Saradha Chit Fund Scam
Report By:
Radhika Bajaj (64)
Harsh Chandak(16)
Reema Parkar(54)
Siddhi Chokhani(65)
Vidhi Gala(57)
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Index
Topic Page Number
People Involved 3
Time of Collapse 3
Rise of Idea 3
Modus Operandi 4
Financial Operations 4
Where they went wrong 5
How the Scam Unfolded 5
Terms Mentioned 6
Magnitude 6
Investigation Process 7
Consequences 8
Aftermath 8
Lessons Learnt 10
Current Status 13
References 14
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Amount: USD 4 – 6 billion
People involved:
Sudipto Sen Chairman and MD, Saradha
Group
Debjani Mukherjee Director, Saradha Group
Kunal Ghosh Member of Parliament
Srinijoy Bose Member of Parliament
Rajat Majumdar West Bengal Director General of
Police
Debabrata Sarkar A top football club official
Madan Mitra Sports and transport minister in
the Mamata Banerjee cabinet
Time of Collapse: April 2013
Activities Involved: International money laundering, serious regulatory
failures and alleged political nexus.
Introduction of Saradha Group:
Saradha Group is a consortium of over 200 private companies that was
believed to be running collective investment schemes popularly but incorrectly
referred to as chit funds in Eastern India.
Rise of idea:
India has a large, low-income, rural population with limited access to formal
banking facilities. Instead by a web of parallel, informal banking in the form of
money lenders who have existed in India for some few centuries, mostly
unregulated often wealthy landlords or now politicians, used to charge
exorbitant rates of interest.
While post offices have tried to address this through postal savings banks,
people are often lured by Ponzi schemes that promise much higher returns.
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The relatively prosperous rural economy of West Bengal had previously relied
on small savings schemes run by the Indian Postal Service. However, low rates
of interest in the 1980s and 1990s encouraged the rise of several Ponzi
schemes in speculative ventures such as Sanchayita Investments, Overland
Investment Company, Verona Credit and Commercial Investment Company.
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 and
manufacturing. As of 2013, 80% of multi-level marketing and finance schemes
against which complaints have been received are based in West Bengal, giving
the state the title of "Ponzi capital of India".
Modus operandi of Saradha:
Important People:
Sudipto Sen was the chairman and managing director of the Saradha Group.
The land bank he formed in around 2000 became the catalyst for enticing early
customers into his Ponzi scheme.
Debjani Mukherjee was one of the executive directors of Saradha Group who
could sign cheques on behalf of the group.
Financial operations:
Raising funds:
More than 200 companies that were comprised under Saradha group were
incorporated in 2006. Saradha group assured huge returns to investors. To
assure huge agent base (local rural community) they promised 25-40 %
commission of the deposit they get along with lucrative gifts.
The web of the 200 companies was made to launder money and evade
regulators as a company could not (As per Indian Companies Act, 1956)
raise capital from more than 50 people without issuing a proper prospectus
and audited financial statements, explicit permission from the regulator
(SEBI).
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They collected money by issuing secured debentures and redeemable
preferential bonds.
Giving timely returns for two years along with raising funds from new investors
went smoothly which built investor’s trust towards Saradha Group.
Where they went wrong:
Betraying Investor’s trust: Mode of repaying old investors was through raising
new investments.
Investors were rarely informed about the true nature of their investments.
Instead, many were told they would get high returns after a fixed period.
The investment was fraudulently sold in the form of a chit fund.
International money laundering to Dubai, South Africa and Singapore.
Serious regulatory failures: Not issuing prospectus
Not getting their financial statements audited, along with not issuing the same
Alleged political nexus: Financial support was offered to various MPs of the
incumbent ruling party, TMC.
How the scam unfolded:
2009: SEBI first confronted Saradha Group in 2009.
To which they reacted by opening up 200 companies resulting into creation of a
complex corporate structure making it difficult for SEBI to take proper action.
2010: The investigation persisted through 2010.
To which they reacted by changing its method of raising capital to CIS and
selling it under the name of Chit funds in West Bengal, Assam, Jharkhand and
Chhattisgarh. This was because regulation of Chit Funds comes under Chit
Fund act (1982) regulated by State Government.
2011: SEBI Intimated West Bengal Government about Saradha Group’s
activities.
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To which they again reacted by changing its methods by acquiring and selling
large numbers of shares of various listed companies then embezzled the
proceeds of the sale through accounts.
2012: SEBI gathered enough evidence to classify the group’s activity as CIS.
SEBI asked Saradha Group to immediately stop operating its investment
schemes until it received permission from SEBI.
2013: Saradha Group failed to comply with SEBI’s instructions.
This resulted in collapse of Saradha Group.
Terms mentioned:
Ponzi Scheme: A Ponzi scheme is a fraudulent investing scam promising high
rates of return with little risk to investors. The Ponzi scheme generates returns
for early investors by acquiring new investors.
CIS: A Collective Investment Scheme (CIS) is an investment scheme wherein
several individuals come together to pool their money for investing in a
particular asset and for sharing the returns arising from that investment as per
the agreement reached between them prior to pooling in the money.
Chit Fund: A chit fund is a type of rotating savings and credit association
system practiced in India. Chit fund schemes may be organized by financial
institutions, or informally among friends, relatives, or neighbours.
Magnitude:
As per the initial SIT reports, Saradha Group had mobilised ₹2,459.59
crore (US$360 million) through issuance of its policies. By April 2014, around
385 FIRs against Saradha Group, in which SIT filed 288 charge sheets. 453
FIRs were filed against other money pooling companies and Ponzi funds, and
75 charge sheets were filed before the court.
By mid-August 2013, the Justice Shyamal Sen Commission finished its initial
compilation of the list of claimants. Around 1.74 million depositors filed claims
with the Commission, of which 83% invested ₹10,000 (US$140) or less.
Commission recommended that West Bengal state government sell the assets
of Saradha Group and proportionally distribute the returns among defrauded
investors. By April 2014, the Commission had refunded 400,000 depositors who
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had invested less than ₹10,000. The Commission received claims from 500,000
depositors who were defrauded by Ponzi funds other than Saradha; the
Commission did not refund any of these depositors. In April 2014, Calcutta High
Court sought a report from the Commission on the discriminatory standards
being applied to the refunding of depositors
Investigation Process:
FIR was filed against Sudipto Sen and Kunal Ghosh on 14 April 2013. Around
six officials from Saradha Group were arrested. The investigation was headed
by the detective department of Bidhannagar police. Ghosh was arrested by SIT
in November 2013 after he posted a list of 12 names on his Facebook page;
these included at least four TMC MPs and West Bengal Chief Minister Mamata
Banerjee.
On 30 April 2013 CBI started investigating into the Saradha Group scandal in
Assam at the request of the state government.
In April, 2014, ED (West Bengal) arrested the absconding wife, son and
daughter-in-law of Sudipto Sen, all of whom had been directors of various
companies of Saradha Group. ED also questioned TMC MPs Ahmad Hassan
and Arpita Ghosh about their financial transactions with Saradha Group.
In May 2014, the Supreme Court transferred all investigations regarding Sharda
Group in suspect of running a Ponzi scheme to the CBI. CBI probed a lot of
people including Sudipto Sen, Debjani Mukherjee and Kunal Ghosh, TMC vice
president and former Director General of Police (DGP) in West Bengal.
On 21 November 2014 CBI arrested Srinjoy Bose, another TMC
parliamentarian in connection with the scam.
On 12 December 2014, CBI arrested West Bengal Transport minister Madan
Mitra on the charges of criminal conspiracy, cheating, misappropriation and
deriving undue financial benefits from the Saradha Group.
Later in February 2019 the CBI arrested and interrogated Kolkata police Rajeev
Kumar commissioner in Shillong following a political controversy on the
investigations when CBI team who had gone to question the commissioner was
detained in Kolkata. They were later released and even as CM Mamta
Bannerjee was protesting on dharna against the arrest of Kumar, the Supreme
court ordered interrogation of Rajeev Kumar at a location outside West Bengal
to avoid further showdown.
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In February 2014, Sudipto Sen was convicted in a case where he was charged,
under various provisions of employment law, as a director of Saradha Group for
his failure to deposit with the provident fund authorities INR 0.03 million that his
firm owed to its employees; he was sentenced by the trial court to three years in
jail, it was the first conviction in a series of civil and criminal cases, relating to
corporate fraud and non-payment of deposits, pending against him.
Consequence:
In February 2014, Sudipta Sen was convicted in a case where he was charged,
under various provisions of employment law, as a director of Saradha Group for
his failure to deposit with the provident fund authorities INR 0.03 million that his
firm owed to its employees; he was sentenced by the trial court to three years in
jail, it was the first conviction in a series of civil and criminal cases, relating to
corporate fraud and non-payment of deposits, pending against him.
Aftermath:
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 to curb
fraudulent financial schemes.
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
Assam.
Assam Government suo motto registered 222 cases against Saradha Group
and 127 other companies after widespread protests in Assam. In 17 cases,
charge sheets have been filed against 42 people belonging to 15 companies.
303 people have been arrested for embezzling public money. The government
seized nearly ₹9.4 million (US$140,000) in cash from those arrested. 106 bank
accounts with deposits of ₹240 million (US$3.5 million) were frozen while a
number of plots totalling more than 99 bighas and buildings have been
identified; steps were taken for their attachment.
6 May 2013, Assam handed the investigation to CBI.
22 April 2013: Mamata Banerjee led West Bengal government announced that
a four-member judicial inquiry commission headed by Shyamal Kumar Sen. The
commission was named the Justice Shyamal Sen Commission of Enquiry. West
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Bengal's Chief Minister Mamata Banerjee was reported to have said, "ja
gechhey ta gechhey" (whatever has gone has gone).
24 April 2013: Banerjee announced a controversial ₹500 crore (US$72 million)
relief fund for the low-income depositors of the Saradha Group, introducing a
10% additional tax on tobacco products to raise the money and in jest asked
smokers "to light up a little more".
The state government decided to repeal an existing Bill passed by the Left Front
Government in 2009, which had not received the approval of the President of
India.
30 April 2013: the new Bill—The West Bengal Protection of Interest of
Depositors in Financial Establishments Bill (2013), was passed in a two-day
special session of the West Bengal Legislative Assembly. The new law has
provisions for retrospective effect, search and seizure, enhanced penalties,
establishment of special courts and confiscation of property.
3 May 2013: Odisha police seized documents and sealed the group's local
offices. During the transfer of the investigation to CBI in May 2014, EOW had
registered up to 207 cases relating to 43 of the group's 44 companies and had
arrested 440 people. Charge sheets for cheating and criminal conspiracy were
filed in 120 cases under provisions of the Indian Penal Code, the Prize Chits
and Money Circulation Schemes (Banning) Act, and the Odisha Protection of
Interest of Depositors (in Financial Establishments) Act.
8 May 2013: Banerjee said West Bengal was considering setting up a
government-backed small savings fund to encourage small depositors to invest
in it rather than in Ponzi schemes.
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.
23 May 2013: Bannerjee indicated the West Bengal government's willingness to
take over Saradha-owned television channels Tara News and Tara Muzic,
which had earlier been sent into administration by Calcutta High Court.
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Lessons Learnt:
1 DON’T FOLLOW THE HERD
We often blindly follow a close relative or a friendly neighbour who sings praises
about a scheme he or she has invested in (see Common Traps). For us, the
trust shown in the person is paramount and, therefore, doing due diligence
about the scheme takes a backseat.
When someone close to you tries to draw you into investing in a scheme, you
can look up on the Internet or other common sources for information regarding
the scheme and then follow it up with a search on any individual or group of
investors who are aggrieved about the scheme. If you happen to find one, join
the forum. Cross check all the information that comes your way as you sift
through the comments.
LESSON 2 BE THE DEVILS ADVOCATE
In collective investment schemes, such as chit funds, the face of the
organisation is, in most cases, a person of high integrity. Promoters have also
roped in seasoned professionals. The first thing you must do is to check the
credentials of the promoters. Visit the company website and look for
information, including the number of years the promoters have been in business
and, more importantly, the areas they operate in. If they have a proven track
record, then it is very unlikely that they would do something that would tarnish
their brand image created over the years. If a finance professional is at the
helm, then you search the Internet to check his background. In the present day,
most professionals leave their trail on the Internet or other sources. Get the
information and try to join the dots—educational qualification of the individual,
his previous assignments, his performance and, most importantly, see how
frequently he had changed jobs. After all, your hard-earned money will be in his
hands as long as he is associated with the organisation or scheme.
LESSON 3 LOOK BEYOND RETURNS
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Before investing, as an investor, the only thing we usually ask the agent selling
us the product is the rate of return on the investment, before investing. And,
even when the rate of return promised by the agent is incredibly high, questions
are not asked. When someone offers a very high rate of return on a financial
product, it’s time to be cautious. Saradha played its cards along the same lines
and the offers did look inviting with Ponzi boss Sudipta Sen offering 36 per cent
a year, while returns, even from the riskiest of asset classes, in the formal
financial sector is 18-19 per cent. Therefore, the first thing you should ask
yourself is: How is the company managing to promise such high returns when
most other financial institutions are conservative with their rates of return? Seek
a clarification from the company representative about this thing, including the
investment strategy of the company, among others. Before signing the contract,
look for clauses that would protect your interests, including the liability of the
company if it was unable to give you the promised returns. You must also
ensure that things are in black and white, especially your rights when the
company defaults or the scheme goes bust.
LESSON 4 KNOW YOUR RIGHTS
Be clear about your rights, know what you will get in return for your investment
and adhering to the rules. Err on the side of caution and look for the redressal
mechanism at your disposal if things go wrong because scams teach us that
things do go wrong—and the trustworthy can actually betray us. Most
companies of repute dealing in financial products and services have a
dedicated grievance redressal mechanism. The Ministry of Corporate Affairs
(MCA), too, has a redressal framework. You can approach officers and regional
directors of the Registrar of Companies, as well as the MCA headquarters. The
ministry also operates an outsourced service through www.investorhelpline.in.
The service provider takes up the complaint with the regulator and the
company. According to the Investor Protection Fund, the redressal rate through
this Portal is around 46 per cent. Sebi has also launched a dedicated helpline
for investors—Sebi Complaints Redress System (SCORES). It is a Web-based
centralised grievance redressal system (http://scores.gov.in). SCORES enables
you to lodge a complaint with the regulator and track the status of your
complaint online.
LESSON 5 KNOW YOUR REGULATOR
When you suffer the worst, you want to put the nightmare quickly behind you
and start the process of redressal. For this you need to know the right
institution. If investors are aware of this, appointed institutions can prevent
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scamsters from escaping. So, knock on the right door to get your grievances
redressed quickly (see Knock On The Right Door).
LESSON 6 DON’T JUDGE THE BOOK BY ITS COVER
Focus on the investment proposition—returns, risks and the like, and ignore the
spiel, bells, whistles and the hype. After all, it's your money. Remember, not
endorsements—whether by cine stars or cricketing greats—are guarantee of
quality. The combination of celebrity endorsements, eye-catching advertisement
and marketing spiel of the agent is often a lethal combination to lure the
unsuspecting small investor. So, beware!
LESSON 7 UNDERSTAND YOUR INVESTMENT GAME
Everyone loves to make a quick buck, but investments have to be made for a
purpose—your future requirements. Are delays and compromises acceptable to
you? Can you accept the losses? If you cannot, then you should stick to the
investment game that you can easily understand and play. That is why experts
suggest you avoid things like chit funds. Says Virendra Jain, founder and
president, Midas Touch Investors Association: ―One should not invest in chit
funds.‖ As for chit funds, the paper observes that there are many such schemes
that have been misused by their promoters and many instances of the founders
vanishing with the funds. Some of these schemes are basically ponzi schemes,
where the initial investors are paid from the deposits made by the new set of
investors and as the amount of deposits soar with the number of investors
growing, the promoter is often found to be untraceable. Says Sandeep Parekh,
founder, Finsec Law Advisors, and visiting faculty IIM, Ahmeda-bad: ―Chit funds
have been held by court rulings to fall within the scope of both the Centre and
the states, under the constitution.‖ Besides, the RBI has the power to inspect
the books of chit funds. ―Therefore, even though chit funds can be legitimate
businesses, they can often be the best source of a fraudulent scheme. Chit
funds can ostensibly be used to raise money and, with friendly state politicians,
can be the ideal breeding ground for fraud,‖ adds Parekh.
LESSON 8 NEVER AVOID THE HOMEWORK
Uninformed and lazy investing is a perfect recipe for disaster. After scams come
to the fore, many blame the government and the regulators. However, this does
not absolve them of their complicity. After all, investors are the best safeguards
of their own investments. Says Parekh, ―The (Saradha chit fund) scam was not
a result of either a lack of proper laws, or the unwillingness to enforce the law,
though that often happens in other scams. Sebi, for instance, has been
pursuing the group for several years, but it was stopped from doing its job.‖ The
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problem is not so much the multiplicity of financial regulators, but rather the
ability of scamsters to find their way between different laws and the approach
some regulators take over their jurisdiction. So, before you invest in a scheme
or product, it will be in your interest to take an informed decision.
LESSON 9 STICK TO THE TRIED AND TESTED
According to a 2006 study by The Institute for Financial Management and
Research, better returns and the lack of paperwork were the major reasons why
people invested in chit funds. It says that those who invested in such schemes
did so primarily to save for house purchase and marriage. This explains why a
few victims of the Saradha scam committed suicide when they realised that they
had lost their money—after all, house purchase and marriage are two important
events in anyone’s life. The root cause of the Indian story of such schemes is
not the smartness of the crooks or the greed of investors. Rather, it is the fact
that formal banking and finance has so excluded the common man that only
less than half of the eligible population has a bank account. One of the reasons
why most people shy away from investing in schemes by the formal financial
sector is that products floated in them are complex.
LESSON 10 GET EMPOWERED, GET INFORMED
One of the best ways to avoid falling into the trap of such ponzi schemes is to
be well informed and be a member of an investor association. It is often difficult
for an investor to fight for his rights at an individual level, including settling of
investor grievances. So, becoming a member of an investor association will be
advantageous as it can take up your case on your behalf. Moreover, many
investor associations regularly organise seminars for their members to educate
them and organise events attended by eminent experts.
It’s not that financial scams will not happen in the future. They will, and retail
investors will continue to be taken for a ride. However, what you need to do is
be more aware financially to protect your own interests. The key lies in taking
lessons from scams such as the Saradha episode, and ensuring you take a
rational view before investing.
Legal Implication and Current Status:
On 22 April 2013 West Bengal government announced that a four-member
judicial inquiry commission headed by ShyamalKumar Sen, retired Chief justice
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of Allahabad High Court would probe the scam. After 2 days, Mamata Banerjee
announced a controversial Rs 500-crore relief fund for the low income
depositors of the Saradha Group.
In the light of the scam, SEBI requested sweeping powers to investigate and
prosecute any fraudulent collective investment schemes. On 7 May 2013,
Calcutta High Court appointed a three member administrator group to run Tara
News and Tara Music.
•On 23 May 2013, Chief Minister, Mamata Bannerjee indicated the willingness
of West Bengal Government to take over Saradha owned TV channels Tara
News and Tara Muzic, which had earlier been sent under administration by
Calcutta High Court.
In May 2014, the Supreme Court of India, inter-state ramifications, possible
international money laundering, serious regulatory failures and alleged political
nexus, transferred all investigations into the Saradha scam and other Ponzi
schemes to the Central Bureau of Investigation (CBI).
Many prominent personalities were arrested for their involvement in the scam
including two Members of Parliament (MP) - Kunal Ghosh and Srinjoy Bose,
former West Bengal Director General of Police Rajat Majumdar, a top football
club official Debabrata Sarkar, Sports and Transport minister in the – Madan
Mitra.
References:
https://www.business-standard.com/about/what-is-saradha-scam
https://economictimes.indiatimes.com/topic/Saradha-chit-fund-scam
https://www.indiatoday.in/india/story/saradha-scam-ex-kolkata-top-cop-kumar-
surrenders-before-court-granted-bail-1605922-2019-10-03
https://www.outlookindia.com/outlookmoney/archive/10-lessons-from-saradha-
285640
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