The popular press and TV are blazing with the "Saradha Story' and everyone is looking for someone to blame ignoring a one of the or perhaps the most important culprit and also the victim - Us - The people of Bengal.
This can be easily seen from the ill informed and sarcastic attitude - like calling this company a 'Chit Fund'. There has always been a tendency among those in the populace not interested in financial companies to refer to them sarcastically as "Chit Fund"- not because that's what they may be but because of phonetic association of the word with "Cheat", not knowing or caring to know that 'Chit Funds' are companies governed by the Chit Fund Act and are among still respectable organisations in Andhra, Tamil Nadu etc. These funds have been fulfilling a very specific need among the investors there for many decades while those in West Bengal seem to be hot air balloons.
This is because and here I am speaking from personal experience, while the Bengali investors on one hand are apparently very skeptical about investing in the financial markets - "you will loose money there" is the common phrase - they are quite prepared to invest in these strange entities without knowing anything about them just because they have been promised astronomical interest - not caring or bothering to understand whether such returns are feasible or not. Why talk only of shady companies ? Till very recently, LIC agents have been having a gala time selling ULIP schemes assuring fabulous returns and people have invested billions based on that promise - rarely bothering to think the viability of such claims. The excuse (nobody likes being blamed particularly if you have lost money) - "well it is LIC" or "this is not our core area. We are not supposed to know these things." I have always felt that we have pathological attraction towards fixed returns and can be easily prayed upon through this weird weakness.
What should be pointed out here that one common modus operandi of these type of organisation is to have apart from political clout (goes without saying), a very large agent network gunning on their behalf in pursuit of the hefty incentive which can be as high as 40%. These agents cannot absolve themselves by saying that they are not responsible for the deploying of funds and therefore not to be blamed. Neither the companies can try to wriggle out of the situation claiming inherent risk in investment. When you are giving such incentives, you are left with only 60% of the original investment while promising 40-60% or even higher returns.That's false promise and is criminal.
Actually, in most cases the basic story is the same. There is one who is a high flyer who thinks he is very clever. He is absolutely certain he has got the key to making humongous profit from the market but finds himself constrained by the 'stupid' laws of the land. He gets together with couple of like minded people (from here the actual scam starts as now he is getting the taste of money and lavish lifestyle) and starts selling an idea to others which can even include banks. Interestingly, these scams are unstable as one side they start causing problems when more money comes in (because while some idea may actually work at least for a while when the corpus is small, they are simply unmanageable in large volumes), on the other hand it will collapse if the money stops flowing in. By this time, the scamsters are already paying interest to one investor with the principal received from another. And this principal is already 40-50% less because of the incentive. Then there is the lifestyle. One gentleman apparently drives a Rolls Royce in Kolkata. Another goes in with 2 BMWs. Perhaps, he gets uncomfortable sitting too long in one.
Take the issue of Saradha. From what is being reported it appears that the Saradha Group is a not even a chit fund. Technically, the group companies—and many others in West Bengal—are not taking deposits. They are selling holidays and pieces of real estate and other products and raising money in the form of advances. Once a subscriber to such a scheme becomes eligible for a week’s holiday at a resort every year or, say, 20 sq. ft worth of real estate, he can encash his entitlement. That’s how these schemes run and no regulator has any jurisdiction on the so-called collective investment schemes (CIS). Chit funds are regulated by state governments.
While the capital market regulator has unsuccessfully tried to stop these companies from raising money from the public by approaching the courts, the Reserve Bank of India (RBI) brass has said several times in the recent past that these companies, though receiving public deposits, do not come under the banking regulator’s jurisdiction.
A very interesting information is available from an article in LiveMint. Below are some excerpts :-
"Why did the group fail? The causes of failure are not new. In 1975, a committee appointed by the Reserve Bank of India (RBI) and chaired by James Raj, former chairman of the erstwhile ICICI Ltd, analysed finance and chit fund companies in Delhi and found the following reasons, and a few others, behind their failure:
One: Dishonesty and lack of integrity of the promoters and directors in the management of the companies.
Two: Giving unsecured advances to directors or their relatives or the firms in which they are interested at nominal rates of interest or even without interest, though funds might have been borrowed by way of deposits or otherwise at high rates of interest.
Three: Extravagant establishment expenses on maintenance of luxurious office premises, publicity, payment of high salaries to some of the employees out of proportion to the turnover or magnitude of the company’s business.
Four: Perpetration of fraud either by misappropriating money received by way of deposits and not accounting them in the books of account or by making advances in the names of fictitious parties.
In the case of Saradha, it seems all four reasons are applicable.
“If such deficiencies or malpractices in their working are to be minimized, if not eliminated, it would be necessary to devise stricter types of controls on the deposit-acceptance activities of the companies and to regulate other aspects of their management,” the James Raj panel report had said.
The committee found that in Bangalore, such companies accept deposits from the public out of all proportion to their own funds and invest in film production, hotels, construction and the usual manufacturing and trading activities. A major portion of their funds was reported to have been invested in the construction of imposing buildings. Such buildings, which also house the offices of the corporations concerned, create a favourable impression in the minds of the gullible public and “they are often led to keep deposits with these corporations”, the report said.
“The corporations are tempted to borrow to the hilt and lock up the funds by investing them in illiquid and risky assets. If for any reason, the business comes to a standstill, as recently happened in the case of one finance corporation, the depositors become the ultimate losers. It is gathered that the partners in some corporations in practice consider the deposits as their share in proportion to their contribution and use or lend the money in any manner they deem fit,” it added.
Thirty-eight years after the James Raj panel issued its report, the Saradha Group’s collapse illustrates how prophetic its findings were. Indeed, regulations have changed, as had been suggested by this committee and many others, but political interference often makes a regulator inactive.
India’s capital market regulator has been fighting a protracted legal battle against at least two such companies—MPS Greenery Developers Ltd and Rose Valley Real Estates and Constructions Ltd—in West Bengal, to stop them from collecting public deposits under so-called collective investment schemes (CIS). It has not been able to stop them, despite issuing cease-and-desist orders.
As many as six district courts have passed injunctions against Sebi’s cease-and-desist order even though only the Securities Appellate Tribunal (SAT) has the jurisdiction to review Sebi’s orders. Sebi even moved the Supreme Court against such firms, but could not make much headway.
Many of these corporations enjoy political patronage. A few of them have built media empires in West Bengal, albeit now crumbling."
Another issue which must be mentioned here is the role our judicial system is playing in this mess. Even the Hon'ble Supreme Court has recently commented that the Sahara Group is manipulating the court system. Which begs the question, why is the court allowing itself to be manipulated? Is it that helpless or are our laws so lame? Perhaps it is a combination of both. But what is also present is politics which has permeated into every level of the society and system. So how can the judiciary remain aloof?
There are several tribunals created specifically to handled certain specific legal issues and laws have been created specially for them which clearly states that those particular matters should be dealt through these tribunals. The Hon'ble Supreme Court has time and again said that when a separate forum is available, those legal matters which relate to these tribunals should be resolved through these tribunals. But that has not stopped the courts from getting into these matters repeatedly as if the court system does not have enough work load.
Unfortunately, today the judicial system is such that if you have money, you can avoid responsibility forever. Again and more unfortunately, it also means that if you do not have money, very little option is available for you. In fact, you are alone against the entire administrative / judicial system.
Or perhaps, I am being naive. Perhaps it has been like this from beginning of time.
This can be easily seen from the ill informed and sarcastic attitude - like calling this company a 'Chit Fund'. There has always been a tendency among those in the populace not interested in financial companies to refer to them sarcastically as "Chit Fund"- not because that's what they may be but because of phonetic association of the word with "Cheat", not knowing or caring to know that 'Chit Funds' are companies governed by the Chit Fund Act and are among still respectable organisations in Andhra, Tamil Nadu etc. These funds have been fulfilling a very specific need among the investors there for many decades while those in West Bengal seem to be hot air balloons.
This is because and here I am speaking from personal experience, while the Bengali investors on one hand are apparently very skeptical about investing in the financial markets - "you will loose money there" is the common phrase - they are quite prepared to invest in these strange entities without knowing anything about them just because they have been promised astronomical interest - not caring or bothering to understand whether such returns are feasible or not. Why talk only of shady companies ? Till very recently, LIC agents have been having a gala time selling ULIP schemes assuring fabulous returns and people have invested billions based on that promise - rarely bothering to think the viability of such claims. The excuse (nobody likes being blamed particularly if you have lost money) - "well it is LIC" or "this is not our core area. We are not supposed to know these things." I have always felt that we have pathological attraction towards fixed returns and can be easily prayed upon through this weird weakness.
What should be pointed out here that one common modus operandi of these type of organisation is to have apart from political clout (goes without saying), a very large agent network gunning on their behalf in pursuit of the hefty incentive which can be as high as 40%. These agents cannot absolve themselves by saying that they are not responsible for the deploying of funds and therefore not to be blamed. Neither the companies can try to wriggle out of the situation claiming inherent risk in investment. When you are giving such incentives, you are left with only 60% of the original investment while promising 40-60% or even higher returns.That's false promise and is criminal.
Actually, in most cases the basic story is the same. There is one who is a high flyer who thinks he is very clever. He is absolutely certain he has got the key to making humongous profit from the market but finds himself constrained by the 'stupid' laws of the land. He gets together with couple of like minded people (from here the actual scam starts as now he is getting the taste of money and lavish lifestyle) and starts selling an idea to others which can even include banks. Interestingly, these scams are unstable as one side they start causing problems when more money comes in (because while some idea may actually work at least for a while when the corpus is small, they are simply unmanageable in large volumes), on the other hand it will collapse if the money stops flowing in. By this time, the scamsters are already paying interest to one investor with the principal received from another. And this principal is already 40-50% less because of the incentive. Then there is the lifestyle. One gentleman apparently drives a Rolls Royce in Kolkata. Another goes in with 2 BMWs. Perhaps, he gets uncomfortable sitting too long in one.
Take the issue of Saradha. From what is being reported it appears that the Saradha Group is a not even a chit fund. Technically, the group companies—and many others in West Bengal—are not taking deposits. They are selling holidays and pieces of real estate and other products and raising money in the form of advances. Once a subscriber to such a scheme becomes eligible for a week’s holiday at a resort every year or, say, 20 sq. ft worth of real estate, he can encash his entitlement. That’s how these schemes run and no regulator has any jurisdiction on the so-called collective investment schemes (CIS). Chit funds are regulated by state governments.
While the capital market regulator has unsuccessfully tried to stop these companies from raising money from the public by approaching the courts, the Reserve Bank of India (RBI) brass has said several times in the recent past that these companies, though receiving public deposits, do not come under the banking regulator’s jurisdiction.
A very interesting information is available from an article in LiveMint. Below are some excerpts :-
"Why did the group fail? The causes of failure are not new. In 1975, a committee appointed by the Reserve Bank of India (RBI) and chaired by James Raj, former chairman of the erstwhile ICICI Ltd, analysed finance and chit fund companies in Delhi and found the following reasons, and a few others, behind their failure:
One: Dishonesty and lack of integrity of the promoters and directors in the management of the companies.
Two: Giving unsecured advances to directors or their relatives or the firms in which they are interested at nominal rates of interest or even without interest, though funds might have been borrowed by way of deposits or otherwise at high rates of interest.
Three: Extravagant establishment expenses on maintenance of luxurious office premises, publicity, payment of high salaries to some of the employees out of proportion to the turnover or magnitude of the company’s business.
Four: Perpetration of fraud either by misappropriating money received by way of deposits and not accounting them in the books of account or by making advances in the names of fictitious parties.
In the case of Saradha, it seems all four reasons are applicable.
“If such deficiencies or malpractices in their working are to be minimized, if not eliminated, it would be necessary to devise stricter types of controls on the deposit-acceptance activities of the companies and to regulate other aspects of their management,” the James Raj panel report had said.
The committee found that in Bangalore, such companies accept deposits from the public out of all proportion to their own funds and invest in film production, hotels, construction and the usual manufacturing and trading activities. A major portion of their funds was reported to have been invested in the construction of imposing buildings. Such buildings, which also house the offices of the corporations concerned, create a favourable impression in the minds of the gullible public and “they are often led to keep deposits with these corporations”, the report said.
“The corporations are tempted to borrow to the hilt and lock up the funds by investing them in illiquid and risky assets. If for any reason, the business comes to a standstill, as recently happened in the case of one finance corporation, the depositors become the ultimate losers. It is gathered that the partners in some corporations in practice consider the deposits as their share in proportion to their contribution and use or lend the money in any manner they deem fit,” it added.
Thirty-eight years after the James Raj panel issued its report, the Saradha Group’s collapse illustrates how prophetic its findings were. Indeed, regulations have changed, as had been suggested by this committee and many others, but political interference often makes a regulator inactive.
India’s capital market regulator has been fighting a protracted legal battle against at least two such companies—MPS Greenery Developers Ltd and Rose Valley Real Estates and Constructions Ltd—in West Bengal, to stop them from collecting public deposits under so-called collective investment schemes (CIS). It has not been able to stop them, despite issuing cease-and-desist orders.
As many as six district courts have passed injunctions against Sebi’s cease-and-desist order even though only the Securities Appellate Tribunal (SAT) has the jurisdiction to review Sebi’s orders. Sebi even moved the Supreme Court against such firms, but could not make much headway.
Many of these corporations enjoy political patronage. A few of them have built media empires in West Bengal, albeit now crumbling."
Another issue which must be mentioned here is the role our judicial system is playing in this mess. Even the Hon'ble Supreme Court has recently commented that the Sahara Group is manipulating the court system. Which begs the question, why is the court allowing itself to be manipulated? Is it that helpless or are our laws so lame? Perhaps it is a combination of both. But what is also present is politics which has permeated into every level of the society and system. So how can the judiciary remain aloof?
There are several tribunals created specifically to handled certain specific legal issues and laws have been created specially for them which clearly states that those particular matters should be dealt through these tribunals. The Hon'ble Supreme Court has time and again said that when a separate forum is available, those legal matters which relate to these tribunals should be resolved through these tribunals. But that has not stopped the courts from getting into these matters repeatedly as if the court system does not have enough work load.
Unfortunately, today the judicial system is such that if you have money, you can avoid responsibility forever. Again and more unfortunately, it also means that if you do not have money, very little option is available for you. In fact, you are alone against the entire administrative / judicial system.
Or perhaps, I am being naive. Perhaps it has been like this from beginning of time.
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