The Securities and Exchange Board of India(Sebi) in a significant order yesterday directed Rose Valley Hotels and Entertainments Limited (RVHEL) and its directors to stop raising deposits through any of its existing investment schemes. The Sebi also directed RVHEL and its directors not to launch any new schemes, not to dispose of any of the properties or alienate any of the assets of the schemes and not to divert any funds raised from public at large which are kept in bank account(s) and/or in the custody of the company.
RVHEL had launched the Rose Valley Holiday Membership Plan (HMP) sometime in 2010. Under this plan investors could book a holiday package through the payment of monthly instalments. On completion of tenure investors could avail the facilities i.e. room accommodation and other services at one of the RVHEL’s hotels. He or she also had the option to opt for a maturity payment along with interest.
The Rose Valley group started sometime in the mid 1990s and has close to 31 registered companies. It claims to have presence in areas from residential townships to film to media and entertainment.
But a careful study of its operations suggests that it is nothing more than a Ponzi scheme. A Ponzi scheme is a fraudulent investment scheme in which the illusion of high returns is created by taking money being brought in by new investors and passing it on to old investors whose investments are falling due and need to be redeemed.
While every Ponzi scheme is different from another in its details, there are certain key characteristics that almost all Ponzi schemes tend to have. And Rose Valley is no exception to this.
The instrument in which the scheme will invest appears to be a genuine investment opportunity but at the same time it is obscure enough, to prevent any scrutiny by the investors: The website of Rose Valley India claims to be in many businesses like residential townships, commercial complexes, shopping malls, hotels & resorts, amusement parks, garments, IT, Media & Entertainment, Healthcare, Education, Social Welfare, Housing finance, Travels, Films & Fashions.
This told the prospective investors that the company was in various businesses and these businesses were supposedly making money. But there are several questions that crop up here. How did one promoter have the expertise to manage such a diverse line of businesses? We live in a day and age where its not possible for a single entrepreneur to run multiple unconnected businesses profitably.
Vijay Mallya thought running an airline, a cricket team and an FI team was just the same as selling alcohol. DLF thought running hotels, generating wind power, selling insurance and mutual funds would be a cake walk after they had created India’s biggest real estate company. Deccan Chronicle saw great synergy in selling newspapers and running a cricket team and a chain of bookshops. Hotel Leela thought running a business park would be similar to running a hotel. Kishore Biyani thought that once he got people inside his Big Bazaars and Pantaloon shops, he could sell them anything from mobile phone connections to life and general insurance. Bharti Telecom thought that mutual funds, insurance and retail were similar to running a successful telecom business. But in sometime all of them realised that they had a problem.
Of course there are groups like Birlas, Tatas and the Ambanis which are present in multiple businesses. But they are more of an exception that proves the rule.
Rose Valley wasn’t making any money from its multiple businesses either. As a recent report in The Financial Express points out “The Serious Fraud Investigation Office (SFIO) probing Rose Valley Hotels & Entertainment is looking into a web of intra-group transactions including Rs 207-crore loans to promoter Gautam Kundu in 2011-12, sources said. The company reported a loss of Rs 468 crore on revenues of Rs 24 crore in the same year.” On a slightly different note, Kundu travels in a Rolls-Royce Phantom.
Let me repeat this again. The company made a loss of Rs 468 crore on revenues of Rs 24 crore. What this clearly means is that the company wasn’t running any business at all. It was just creating an illusion of having several businesses, so that investors kept coming to it. Meanwhile, it was simply rotating money, using the money being brought in by the newer investors to pay off the older investors. This conclusion can be drawn from the fact that its real businesses weren’t making any money. So the money to pay off the older investors whose investments were up for redemption could only have come from newer investors.
There is other evidence that points to the fact that the company did not have much of a business model. As a January 2011 piece published on www.moneylife.in points out “Under its ‘Ashirvad’ scheme, Rose Valley mobilised Rs1,207 crore by selling 508,792 plots, but handed over only 9,045 plots. While the company claims to have a land bank in several upcoming and industrial areas of West Bengal, the question is, how did they get access to all those vast stretches of land that are traditionally used for agriculture?”
The rate of return promised is high and is fixed at the time the investor enters the scheme: The Sebi order against Rose Valley Hotels and Entertainments clearly points out that returns on various investment schemes varied from anywhere between 11.2% to 17.65%. At its upper the return is significantly higher than the rate of return from other fixed income investments like bank fixed deposits and post office deposits.
The certificate issued for investing in the Holiday Membership Plan said that the money is being invested for booking a room in one of the hotels of Rose Valley, but at the time of maturity the money would be returned against cancellation. This meant that the investors into the Holiday Membership plan could cancel it on maturity and be paid a bulk amount which would include the money invested into the scheme and the interest that had accumulated on it. As the Sebi order points out “However, such investor may also cancel the HMP(Holiday Membership Plan) booking upon maturity or completion of tenure for monthly installments, in lieu of maturity payment for non-utilization of the facilities i.e. the equivalent accumulated credit value under the HMP inclusive of annualized interest.”
An investor who had paid Rs 500 per month for 60 months would get Rs 48,000 if he cancelled at maturity, meaning a return of 17.65% per year. The Sebi order quotes an interim order passed by a sub divisional magistrate in West Tripura. As the Sebi order points out “As per the Interim Order passed by the SDM, West Tripura, RVHEL is alleged to have taken “recourse to unilateral and spontaneous cancellation of bookings of hotels in a routine manner so as to make returns.””
What this tells us is that Rose Valley wasn’t really interested in running the holiday membership plan. It couldn’t possibly have built all the hotel rooms that it had promised to build under the Holiday Membership Plan and hence encouraged investors to opt for a bulk payment on maturity.
Brand building is an inherent part of a Ponzi Scheme: Rose Valley spent a lot of money in building its brand. The company was one of the main sponsors for the IPL team Kolkata Knight Riders (KKR). KKR players wore jerseys with the Rose Valley logo. Rose Valley had a two year sponsorship deal with KKR. For this it paid Rs 5.5 crore during the first year and Rs 6.05 crore during the second year. The deal has now ended. Gautam Kundu, chairman, Rose Valley Group, recently told The Times of India “Our contract was for two years. Now it’s for me to decide whether I shall renew it or not. The decision to invest in KKR will also be mine, entirely.”
This deal helped Rose Valley build more credibility among prospective investors in West Bengal where it is primarily based out of. As Ashok Mitra, a retired clerk with the state government told New York Times India Ink “I saw Shah Rukh Khan(one of the owners of KKR) and invested 75,000 rupees…I did not worry because he was vouching for the company.”A report that appeared in The Indian Express in May 2013 quoted a source as saying “The company joined hands with KKR because they wanted to build their image and extend their reach. With 254 branches across the country, the association with the KKR provided them the right platform.”
Rose Valley has significant presence in the media. It owns newspapers as well as television channels. It also used other newspapers to build its brand. As the Moneylife article cited earlier points out “Rose Valley has been a big advertiser with Ananda Bazar Patrika (ABP) group. ABP has gone out of its way to promote them and celebrate their “entrepreneurship”.”
The most important part of a Ponzi Scheme is assuring the investor that their investment is safe: This is the most tricky part about running a Ponzi scheme. Unless the investor feels assured that his money will be safe he won’t invest it in the scheme. Rose Valley was a corporate agent of the Life Insurance Corporation(LIC) of India between 2002 and 2011. It is said that Rose Valley used this route to raise money for its own investment schemes. Given this, the confidence that people have in LIC which is backed by the government of India would have rubbed onto Rose Valley as well.
Interestingly, the Insurance Regulatory and Development Authority(Irda), the insurance regulator, cancelled Rose Valley’s license in early 2012.
To conclude, it is important to know that on March 14, 2013, Sachin Pilot, the Union Minister of State for Corporate Affairs, presented a long list of companies across the country against which complaints had been received for running Ponzi schemes. This list had 14 companies belonging to the Rose Valley group.
The article originally appeared on www.firstpost.com on July 11, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Saradha Redux: Why Rose Valley is a Ponzi scheme