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Saradha Group financial scandal

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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

Template: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 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. 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

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.


Political patronage

Union minister of Finance's wife Nalini Chidambaram is also was also indicated in the scam by TMC and Sudipta Sen.

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.


Key People

  • Sudipto Sen
  • Debjani Mukhopadhdhay
  • Somnath Dutta

Alleged TMC Leaders

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 reaction

Macroeconomic and microeconomic effects

Victims

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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  5. Mamata sets up fund for duped Saradha investors, Business Standard, 24 April 2013
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  18. Acharya, Namrata (26 April 2013). "In Bengal's grey 'money market', Saradha is just one". Business Standard. Retrieved 29 April 2013.
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  22. Basak, Probal (27 April 2013). "After Saradha, next target should be Rose Valley: Sushil Modi". Business Standard. Kolkata. Retrieved 29 April 2013.
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  25. ^ "SEBI Order (WTM/RKA/ERO-CIS/19/2013)" (PDF). Mumbai: SEBI. 23 April 2013. Retrieved 29 April 2013.
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  34. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1366731012533.pdf
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