DLF shares in debt spiral: Decoding why the stock fell 28% after Sebi ban

DLFVivek Kaul

The share price of DLF crashed today by 28.5% to close at Rs 104.95. In the process Rs 7439.5 crore of investor wealth was destroyed. Given that promoters own close to 75% of the company they had to bear a bulk of this fall.
In a landmark order, the Securities and Exchange Board of India(Sebi), barred DLF, KP Singh, the chairman and founder of the company, along with five other company executives from “buying, selling or otherwise dealing in securities, directly or indirectly, in any manner, whatsoever, for the period of three years.”
DLF failed to provide information on various subsidiaries as well as FIRs that were pending against it, when it re-listed in the stock market in 2007. (
This blog explains the entire order in a very simple way).
Back then, the company had raised close to $2.3 billion through what was the biggest initial public offering until then. The Sebi order pointed out that “Noticees suppressed several material information in the RHP/Prospectus of DLF and actively concealed the fact about filing of FIR against Sudipti [a DLF subsidary] and others.”
The stock crashed today by 28.5% as investors sold out enmasse. The question is why did the investors abandon DLF today?
As on June 30, 2014, the company had a total debt of Rs 19,064 crore on its balance sheet. In the annual report for 2013-2014, the company points out that the “average cost of debt has continued to range between 12.5% and 13%.” This rate of interest couldn’t have changed much since then.
At 12.5%, the total amount of interest that the company needs to pay per year on an outstanding debt of more than Rs 19,000 crore, works close to Rs 2,400 crore per year or around Rs 600 crore per quarter. This is huge for a company which had sales of Rs 1,851 crore for the period between April and June 2014.
With the company paying huge interest on its outstanding debt, the finance charges stood at 30% of the total revenue during April to June 2014. This number has gone up over the years as the sales of the company have plummeted.
For the period between April and June 2012, the finance charges were at 20% of the total revenue. The net sales for the period had stood at Rs 2,503 crore. The sales since then have fallen by around 26% to Rs 1,851 crore for the period between April to June 2014. The hope was that DLF would be able to bring down the value of its debts by listing a real estate investment trust (REIT), the rules for which were finalized last month. The company has close to 26 million square feet of leased assets. With the Sebi barring the company and its promoters from accessing capital markets, the company will now not be allowed to list a REIT in the next 36 months.
This means that the company will continue with a massive amount of debt on its balance sheet. This explains why the stock price fell by more than 28% today. It was simply adjusting to the new reality.
How did the company end up with so much debt on its balance sheet?
The company essentially borrowed a lot after it got relisted in the stock market in 2007. As on December 31, 2007, the total debt of the company had stood at Rs 3,702 crore. This jumped to Rs 7,066 crore by December 31, 2008, to Rs 12,830 crore by December 31, 2009 and Rs 22,758 crore by December 31, 2011. In a period of four years, the debt of the company jumped by more than six times.
The company borrowed a lot of money during this period to build a land bank and to diversify itself into other businesses which ranged from wind power to insurance and mutual fund to the luxury hospitality business. Since then, the company has been trying to come out of these businesses. During the last financial year, the company sold off its stake in the insurance business as well as DLF Global Hospitality Ltd.
This has helped the company to bring down its total debt marginally. The total debt of the company as on March 31, 2013, had stood at Rs 21,731 crore. This came down to Rs 18,526 crore by March 31, 2014. But has since then again shot up to Rs 19,064 crore.
The company will challenge the Sebi order. As it said in a release today “DLF will defend itself to the fullest extent against any adverse findings and measures contained in the order passed by SEBI. DLF has full faith in the judicial process and is confident of vindication of its stand in the near future.” Nonetheless, a close reading of the order suggests that the company is clearly on a weak wicket here. In fact, earlier this year, the Supreme Court had upheld a Rs 630 crore fine imposed on DLF by the Competition Commission of India. The Sebi order has made the situation worse for DLF.
To conclude, the mistakes made by DLF in the era of “easy money” seem to be catching up with it.

The article originally appeared on www.FirstBiz.com on Oct 14, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

How PACL ran a Rs 50,000 crore Ponzi scheme


So another Ponzi scheme has been busted.
The Securities and Exchange Board of India(Sebi) in an order issued on August 23, 2014, banned Delhi based PACL, from collecting any more money from investors. Sebi also asked PACL to refund the money to investors over the next three months.
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.
In case of PACL, the money collected was supposedly invested in “ agricultural land”.
As the Sebi order on the company written by Whole Time Member Prashant Saran points out “According to PACL, it mainly deals in the sale and purchase of agricultural land and development of the land…PACL’s business model is not limited to simple trading in barren agricultural land but to provide significant value addition to such low value barren land by developing it into productive agricultural land.”
This land bought by PACL after collecting money from the investors wasn’t handed over to them. As the Sebi order points out “PACL has also submitted that only symbolic possession of plots are handed over to the customers as fragmentation of land/ plot into smaller sizes may not be practical or permissible under the applicable revenue laws.”
The Sebi order goes on to inform that till March 31, 2012, Rs 44,736 crore was invested in PACL schemes. The company further informed Sebi that Rs 4,364.78 crore was collected by it between February 26, 2013 and June 15, 2014. Hence, the total amount collected amounts to a whopping Rs 49,100 crore. “This figure could have been even more if PACL would have provided the details of the funds mobilized during the period of April 01, 2012 to February 25, 2013,” the Sebi order points out.
The order goes on to note that “from the available records, it is also noted that since inception till 2012, PACL has allotted land to about 1.22 crore customers.” PACL also informed Sebi that the company has more than 4.63 crore customers to whom land hasn’t been allotted. Hence, “the total number of the customer of PACL comes to around 5.85 crore.”
To summarize, the company has close to 5.85 crore customers who have invested around Rs 50,000 crore with it. This is the basic back story of PACL, which has been put together brilliantly by Saran in the Sebi order. So what are the holes in this story?
First and foremost if the company has Rs 50,000 crore invested with it, it must have used that money to buy “agricultural land” worth a similar value. But the Sebi order clearly points out that PACL hasn’t done so. “The company has only lands worth Rs 11,706.96 crore [i.e. agricultural lands (Rs 7,322.11 crores) and commercial lands (Rs 4,384.84 crores)] out of which it has not only to satisfy the claim of 4.63 crore customers who have deposited Rs 29,420 crore with it but also to satisfy 1.22 crore customers to whom the land has been allotted but sale deeds have not been executed.”
PACL claims to have more land but hasn’t been able to share those details with Sebi “In view of the above, the proposal does not appear to be serious and reasonable,” writes Saran of Sebi. This throws up several questions? If the company has land worth Rs 11,706.96 crore only, where is the remaining money that it has raised from its customers? Why hasn’t it been invested?
Further, how does it plan to repay the customers at the end of the tenure of their investment? The customers have been promised a certain rate of return. And that return can be paid only when the land which PACL claims to invest in grows in value. But without the company investing money in land, that isn’t going to happen.
Also, at the end of the tenure of his investment, the investor either has the option of taking land or money. Saran of Sebi had asked PACL to provide him a sample of 500 customers. From this sample, 421 customers had taken their money back. The question is how were these customers repaid if the money being raised is not being invested totally?
In fact, in a news report published in The Economic Times in June 2011
PACL director S Bhattacharya had said that “about 80% of customers opt to take the money at the end of the plan term instead of the plot of land they supposedly paid for.” So the remaining 20% must be taking on the land, they had originally invested in, is a fair conclusion that one can draw. But as the Sebi order also points out “Not a single applicant out of the 500 samples selected has registered a sale deed of the land he had proceeded to purchase in the first instance…These facts raise serious doubt the real estate business that PACL claims to carry out.”
In fact, the situation gets even more intriguing when one considers the total number of investors in the scheme. As summarised earlier nearly 5.85 crore investors have invested around Rs 50,000 crore in the scheme. But interestingly Bhattacharya had told The Economic Times in 2011 that the “
the company has no more than 50 lakh customers”. So how did the number go from 50 lakh to 5.85 crore in just over three years? Or like Sahara, PACL does not really know how many customers does it really have?
All these lacunae lead Saran to conclude that “the lack of maintenance of proper records/ data is a clear indication that the activities of PACL are in the nature of ponzi scheme.” Hence, like most Ponzi schemes which run for a while, the company over the years has managed to build in the minds of its customers some sort of a façade of a business model, where they make money by buying and selling agricultural land.
But the available data does not lead to that conclusion. What the company seems to have been doing is to take money from new investors and hand it over to the investors whose investment had been maturing. That was all it did. It did not have a business model. It was an out and out Ponzi scheme.

The article originally appeared on www.Firstbiz.com on August 26, 2014.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

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

 subroto-roy (1)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.”
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)  

Saradha Redux: Why Rose Valley is a Ponzi scheme

KKRVivek Kaul
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.
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 InkI 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)

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)