How the scheme worked and the bubble burst

The expression ‘Ponzi scheme’ borrowed from US experiences, is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organisation running the operation. 

In case of the Saradha Group, it was running a wide variety of collective investment schemes. The group appointed agents who collected money from the public by issuing secured debentures and redeemable preferential bonds on commission basis. 

A chit fund firm cannot declare in advance the return an individual is likely to make, given the way it is structured.  The fact that a rate of return was promised in advance here clearly means that what Saradha Group CMD  Sudipto Sen was not running a chit fund but something else. Moreover, the investors did not have day to day control over the scheme and the money would come to them only at maturity, which makes it a collective investment scheme. 

In the Saradha case, investors were rarely informed about the true nature of how their investment was used by the group, although this needs to be established in a court. Instead, many investors were assured that they would get high returns after a fixed period. In reality, it is likely that the promoters of these companies have a dominant shareholding. 

In August this year, parliament passed a law giving more powers to the Securities and Exchange Board of India (Sebi) to act against fraudsters who cheat gullible investors through illicit money pooling activities including ponzi schemes. Sebi can now act against all illegal money-pooling schemes involving Rs 100 crore or more, launch recovery proceedings and facilitate its return to identifiable investors.

This has heralded a new hope that Saradha Group cheats will be dealt with severely. But this is not the first time a new law has been created to deal with wrong doers. Ironically, the number of regulations for investor protection is commensurate with the number of financial sector scams taking place in the country. 

Sebi first challenged Saradha Group in 2009 after which the Group created a complex web of corporate structure to create more cross-holdings which made it nearly impossible for the regulator to pin any one company for wrong doing. It also changed its methods of raising funds and entered into collective investment schemes (CIS). 

WB govt warned

Saradha came out with tourism packages, entered realty space and infrastructure finance. Investors were never told where their funds were being invested. Nevertheless, Sebi continued investigations. In 2011, it also warned the West Bengal government about Shardha Group chit fund activities. Saradha, which was growing bigger by the day under influential people and political patronage, once again tried to befool the investigator by changing its business module. 

Its promoters, who entered into laundering of funds to tax havens, prospered. Sudipta Sen also started to invest in media organisations devoted for pro-government news. This saved his company from public scrutiny and Sen had a lavish lifestyle. Lakhs of investors in West Bengal and neighbouring states who invested their life savings in Saradha, named after Bengal’s most revered Godmother, ostensibly to stir emotional values, were left in the lurch. The fate of workers who worked in companies run by Saradha remain uncertain. 

However, by 2012, Saradha came in Sebi’s  lense once again. The regulator identified the group’s CIS activities and asked it to immediately stop operating its investment schemes until it received the capital market regulator’s nod. But Saradha continued on the same magnitude until severe probes began into its money trail last year. The Enforcement Directorate, under the finance ministry, started investigation in April 2013, properties worth Rs 350 crore and bank accounts belonging to Saradha Group were attached in West Bengal, Assam and Odisha. Arrests were made by ED, CBI and the West Bengal police. This marked the end of proliferation of Sharadha’s business. 

Earlier this month , a Serious Fraud Investigation Office probe into 14 companies of the Saradha Group found evidence of violation of several provisions of the Indian Penal Code including abetment of crime, criminal conspiracy, misappropriation of property, criminal breach of trust by public servants, cheating and falsification of accounts. Saradha, which emerged as the largest chit fund company in 2007 tapping private household savings but transformed into fraudulent investment schemes.

The promise of handsome return by fly-by-night operators have cheated not only the poor but also avast majority of middle class. Only time will tell whether the new Sebi Act will be able to check such activities.  So far, the Sebi has been unable to catch the flashing signals by Saradha and the likes.