The Saradha Group financial scandal was a major financial scam and political scandalcaused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over 200 private companies that was believed to be running collective investment schemes popularly but incorrectly referred to as chit funds
The group collected around 200 to 300 billion US$4-6 billion from over 1.7 million depositors before it collapsed in April 2013. In the aftermath of the scandal, the State Government of West Bengal where the Saradha Group and most of its investors were based instituted an inquiry commission to investigate the collapse The State government also set up a fund of 5 billion (US$79 million) to ensure that low-income investors were not bankrupted .
The Central Government through the Income Tax Department and Enforcement Directorate launched a multi-agency probe to investigate the Saradha scam and similar Ponzi schemes. In May 2014, the Supreme Court of India, citing 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), India’s federal investigative agency. 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 West Bengal Government – Madan Mitra.
Key People
Sudipto Sen was the chairman and managing director of the Saradha Group. Sen was described as a softly spoken, charming, and forceful orator. At the time of his arrest, he was in his mid-50s. In his youth, he was known as Shankaraditya Sen, and was part of the Naxalite movement in West Bengal. The land bank he formed in around 2000 became the catalyst for enticing early customers into his Ponzi scheme.
Financial operations
The companies that comprised Saradha Group were incorporated in 2006. Its name is a cacography of Sarada Devi, the wife and spiritual counterpart of Ramakrishna Paramahamsa-a nineteenth-century mystic of Bengal. This association gave Saradha Group a veneer of respectability. Like all Ponzi schemes, Saradha Group promised astronomical returns in fanciful but credible investments. Its funds were sold on commission by agents recruited from local rural communities. Between 25 and 40% of the deposit was returned to these agents as commissions and lucrative gifts to quickly build up a wide agent pyramid. The group used a nexus of companies to launder money and evade regulators.
Initially, the frontline companies collected money from the public by issuing secured debentures and redeemable preferential bonds. Under Indian Securities regulations and section 67 of the Indian Companies Act (1956), a company cannot raise capital from more than 50 people without issuing a proper prospectus and balance sheet. Its accounts must be audited and it must also have explicit permission to operate from the market regulator Securities and Exchange Board of India (SEBI).
SEBI first confronted Saradha Group in 2009. Saradha Group adapted by opening up to 200 new companies to create more cross-holdings. This created an extremely complex tiered corporate structure to confound SEBI by hampering their ability to consolidate blame. SEBI persisted in its investigation through 2010. Saradha Group reacted by changing its methods of raising capital. In West Bengal, Jharkhand, Assam and Chhattisgarh, it began operating variations of collective investment schemes (CIS) involving tourism packages, forward travel and hotel booking timeshare credit transfer, real estate, infrastructure finance, and motorcycle manufacturing. Investors were rarely informed about the true nature of their investments. Instead, many were told they would get high returns after a fixed period. With other investors, the investment was fraudulently sold in the form of a chit fund. Under the Chit Fund Act (1982), chit funds are regulated by state governments rather than SEBI.
SEBI warned the state government of West Bengal about Saradha Group’s chit fund activities in 2011, again prompting Saradha Group to change its methods. This time, it acquired and sold large numbers of shares of various listed companies then embezzled the proceeds of the sale through accounts which as of September 2014 have not been identified. Meanwhile, Saradha Group started laundering a large portion of its funds to Dubai , South Africa ]and Singapore. By 2012, SEBI was able to classify the group’s activities as collective investment schemes rather than chit funds-and demanded that it immediately stop operating its investment schemes until it received permission to operate from SEBI. Saradha Group did not comply with this ruling and continued to operate until its collapse in April 2013.
Collapse
The earliest public warnings about the reckless and fradulent CIS in West Bengal started in 2009 from MPs Somendra Nath Mitra and Abu Hasem Khan Choudhuryand West Bengal Consumer Affairs Minister Sadhan Pande. Apart from the SEBI investigation, no executive actions were taken at this time. On 7 December 2012,Reserve Bank of India (RBI) governor Duvvuri Subbarao said the West Bengal government should initiate suo motu action against companies that were indulging in financial malpractice. By that time, the Saradha Group Ponzi scheme was already beginning to unravel. In January 2013, the group’s cash inflow was, for the first time, less than its cash payouts. This outcome is inevitable in a Ponzi scheme that is allowed to run full course. Sudipto Sen tried but failed to calm uneasy depositors and agents, and could not increase inflow of funds.
On 6 April 2013, Sen wrote an 18-page confessional letter to the CBI, in which he admitted that he had paid large sums of money to several politicians. He also stated that TMC leader Kunal Ghosh had forced him to enter into loss-making media ventures and blackmailed him into selling one of his television channels at below market price. Sen fled after posting this letter on 10 April.
In his absence, the Ponzi scheme unravelled. On 17 April, around 600 collection agents claiming to be associated with Saradha Group assembled at the headquarters of TMC and demanded government intervention. Despondency quickly spread across Bengal.
Special Investigation Team (SIT), West Bengal Police
FIR was filed against Sudipto Sen and Kunal Ghosh on 14 April 2013.[177] Around six officials from Saradha Group were arrested, The investigation was headed by the detective department of Bidhannagar police. The investigation was widened to include other Ponzi funds. Kunal Ghosh and other Ponzi fund officials from Saradha were repeatedly questioned by police to determine the true assets of the company and other facets of the fraud. 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.
As per the initial SIT reports, Saradha Group had mobilised 2459.59 crore (US$390 million) through issuance of its policies. By April 2014, around 385 FIRs against Sardha Group, in which SIT filed 288 chargesheets, had been filed. 453 FIRs were filed against other money pooling companies and Ponzi funds, and 75 charge sheets were filed before the court.
Since 2 May 2013, after complaints from depositors, state government ordered SIT to broaden its investigation and conduct search and seizure at offices of MPS Greenery Developers Ltd and Prayag Infotech Hi-Rise Ltd, which were running unregistered collective investment schemes similar to Saradha Group. By 6 May 2013, police had arrested directors of Ponzi companies ATM Group and Annex Infrastructure Pvt Ltd on charges of defrauding depositors. According to news-reports, at the time of handing the Saradha Group investigation to CBI, SIT had arrested 11 people, had traced 224 immovable properties, seized 54 vehicles and had filed charge sheet in almost 300 pending cases.
Convictions and sentences
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
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