Chit fund scam

Deposit and despair

Print edition : May 31, 2013

A anguished money collection agent of Saradha Group on Mayo Road in Kolkata. Photo: Ashoke Chakrabarty

Sudipta Sen, Saradha Group chief, being taken to a court in Kolkata on April 25. Photo: Ashok Bhaumik/PTI

Investors of Sarada chit fund company checking their certificates before submitting them to an Inquiry commission, constituted to probe the scam, in Kolkata on May 3. Photo: PTI

Chief Minister Mamata Banerjee and Finance Minister Amit Mitra at a press conference on the chit fund scam at Writers Building in Kolkata on May 8. Photo: Ashok Bhaumik/PTI

The financial fraud involving the Saradha Group, in which lakhs of rural people lost their hard-earned money, puts Mamata Banerjee’s government in West Bengal in a tight spot.

TROUBLE does not seem to end for the Mamata Banerjee-led Trinamool Congress government in West Bengal.

The collapse of the chit fund company Saradha Group is one of the biggest financial scandals to hit the State and may well be the ultimate undoing of Mamata Banerjee’s government. The Trinamool Congress, which completes two years in power in May, will find it next to impossible to disown its close ties with the tainted organisation or provide a plausible answer to the righteous indignation of lakhs of gullible investors, including a sizable section of urban and rural poor, who constitute much of the party’s support base. Though the extent of loss to the investors is not known, some estimates state that the group may have collected more than Rs.20,000 crore through its various deposit-collection schemes in West Bengal, Assam, Odisha, Tripura, Jharkhand and Bihar run through its 160 companies.

Although the Saradha Group, under the leadership of its founder and chairman and managing director Sudipta Sen, was carrying on its operations in the State for over a decade, it was in mid-2010 that its activities started gaining momentum and coverage. It forayed into the media business, and between 2010 and 2011 acquired or launched 10 organisations, both in the print and television media. With the help of publicity, it became a household name. Its position strengthened further with the change of government in May 2011 when the Trinamool Congress came to power, ending the 34-year-old rule of the Communist Party of India (Marxist)-led Left Front. The company’s media wing practically became the government’s mouthpiece. Kunal Ghosh, Trinamool Congress leader and Rajya Sabha member, was the chief executive officer (CEO) of the Saradha Group’s media unit, and Shatabdi Roy, Bengali film actor and Trinamool Congress Lok Sabha member, was the brand ambassador for some of its businesses.

“At a time when chit-fund, Ponzi-scheme and illegal deposit-collecting companies were in their heyday, Saradha and Sudipta Sen ruled the roost,” an industry source told Frontline.

There was hardly a public ceremony or occasion of the Saradha Group that was not graced by Trinamool’s Ministers or other bigwigs. Their faces would adorn the banners and advertisements of the various companies of the group. Trinamool leaders have been photographed with Sudipta Sen and other top functionaries of the group. Such blatant display of bonhomie apparently helped foster confidence in the minds of ordinary people about the bona fides of the group’s schemes. “We put our trust in the State government and our money in Saradha,” said Alok Das, a small farmer from North 24 Paraganas, who has lost a deposit of around Rs.1 lakh.

The group began to feel the heat with the establishment of the Serious Fraud Investigation Office (SFIO) and, according to political observers, after Mamata Banerjee pulled out of the Congress-led United Progressive Alliance (UPA) government at the Centre in September 2012. The bubble finally burst when the group started defaulting on the payment of dues to investors early this year. Its media units started to close down by mid-April, rendering more than 1,000 employees jobless, and the crisis exploded right in the face of the government as hundreds of agents of the various Saradha schemes staged demonstrations outside the house of Mamata Banerjee and the offices of the Trinamool Congress. Many of these agents had fled their homes to escape the wrath of the investors. As of May 8, 10 of them had committed suicide.

Sen's letter to CBI

Sudipta Sen, who was on the run, was arrested in Sonamarg near Srinagar (Jammu and Kashmir) on April 23 along with Debjani Mukherjee, his second in command. But before he went into hiding, in an explosive letter to the Central Bureau of Investigation (CBI) dated April 6, he alleged that two Trinamool MPs, Kunal Ghosh and Srinjoy Bose, had entered into an “agreement” with him to “protect” his business from the State and Central governments in exchange for a high consideration. He said they had assured him “smooth passage” for his operations, using their “close connection” with Mamata Banerjee. Both the MPs were apparently representing the Bengali newspaper Pratidin and as per the agreement Sudipta Sen would have to pay Rs.60 lakh a month to Pratidin, and Rs.15 lakh along with other sundry expenses a month to Kunal Ghosh towards his salary as the CEO of the Pratidin news channel. Sudipta Sen also accused Kunal Ghosh of coercing him into signing certain documents that made it look as though he had sold the television channel to him for a mere Rs.55 lakh. Both the MPs have denied these accusations.

As the scam came out in the open, the State government moved into damage control mode. The Trinamool leaders sought to distance themselves from the scam-tainted organisation and proclaim their ignorance about its financial irregularities. The government cracked down on erring deposit-collecting organisations. It sealed the offices of MPS Greenery Developers Ltd and Prayag Infotech Hi-Rise Ltd, two companies against which there were complaints. But it was faced with the question why it had not taken similar penal measures in time and save thousands of people from financial ruin.

Though Mamata Banerjee claimed that she got to know about the scam only on April 15, Bengali New Year’s day, there is ample proof that the government received alerts from the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Central government on the need to regulate the activities of various illegal fund-collecting companies, including Saradha.

Ironically, the State government, in its affidavit filed before the Calcutta High Court on May 2 in reply to a public interest petition in the Saradha case, admitted to have corresponded with the Central government on the matter in 2011 and 2012. Moreover, even Mamata Banerjee’s brother, Kartik Banerjee, put paid to her plea of ignorance by stating in a television interview: “I raised the alarm about the activities of the chit fund companies and the manner in which they were duping people a year ago.”

CBI probe

The State government set up a five-member panel headed by Justice Shyamal Sen, a retired Chief Justice of the Calcutta High Court, and also a Special Investigation Team led by the Director General of Police, Naparajita Mukherjee, to probe the scam. The clamour for a CBI probe from the opposition was growing louder, but Mamata Banerjee seemed determined not to allow such an inquiry. Ironically, until she assumed power in 2011, she was most vocal in demanding CBI inquiry into the various activities of the Left Front government.

Describing the Saradha scam as a “multi-state” offence, former Mayor of Kolkata and CPI(M) leader Bikash Ranjan Bhattacharjee said a detailed inquiry by the CBI was called for. “But a CBI inquiry will expose the Trinamool and so they wish to dilute the situation,” he told Frontline. Speaking in the same vein, Minister of State for Railways and Congress heavyweight from Murshidabad district Adhir Ranjan Chowdhury asked: “If I am not scared, then why should I not want a CBI inquiry?” A public interest petition has been filed in the High Court seeking a CBI investigation. In an affidavit filed before the court, the CBI said it had “no objection” to hold such an inquiry.

Mamata Banerjee appeared to skirt the issue. “There is no point in threatening us with a CBI inquiry as there is no chance of a UPA-3 government at the Centre,” she said at a public rally. However, pressure has been building up for a CBI probe from within her own party as well. The senior Trinamool leader and Lok Sabha MP, Somen Mitra, asked for one in a television interview.

Moreover, it is feared that Mamata Banerjee’s intransigence on the issue might prove detrimental to her government’s reputation. A section of her party is apprehensive about the adverse public opinion her stance may create. “The fact that while we were in the opposition we constantly demanded a CBI probe into all the wrong-doings of the CPI(M) is still fresh in the memory of the people. Our present stand against a CBI probe on the Saradha scam may make people suspicious,” a Trinamool Congress source told Frontline.

To stave off criticism, Mamata Banerjee announced the setting up of a Rs.500-crore relief fund to bail out “the most ordinary and small investors who have lost everything”. The compensation will be extended according to the recommendations of the Shyamal Sen Commission. To raise funds for this, she announced an additional 10 per cent tax on tobacco and tobacco products. She hoped to raise Rs.150 crore by way of this tax. “Please smoke a little more for the next few days so that the amount can be raised quickly,” she quipped. The comment brought severe criticism from all quarters, particularly from the medical fraternity.

Referring to the fund, former Finance Minister Asim Dasgupta of the CPI(M) said, “Can that be a priority now? The Saradha Group’s property should be seized immediately and the court should be approached for attachment and auction of it. The proceeds of the auction should be distributed to those cheated by the group.”

Dummy companies

The manner in which the group operated was complex and secretive. Sudipta Sen himself acknowledged in the letter to the CBI that he was the “sole proprietor” of the organisation. “Even all the shareholder and directors appearing in the articles and memorandum of my companies are dummy… Even my cook, Hemanta Pradhan, I have included in the name of the Directors, though he does not know the meaning of the Director even (sic),” he wrote.

There were not just dummy directors, but dummy production units, too. One such is Global Automobiles, a two-wheeler manufacturing unit that Sudipta Sen bought in 2010 from the Kolkata-based Xenitis Group. Not a single two-wheeler came out of the plant after he acquired it, though more than 200 people were employed to maintain a facade of activity to convince depositors and investors of the varied businesses the group was engaged in. Sudipta Sen defaulted on the payment of a Rs.186 crore loan taken from a consortium of seven public sector banks for this eye-wash project. Instead of making any constructive investment, he apparently splurged the money on “brand-building”.

Saradha’s money-collection network was vast. According to reports, Sudipta Sen had set up around 300 offices in West Bengal, Tripura, Assam, Odisha and Jharkhand and, at the peak of his fraudulent operations, had more than two lakh agents working for him. He had also apparently operated more than 200 foreign bank accounts in his and his companies’ names. It is suspected that these accounts were used to channel the funds collected from depositors to personal investments abroad. Most of his Indian bank accounts show no more than a few lakhs of rupees. Investigations have also revealed that Sudipta Sen maintained a server in Boston, U.S., at a cost of $44,000 a month, which stored all the data pertaining to his organisation.

Unregulated schemes

Saradha’s meteoric growth was representative of a trend in the east and north-east of India of the proliferation of illegal Collective Investment Schemes (CIS) and Ponzi scheme companies. These companies have thrived on schemes promising incredible returns on investments by recycling depositors’ money.

The activities of these companies have gone completely unregulated. Many of their schemes are dubious. The investments in various non-existent assets, range from land and real estate to agri-products to hotels. Some of the schemes are also plain money-return packages. Rural people are an easy target forPonzi operators because of the lack of penetration of the formal financial services sector in villages. Moreover, a large number of the rural poor do not have the necessary documents to open bank accounts. The easiest option available to them is investment in schemes such as those offered by Saradha, which only requires them to furnish their names and addresses.

The proliferation of such dubious companies is also a reflection of the economic condition of a region. “In the eastern region, particularly in West Bengal and some of its neighbouring States, there has not been much economic activity in terms of growth and development. These companies that are committing fraud have essentially taken advantage of a vacuum in economic activities and filled it with their own operations,” Dipankar Dasgupta, eminent economist and former head of the Indian Statistical Institute, New Delhi, told Frontline. Pointing out that West Bengal ranked 15th among the States in terms of per capita income, he said it was the lack of other legal avenues and gainful opportunities that prompted the poor to invest in these schemes and the agents to seek employment in these companies. The Ministry of Corporate Affairs has received complaints against 72 deposit-collecting companies in West Bengal.

As a result of the Saradha debacle, other fund collection companies are facing a crisis as investors are insisting on premature redemption of their deposits. Owners of these companies have been appearing in advertisements on private TV news channels to convince the depositors of the legitimacy of their operations and their solvency. However, such gestures have done little to quell the panic in the market.

The Saradha scam brought back to public memory the Sanchayita Investments scam in 1980, which had affected more than one lakh investors. However, the present scam is of a far greater magnitude, in that a much larger number of people have been ruined by it. “The Sanchayita scam hit the middle class very badly, but this scam has ruined the poor, which makes it even worse,” said Dipankar Dasgupta. In Saradha’s case, the risk factor was obviated by the constant presence of the ruling party in all its social functions. “The enormity of the scam is what has perhaps put the State government in a tight spot. The common perception is that the State government and the Saradha Group were extremely close,” said a source in the administration.

The Saradha scam has taken the Mamata Banerjee government to a new low. As she swung into damage control mode in her characteristic, aggressive style, her government’s plight became all the more apparent. Her public speech in Kolkata on May 2 was devoted to denouncing the Left and blowing her own trumpet. Holding aloft bundles of Ganashakti (the CPI(M)’s mouthpiece), in which the Saradha Group had placed an advertisement, as though it was proof of the Left’s culpability in the scam and her party’s innocence, she said: “I personally stand guarantee against any wrongdoing.” The speech betrayed a sense of desperation to retain the trust of the masses.

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