme. After being on run for at least 10 days, he was arrested from Kashmir on 23 April 2013.

Debjani Mukhopadhdhay is one of the executive directors of Saradha Group and had the power to sign cheques on behalf of the group. She joined the group in 2010 as a receptionist and rose rapidly to be the 'number two' in the group hierarchy. She was also arrested from Kashmir along with Sudipto Sen and another official of the group.

Collapse and unravelling of the scam

Finally in April 2013 just after the collapse of the fund SEBI opined that chain marketing and forward contracts are forms of CIS and asked Saradha Group to immediately desist from raising any further capital and return all deposits by three months.



In a mail to Central Bureau of Investigation Saradha Group CMD Sudipta Sen has made allegation of extortion against various persons.


Aftermath and reactions

State government reaction

Central government reaction

Political reactions and protests

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


Macroeconomic and microeconomic effects

Suicides by victims of the scam

Since the breaking out of the news of the financial scam, many agents and depositors have committed suicide.

  • Tapan Biswas (36, depositor, Balrampur, Purulia), by hanging himself from the ceiling of his house, on April,26
  • Dilip Mandal (55, agent, Delsinha village near Phalta, South 24 Parganas), by consuming pesticides, on April 25
  • Urmila Pramanik (50, depositor, Baruipur, South 24 Parganas), by setting herself on fire, on April 20
  • Yadav Majhi (33, agent, Mayabazar, Durgapur, Burdwan), by hanging himself from the ceiling of his house, on April 19

Criminal prosecution and ongoing investigations

References

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