Tag: Sahara | Vivek Kaul

10 September, 2014

Here’s how India’s government unwittingly aids the growth of ponzi schemes

Over the last few years a spate of Ponzi schemes have come to light. These include Sahara, Saradha Chit Fund, Rose Valley Hotels and Entertainment and most recently PACL. A Ponzi scheme is essentially a fraudulent investment scheme in which money brought in by new investors is used to redeem the payment that is due to existing investors.
The instrument in which the money collected is invested appears to be a genuine investment opportunity but at the same time it is obscure enough, to prevent any scrutiny by the investors. So PACL invested the money it collected in agricultural land. Rose Valley, Sahara and Saradha had different businesses in which this money collected was invested.
These Ponzi schemes managed to raise thousands of crore over the years. In a recent order against PACL, the Securities and Exchange Board of India(Sebi) estimated that the company had managed to collect close to Rs 50,000 crore from investors. Sahara is in the process of returning more than Rs 20,000 crore that it had managed to collect from investors, over the years.
The question is how do these schemes manage to collect such a large amount of money. A June 2011, news-report in The Economic Times had estimated that PACL had managed to collect Rs 20,000 crore from investors at that point of time. This means that since then the company has managed to collect Rs 30,000 crore more from investors. An April 2013 report in the Mint quoting state officials had put the total amount of money collected by the Saradha at Rs 20,000 crore.
These Ponzi schemes have managed to collect a lot of money in an environment where the household financial savings in India have been falling. Household financial savings is essentially the money invested by individuals in fixed deposits, small savings scheme, mutual funds, shares, insurance etc.
The latest RBI annual report points out that “the household financial saving rate remained low during 2013-14, increasing only marginally to 7.2 per cent of GDP in 2013-14 from 7.1 per cent of GDP in 2012-13 and 7.0 per cent of GDP in 2011-12…the household financial saving rate [has] dipped sharply from 12 per cent in 2009-10.”
While the household financial savings have dipped, the money collected by Ponzi schemes has grown by leaps and bounds. What explains this dichotomy? Some experts have blamed the low penetration of banks as a reason behind the rapid spread of Ponzi schemes in the last few years. K C Chakrabarty, former deputy governor of the Reserve Bank of India, in September 2013 had pointed out that only 40,000 out of the 6 lakh villages in India have a bank branch.
Hence, investors find it easier to invest their money with Ponzi schemes, which seem to have a better geographical presence than banks. While this sounds logical enough, the trouble with this reasoning is that the bank penetration in India has always been low. It clearly isn’t a recent phenomenon. So, why have so many Ponzi schemes come to light only in the last few years?
Another reason offered is that the rate of return promised by these Ponzi schemes is high and is fixed at the time the investor enters the scheme. This is an essential characteristic of almost all Ponzi schemes. Take the case of Rose Valley. The return on the various investment schemes run by the company varied from anywhere between 11.2% to 17.65%.
In case of PACL The Economic Times report referred to earlier pointed out that “If a customer puts down Rs 50,000 for a 500 square yard plot, he or she can expect to get back Rs 1,01,365 in six years, or Rs 1.85 lakh in 10 years.” This meant a return of 12.5% and 14% on investments. An April 2013 report in the Business Standard pointed out that the fixed deposits of Saradha “promised to multiply the principal 1.5 times in two-and-a-half years, 2.5 times in 5 years and 4 times in 7 years.” This basically implied a return of 17.5-22%.
It is clear that returns promised by these Ponzi schemes have been significantly higher than the returns available on fixed income investments like fixed deposits, small savings schemes, provident funds etc., which ranged between 8-10%. Given this, it was the greed of the investors which drove them to these Ponzi schemes, and in the end they had to pay for it.
Again that would be a simplistic conclusion to draw. Rose Valley was paying 11.2% on one of its schemes. PACL was offering 12.5%. This returns weren’t very high in comparison to the returns on offer on other fixed income investments.
In fact, most Ponzi schemes tend to offer atrociously higher returns than this. Charles Ponzi on whom the scheme is named had offered to double investors’ money in 90 days. Or take the case of the Russian Ponzi scheme MMM, which came to India sometime back. Its sales pitch was that Rs 5000 could grow to Rs 3.4 crore in a period of twelve months. Speak Asia, a Ponzi scheme which made a huge splash across the Indian media a few years back, promised that an initial investment of Rs 11,000 would grow to Rs 52,000 at the end of an year. This meant a return of 373% in one year. Another Ponzi scheme Stock Guru, offered a return of 20% per month for a period of up to 6 months.
In comparison, the returns
offered by the likes of Rose Valley, Saradha, Sahara and PACL are very low indeed. But investors have still flocked to them. In fact, in its order against PACL, Sebi estimated that the company had close to 5.85 crore investors. So, the question is why are so many people investing money in such schemes?
The answer lies in the high inflation that has prevailed in the county since 2008. For most of this period the consumer price inflation and food inflation have been greater than 10%. In this scenario, the returns on offer on fixed income investments have been lower than the rate of inflation. Hence, people have had to look at other modes of investment, in order to protect the purchasing power of their accumulated wealth. A lot of this money found its way into real estate and gold. And some of it also found its way into Ponzi schemes. This is the “real” reason behind the explosion in the kind of money that has been raised by these Ponzi schemes.
But why is the rate of interest on offer on fixed income investments been lower than the rate of inflation? This is where things get really interesting. Take a look at the graph that follows. The government of India since 2007-2008 has been able to raise money at a much lower rate of interest than the prevailing inflation. The red line which represent the estimated average cost of public debt(i.e. Interest paid on government borrowings) has been below the green line which represents the consumer price inflation, since around 2007-2008.

How has the government managed to do this? The answer lies in the fact that India is a financially repressed nation. Currently banks need to invest Rs 22 out of every Rs 100 they raise as deposits in government bonds. This number was at higher levels earlier and has constantly been brought down. Over and above this Indian provident funds like the employee provident fund, the coal mines provident fund, the general provident fund etc. are not allowed to invest in equity. Hence, all the money collected by these funds ends up being invested in government bonds.
As the Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework points out “Large government market borrowing has been supported by regulatory prescriptions under which most financial institutions in India, including banks, are statutorily required to invest a certain portion of their specified liabilities in government securities and/or maintain a statutory liquidity ratio (SLR).”
This ensures that there is huge demand for government bonds and the government can get away by offering a low rate of interest on its bonds. “The SLR prescription provides a captive market for government securities and helps to artificially suppress the cost of borrowing for the Government, dampening the transmission of interest rate changes across the term structure,” the Expert Committee report points out.
The rate of return on government bonds becomes the benchmark for all other kinds of loans and deposits. As can be seen from the graph above, the government has managed to raise loans at much lower than the rate of inflation since 2007-2008. And if the government can raise money at a rate of interest below the rate of inflation, banks can’t be far behind. Hence, the interest offered on fixed deposits by banks and other forms of fixed income investments has also been lower than the rate of inflation over the last few years.
This explains why so much money has founds its way into Ponzi schemes, even though the rate of return they have been offering is not very high in comparison to other forms of fixed income investment. To conclude, the government of India has had a significant role to play in the spread of Ponzi schemes.

A slightly different version of this article appeared on Quartz India on September 10, 2014

(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])

27 February, 2014

How Sahara hoodwinked Sebi, RBI and the Supreme Court

Vivek Kaul
The Rs 24,000 crore question for the Sahara group is where did it get the money from to repay the investors who had invested in its housing bonds or the optionally fully convertible debentures(OFCDs)? The group had raised this money through Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL).
This happened after the Reserve Bank of India(RBI) ordered the group to shut-down its para-banking operations through which it used to raise money to fund its capital intensive businesses from real estate to an airline.
To get around the RBI directive, the Sahara group started issuing housing bonds through SIRECL and SHICL. These bonds were technically referred to as OFCDs. The Sahara group noted that these bonds were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
On this pretext, the group felt that issuance of these OFCDs did not amount to a public issue. As per Section 67 of the Companies Act, 1956, an offer of shares or debentures made to 50 persons or more is construed to be a public offer. It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.
Hence, the issuance of OFCDs was a public issue and given that it needed to be listed on a stock exchange, which it wasn’t. The Securities and Exchange Board of India(Sebi) came calling and KM Abraham, who was a whole-time member of Sebi, issued an order dated June 23, 2011, in which he asked Sahara to “refund the money collected by the aforesaid companies[i.e. SIRECL and SHCL]…to the subscribers of such Optionally Fully Convertible Debentures with interest of 15% per annum from the date of receipt of money till the date of such repayment.”
In the order Abraham also contested how could Sahara raise such a huge amount of money only through members associated with the Sahara group. “The case of the two Companies is that they have issued OFCDs only to members associated with the Sahara group…Even the listed company with the biggest market capitalisation and the largest investor base in India has only under 4 million investors. In fact, the total investor base in India currently (reckoned on the basis of unique depository accounts in the two Depositories taken together) is only of the order of 15 million,” wrote Abraham. Given this, how did Sahara manage to issue bonds to 2.96 crore investors, who were largely members associated with the group?
This Sebi order was challenged in court by Sahara. It led to a series of events, which finally led to the Supreme Court judgement on August 31, 2012. The apex court in the country basically stood by Sebi’s decision and asked Sahara to refund Rs 24,029 crore that it had raised through OFCDs, to the investors by November 2012.
The Supreme Court directed the Sahara group to hand over money to Sebi, which would in turn refund the money to the investors. The group was soon given more time to repay the money, and further directed to deposit Rs 5,120 crore immediately. This the group paid up on December 5, 2012 and hasn’t paid up anything since then.
It has since contested that it has already paid its investors and handing over the money to Sebi would mean double payment. The group claims that it refunded Rs 16,177 crore to investors in May and June 2012. In fact, the Business Standard had reported in November 2012 that the agents of the Sahara Group were being pushed to collect sehmat patras (consent letters) from investors to show that their money had already been returned to them. “Agents, estimated to be a million strong, who sold OFCDs, often termed housing bonds, have been ordered to collect these letters, failing which their commissions are being stopped. With these consent letters, many of which are pre-dated, with dates ranging from as early as April to show that refunds were spread over a long period, documents such as account statements and passbooks in the hands of the customers are being collected,” the newspaper reported. This happened after the Supreme Court judgement asking Sahara to hand over Rs 24,000 crore to Sebi. If the group was refunding the investors as early as April 2012, why was it fighting a case in the Supreme Court at the same time?
Further, where did the group get the money from? Rs 24,000 crore is clearly not small change. Interestingly, the group has offered an explanation for this.
The group claims that the Sahara India Cooperative Credit Society and Sahara Q Shop bought the real estate assets worth thousands of crores from SIRECL and SHICL, the companies which had issued the OFCDs. This money was then used to repay the investors who had invested in the OFCDs.
But where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money to buy the real estate assets of SIRECL and SHICL? The group claims to have raised this money through the Sahara India partnership firm which raised money on behalf of Sahara India Cooperative Credit Society and Sahara Q Shop, across 4,700 locations throughout the country. The group essentially put its vast network of branches to work, it claims.
The next question is that what was the pretext on which Sahara India Cooperative Credit Society and Sahara Q Shop raised money? Sahara Q Shop could have raised money as an advance against the promise of providing consumer goods to investors who invested in it. The Sahara Q Shop had got immense credibility in small town India, given that it was being advertised by the Indian cricket team.
On the face of it Q Shop seems like a money raising scheme that is being marketed as a retail venture. In fact, in an affidavit filed with the Allahabad High Court, Sebi has alleged that the group was “forcibly and unilaterally converting the investments in Sahara India Real Estate and Sahara Housing Invest to Sahara Q Shop without any consent of the investor, in defiance of the orders of the Supreme Court.”
Also, the question is why shouldn’t the Sahara Q Shop venture qualify as a collective investment scheme. A collective investment scheme is defined as “Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS(collective investment scheme). Investors do not have day to day control over the management and operation of such scheme or arrangement.” And this should bring the Sahara Q Shop under the regulatory ambit of Sebi.
Interestingly, the Sahara Q Shop seems to have also invested in the troubled National Spot Exchange. As the Business Standard reports “Recent data put out by the troubled National Spot Exchange (NSEL) showed that Sahara Q Shop had invested a little over Rs 220 crore through Indian Bullion Markets Association, a subsidiary of NSEL.”
What all this tells us is that Sahara continues to be a para-banking operation on the ground.
The article originally appeared on www.FirstBiz.com on February 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)

27 February, 2014

Arrest warrant out, what new ruse will Subrata Roy come up with?

Vivek Kaul
George Orwell in his 1945 classic Animal Farm said that “all animals are equal, but some animals are more equal than others.” Sahara bossman Subrata Roy, clearly belongs to the second category.
On February 20, 2014, the Supreme Court of India had directed Roy to be present in court on February 26, 2014, to explain the failure of two Sahara group companies to refund an amount of a little over Rs 24,000 crore, raised from investors, by selling optionally fully convertible debentures (OFCDs).
Roy did not turn up in Court and his counsel Ram Jethmilani told the Court that “His mother is dying and he is required to be by her side holding her hand.”
To buttress their point further, the Sahara Group even attached a medical statement by doctors attending to Roy’s mother at the Sahara Hospital in Lucknow. Interestingly, along with Roy, the Court had directed Ashok Roy Choudhary, Ravi Shankar Dubey and Vandana Barghava, three directors of Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) to be present on February 26, 2014. SIRECL and SHICL are the two companies that had issued the OFCDs.
Only Roy did not turn up citing his mother’s illness. The other three did. This did not go down well with the Court. “The arm of this court is very long. We will issue warrants. This is the Supreme Court of the land. When other directors are here, why cannot he be here?” asked Justice KS Radhakrishnan.
After this, the Court issued non bailable arrest warrant against Roy and directed that he be arrested and produced before it, on March 4, 2014.
The Sahara group has been testing the patience of the Supreme Court for a while now and on Wednesday (i.e. February 26, 2014), the apex court in the country simply ran out of it.
Sahara is a finance to reality conglomerate with huge para-banking operations in the states of Uttar Pradesh and Bihar. In July 2008, the Reserve Bank of India ordered the group to shut-down its para-banking operations. This, after it found several discrepancies in the books of Sahara. Sahara used to run the para-banking operations through the Sahara India Financial Corporation. The group raised a large amount of money from people who did not have bank accounts. It even collected small amounts on a daily basis.
The deposits funded the many businesses (like media, films, real estate, hospitals, hotels and even airlines) that the group was into. The Reserve Bank hit at the heart of Sahara’s business model by prohibiting it from running a para-banking operation. The central bank banned Sahara from raising fresh deposits beyond June 30, 2011 and at the same time asked Sahara to repay all its depositors by June 30, 2015.
It is easy to see that most of the businesses that Sahara was into were highly capital intensive. Hence, it was important for the group to keep raising deposits. But with the RBI clamping down on its para-banking operations that was not possible.
To get around the RBI directive, the Sahara group started issuing housing bonds through SIRECL and SHICL. These bonds were technically referred to as OFCDs. The Sahara group noted that these bonds were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
Given this, the group felt that the issuance did not amount to a public issue, and did not require compliance either with the Companies Act, 1956, or the Securities and Exchange Board of India(Sebi) Act.
As per Section 67 of the Companies Act, 1956, an offer of shares or debentures made to 50 persons or more is construed to be a public offer. It is estimated that the Sahara group sold the housing bonds or OFCDs to around 2.96 crore investors and raised over Rs 24,000 crore.
Given this discrepancy, KM Abraham, who was a whole-time member of Sebi, issued an order dated June 23, 2011, in which he asked Sahara to “refund the money collected by the aforesaid companies[i.e. SIRECL and SHCL]…to the subscribers of such Optionally Fully Convertible Debentures with interest of 15% per annum from the date of receipt of money till the date of such repayment.”
In this order Abraham also pointed out that “The first proviso to section 67(3) inserted by the Companies (Amendment) Act, 2000 with effect from 13.12.2000 sets at rest the question by stating that if an invitation to subscription is made to 50 or more persons, it ceases to be a private.”
Hence, the OFCDs sold by Sahara constituted a public offer and given that needed to be listed on a stock exchange, which they were not. As Section 73 of the Companies Act points out “Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchange for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange.” The OFCDs of Sahara were not listed on any stock exchange.
Sahara challenged the Sebi order in court. This started a series of events which finally led to the Supreme Court judgement as on August 31, 2012. In this judgement, the Court directed the Sahara group to refund Rs 24,029 crore that it raised through OFCDs to the investors by the end of November 2012. The order had directed that Sahara to pay this amount to Sebi,which would in turn refund the money to the investors.
The group was given more time to refund and directed to deposit Rs 5,120 crore immediately. Rs 10,000 crore was to be deposited with Sebi in January 2013 and the remaining amount in February 2013. The Sahara group handed over draft of Rs 5,120 crore on December 5, 2012, and hasn’t paid anything since then.
In fact, it has since maintained that it has already returned the money to investors and paying money to Sebi would amount to paying twice. As a November 2013 report in the Business Standard puts it “Its(i.e. Sahara’s) top lawyers have argued that it was not the intention of the court to pay investors twice and that the regulator has to first check several truckloads of documents pertaining to the millions of investors before coming to ask for the balance.”
But there are some basic loopholes in the argument. If Sahara was in the process of repaying its investors, why was fighting a case with Sebi in the Supreme Court?
The group claims that it refunded Rs 16,177 crore to investors in May and June 2012. This led to Justice Kehar, one of the judges on the bench hearing this case, to wonder “The whole of May and June, they were fighting before us. Why would they do that if they were already refunding?”
In January 2014, the Supreme Court had directed the Sahara group to file bank statements and documents to prove that it had refunded the money to its investors in 2012. A Business Standard report dated February 14, 2014, quotes Arvind Dattar, the Sebi counsel as saying “They have filed five volumes of documents. These contain everything except what we want.”
Datar also asked that how could Sahara return money that it had collected over a period of three years in just two months. The money Sahara has repaid to the investors who had bought OFCDs has come through transactions within the group. The group has told the Supreme Court that Sahara India Cooperative Credit Society and Sahara Q Shop bought real estate assets worth thousands of crores from SIRECL and SHICL, the two companies that issued OFCDs, to bail them out. This money was then used to repay the investors.
The question is where did Sahara India Cooperative Credit Society and Sahara Q Shop get the money from? The Sahara Group told the apex court that the money to buy these assets was raised from numerous investors through its big branch network of 4,700 branches.
The money from this transaction was used to repay the OFCD investors in cash. The group explained that it put in place the cash policy after hundreds of cases of “snatching, robberies, injuries and even death faced by its workers while carrying money between branches and banks.” But wouldn’t that still be applicable, if it repaid its investors in cash? Wouldn’t its agents have to carry cash around to repay it’s investors?
In a statement issued earlier this month the Sahara group claimed that almost 98% of its investors had put in amounts ranging from Rs 500 to Rs 19,000 into the OFCDs. The average investment was around Rs 8,000. The group further said that these people do not go to banks and wanted their money back in cash.
The Supreme Court in a hearing this month asked if payments of such huge amounts of cash was legally allowed. The Sebi counsel Datar explained that “Under Section 73 of the Companies Act, refund has to be made only by cheque. Even the Sebi ICDR (Issue of Capital and Disclosure requirements) regulations mandate that payments have to be made through banking channels only.”
To conclude, basically, Sahara and its lawyers have been playing the delaying game and keep coming up with a new theory every time there is a hearing. It will be interesting to see what new theory they come up with on March 4, 2014, when Subrata Roy will have to appear in court.
We haven’t seen the last of this case. Watch this space.
The article originally appeared on www.firstpost.com on February 27, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)

22 November, 2013

Sahara's hide and seek with the Supreme Court and Sebi continues

Vivek Kaul
The Supreme Court has barred Sahara, the finance to reality conglomerate, from selling any immovable property. It has also ordered Sahara boss Subrata Roy and its directors not to leave the country until they submit original title deeds on properties worth Rs 20,000 crore.
On October 28, 2013, the court had directed Sahara to hand over title deeds of properties worth Rs 20,000 crore to the Securities and Exchange Board of India(Sebi). It had also added that a failure to do so would mean that Sahara bossman Subrata Roy would not be allowed to leave India.
On that date, the judges had said “You indulge too much in hide and seek. We cannot trust you any more…There is no escape for you and the money has to come.”
Yesterday, Sahara submitted documents for two parcels of land. This included 106 acres of land in Versova, a western suburb in Mumbai and another 200 acres of land in Vasai, another Western suburb of Mumbai. Sahara provided a detailed valuation of the land carried out by Knight and Frank and another valuer. This put the value of the land in Versova anywhere between Rs 18,800-19,300 crore. The land in Vasai is expected to be worth around Rs 1,000 crore.
This claim of Sahara was immediately contested by the Sebi counsel Arvind Datar. He pointed out that the land in Versova was a part of a green zone where real estate development would not be possible, and that is why there was a plan to develop a golf course there. Sahara contested this claim by saying that the rules had been changed in 2012 and development was possible. To this Datar replied saying that environment ministry would have to agree to this.
Also, the 106 acres of land was a part of a larger disputed area of 614 acres. Sahara is currently in litigation with original owners B Jeejeebhoy Wakaria and associates since 2001.
Over and above this, Datar pointed out that Sahara had supplied only 52 out of the 82 title deeds relating to the collaterals. The rest were certified copies. Datar also challenged Sahara to sell the land and deposit the money. “Let them sell this, find a buyer and deposit the money. Let them sell it and show. Why should Sebi undertake this responsibility? … The October 28, 2013, order was clear – to submit original title deeds of land worth Rs 20,000 crore…The rights and interests of investors must be protected,” he said.
The Supreme Court then asked Sahara to deposit original title deeds of properties worth Rs 20,000 crore anywhere in the country, within two days. This would ensure that the order barring Sahara from selling any property and not allowing its directors to leave the country, would not operate.
So what is the fuss all about? In July 2008, the Reserve Bank of India, ordered Sahara to wind down its parabanking operation run through the Sahara India Financial Corporation, which operated as a Residual Non-Banking Company (RNBC).
This happened after the central bank found several discrepancies in the books of Sahara. It banned Sahara from raising fresh deposits beyond June 30, 2011 and at the same time asked Sahara to repay all its depositors by June 30, 2015.
Sahara India Financial Corporation is big in parts of Uttar Pradesh and Bihar, where it has managed to raise thousands of rupees as deposits over the years. These deposits funded the various businesses of the group from media, films, real estate to even buying international hotels. The group even ran an airline briefly which it sold off to Jet Airways. Most of these businesses are capital intensive businesses which needed a lot of money. The money as mentioned earlier came from the parabanking operation of the group.
Once RBI asked Sahara to wind down its parabanking operation it stuck at the heart of the group’s business model. But soon Sahara started issuing what it called housing bonds. Two group companies, Sahara India Real Estate Corporation Ltd and Sahara Housing Investment Corporation Ltd, issued these bonds technically referred to as optionally fully convertible debentures (OFCDs).
Sahara noted that these OFCDs were being issued to “friends, associates, group companies, workers/ employees and other individuals associated/affiliated or connected in any manner with Sahara India Group of Companies.”
Hence, it did not amount to a public issue and thus, did not require compliance either with the Companies Act, 1956, or the Sebi Act as well as regulation dealing with public issues. This was the way Sahara interpreted the OFCD issue.
As per the Section of the Companies Act, 1956, any offer made to 50 or more people, becomes a public offer. Estimates suggest that the OFCDs were sold to nearly 2.96 crore investors.
This started a series of events which finally led to the Supreme Court judgement as on August 31, 2012. In this judgement, the Court directed the Sahara group to refund investors Rs 24,029 crore to the investors by the end of November.
One of the judges, Justice Khehar said: “It seems the two companies collected money from investors without any sense of responsibility to maintain records pertaining to funds received. It is not easy to overlook that the financial transactions under reference are not akin to transactions of a street hawker or a cigarette retail made from a wooden cabin. The present controversy involves contributions which approximate Rs. 40,000 crore, allegedly collected from the poor rural inhabitants of India. Despite restraint, one is compelled to record that the whole affair seems to be doubtful, dubious and questionable. Money transactions are not expected to be casual, certainly not in the manner expressed by the two companies.”
The November deadline was further extended and Sahara was directed to deposit Rs 5,120 crore immediately, Rs 10,000 crore in January 2013 and the remaining amount in February 2013. Of this amount the group handed over draft of Rs 5,120 crore on December 5, last year, and hasn’t paid anything since then.
At the same time it continued to play ‘hide and seek’ with the Indian judicial system by claiming that it had already repaid most of the amount to the investors and hence, did not have to pay Sebi anymore money. If that was the case why was this not brought to notice of the Supreme Court in August 2012? And why was it brought to notice after the Supreme Court asked it to repay the investors?
As a report in the Business Standard puts it “Its(i.e. Sahara’s) top lawyers have argued that it was not the intention of the court to pay investors twice and that the regulator has to first check several truckloads of documents pertaining to the millions of investors before coming to ask for the balance.”
A report appearing in the Business Standard newspaper in late November 2012 seemed to suggest that agents of the Sahara Group were being pushed to collect sehmat patras (consent letters) from investors to show that their money had already been returned to them. “Agents, estimated to be a million strong, who sold OFCDs, often termed housing bonds, have been ordered to collect these letters, failing which their commissions are being stopped. With these consent letters, many of which are pre-dated, with dates ranging from as early as April to show that refunds were spread over a long period, documents such as account statements and passbooks in the hands of the customers are being collected,” the newspaper reported. Of course, this happened after the Supreme Court judgement in August 2012.
Also money was being transferred to the new Q shop venture launched by the group. As the Business Standard reported“While this documentation process has been on, a significant portion of the money deposited in the accounts have already been transferred to the Q-Shop plan, another money raising plan being marketed as a retail venture.”
It remains to be seen whether Sahara deposits title deeds of properties worth Rs 20,000 crore with Sebi in two days time or not. Or will it manage to come up with a new delaying tactic and continue with its casual approach? In short, all that can be said is that we haven’t heard the last of this issue.
Watch this space.
The article originally appeared on www.firstpost.com on November 22, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

24 April, 2013

Another Sahara: How Saradha built a ‘brand’ and duped investors

Vivek Kaul
Sudipta Sen, the man behind the Saradha group, who has been on the run, was finally arrested yesterday in the beautiful alpine valley of Sonamarg in Kashmir. Sen is accused of running a Rs 20,000 crore Ponzi scheme.
A Ponzi scheme is essentially a fraudulent investment scheme where money brought in by the newer investors is used to pay off the older investors. This creates an impression of a successful investment scheme. Of course, as long as money entering the scheme is greater than the money leaving it, all is well. The moment the situation is reversed, the scheme collapses.(For a more detailed and historical treatment of Ponzi schemes click here).
The scheme gets its name from an Italian American called Charles Ponzi who in 1919 ran an investment scheme in the city of Boston, which promised to double the investor’s investment in 90 days. This was later cut to 45 days. At its peak the scheme managed to collect around $40 million and had nearly 15,000 investors.
Ponzi thought he had figured out an arbitrage opportunity which would help him earn stupendous return. In the end he couldn’t execute the arbitrage and started using the money being brought in by newer investors to pay off the older investors whose money needed to be returned.
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 Saradha was no exception to this.
The rate of return promised is high and is fixed at the time the investor enters the scheme: For an individual to get interested, the returns on offer in a Ponzi scheme need to be higher than the returns he can hope to earn from other modes of investment available at that point of time.
An order issued by the Securities and Exchange Board of India yesterday, explains this point beautifully. This order has asked Saradha Reality, one of the companies being run by the Saradha Group, to wind up operations in three months.
Saradha Reality catered to all kinds of investors. It had had instalment plans with tenure varying from 12 to 60 months where minimum investment was Rs 100 per month. It raised money from investors with contributions ranging from Rs 10,000 to Rs 1 lakh for a tenure of 15 months to 120 months. It also had a lump sum investment scheme (with minimum amount of 1000/- and multiple thereof) with tenure varying from 12 months to 168 months. The rates of interest on offer where different for different investment plans.
At the end of the tenure the investor had the option to get allotment of land or a flat or to simply get a refund of the money he or she had put in, along with the promised interest. And what were the returns on offer? As the Sebi order points out “The average return offered by the noticee (i.e. Saradha), in lieu of the land when the investor opts for returns were between 12% to 24%.”
So clearly the returns being offered by Saradha were higher than the returns on offer through other investment avenues. And most investors seem to have opted for the absolute return option rather than claiming land or a flat at the end of the investment tenure. As the Sebi order points out “As informed by the noticee (i.e. Saradha), not many of investors have opted for allotment of land rather, more investors have opted for the pre-determined returns as promised by it.”
The higher returns clearly got investors to invest in Saradha.
The most important part of a Ponzi Scheme is assuring the investor that their investment is safe.
How did an upstart like Saradha managed to assure investors that their investment would be safe? The story that seems to be coming out is that Saradha employed agents of Peerless General Finance and Investment Co. Ltd. Peerless, formed in 1932 had pioneered the collection of small savings in eastern India, primarily West Bengal. Hence, it had a reasonable reputation among the people of West Bengal.
As The Mint points out “Though it didn’t ever default on repayments, Reserve Bank of India (RBI) forced Peerless to stop taking deposits in 2005-2006. This spawned the growth of unregulated deposit-taking companies in West Bengal and other eastern Indian states.”
Agents of Peerless were used to collect money for the Saradha group. In that way the brand name of Peerless rubbed onto Saradha. The Mint story cited earlier talks about one Debasish Banerjee, who used to work for Peerless and then became the blue eyed boy of Sudipta Sen, and presided ove 10,000 sub-agents working across eight districts in West Bengal.
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. If you go to the website of Saradha Group (http://saradhagroup.com/index.html) you will find that they were in multiple lines of business. From real estate to two wheelers to media to tours and travels to even bio gas. The company had presence across sectors. But where they doing any business? Largely, the answer is no. The various businesses were just used as a façade to collect money from investors. They were used to show investors and agents as to what the company was doing with the money it was collecting.
As the Sebi order points out in the context of the reality division “It was prima facie observed that under the scheme of the noticee(i.e. Saradha) the real objective is to mobilize fund from public by showing some real estate projects to the investors and the noticee indirectly promises return of funds with high interest rates.”
The company had even bought a two wheeler company called Global Motors to show off to its agents. As the Business Standard points out “The Hooghly factory of Global Motors, acquired by Saradha sometime back, had closed down in 2011. But 150 of its employees had been kept on rolls to show, when agents made visits, that all was hunky dory and operations were on in full swing.”
All this was enough to create an illusion that the company was putting the money it collected from its investors to some use. Turned out it was not. It was simply rotating money.
The period between the investment and the pay out in a Ponzi Scheme is short. This ensures that the word spreads fast and more money comes in. Every additional investor gives legitimacy to the Ponzi Scheme. As we can see in case of Saradha the minimum tenure on offer was around 12-15 months. While there is no conclusive proof to say that most investors opted for the minimum tenure or lower tenures, I feel it would be safe to say that most new investors who were checking out the scheme would have opted for lower tenures. And gradually as the scheme spread and got some legitimacy only then would the investment tenures have gone up.
Also the fact that the scheme has collapsed tells us at some level that not many investors opted for long investment tenures. If they had, money would still be coming in and Saradha would have managed to continue operations. The fact that its more or less shutdown tells us that money has clearly stopped coming in.
Brand building is an inherent part of a Ponzi Scheme. Sudipta Sen ensured that the Saradha Group had huge presence in the media. “His first entry into the space was through Channel 10 and thereafter he expanded into dailies—Bengal Post & Sakalbela—in 2010. Sen bought out Tara channels, as well. At the time of closing down, the group had 10 media outfits — news TV channels, newspapers and magazine,” the Business Standard points out. This gave the group a lot of credibility and helped build its brand. The cine actor Mithun Chakraborty was the brand ambassador for Channel 10.
Trinamool Congress was also seen to be close to the group. As Reba Mitra a Saradha agent told NDTV.com “We put our faith in Saradha because big leaders of the Trinamool, like Madan Mitra, Didi…the chief minister, Kunal Ghosh, Shatabdi Roy, Mithun Chakraborty – when these big people are with them, government people, then would this money be stolen from us?”
Julie Potua, another agent of Saradha told NDTV that “they told clients in their pitch that other companies could collapse but Saradha would not as “Kunal Ghosh is with us, Mamata didi is with us, so invest in us.”
Kunal Ghosh, was editor and chief executive of Saradha Group’s media business. He is also a member of the Rajya Sabha nominated by the Trinamool Congress. Shatabdi Roy is a Bengali actress who is also a Lok Sabha MP from the Trinamool Congress. Being seen close to the leading political party of the state was like the icing on the cake and attracted investors by the drove.
There are some indications being given now that the Reserve Bank of India had warned the state government on the mushrooming of chit funds in West Bengal.
What is interesting is that the SEBI has been investigating the Saradha Group since June 2010. The Saradha Group, like Sahara now, had managed to delay the process by submitting voluminous documents. At various points of time in 2012, Saradha submitted 16 cartons, 19 cartons, 170 boxes and 35 cartons, as a strategy to avoid submitting the specific information being asked for by SEBI.
After this Saradha Group was directed to provide information in excel sheets. This helped Sebi to nail the group. As the SEBI order points out “On sample study of the data (in excel) provided by the noticee (Saradha), veracity of which cannot be verified, it is noted that agreements for sale was entered into with two investors namely Dhruba Bose and Arindam Pani on January 01, 2010 for flats having number 1A and 1C, respectively, both admeasuring 1437 sq ft. area in the same building i.e., Ten Katha. It is further noted that the consideration amount for flat number 1A was Rs 37,69,000 and for flat number 1C was Rs 1,17,75,850. It is highly unlikely that in a real estate business the difference between consideration amounts for sale of two similar flats at the same building on the same day shall be in the ration of 1:4. In view of these facts the possible inference will be that the allotment of plots/flats are simply a farce, and might have been done to mislead the regulatory authority.”
But by the time the SEBI order came out, Saradha had already collapsed. What is intriguing is that the investigation against Saradha started in mid 2010, but it took the company more than two years to submit the relevant data. If SEBI had cracked the whip and acted a little faster, the situation might have been a little better.
The article originally appeared on www.firstpost.com on April 24, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)