Saradha Group financial scandal

Introduction

The Saradha Group financial scandal was a major financial scam caused by the collapse of a Ponzi
scheme run by Saradha Group, a consortium of over 200 private companies that was believed to be running
collective investment schemes popularly but incorrectly referred to as chit funds in Eastern India.

The group collected around Rs- 2,459.59 crore (almost 5000 crore in 2018 value) from over 1.7 million
depositors before it collapsed in April 2013. In the aftermath of the scandal, the State Government of West
Bengal where the Saradha Group and most of its investors were based instituted an inquiry commission to
investigate the collapse. The State government also set up a fund of Rs- 500 cr. to ensure that low-income
investors were not bankrupted.

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The central government through the Income Tax Department and Enforcement Directorate launched a multi-
agency probe to investigate the Saradha scam and similar Ponzi schemes. In May 2014, the Supreme Court of
India, transferred all investigations into the Saradha scam and other Ponzi schemes to the Central Bureau of
Investigation (CBI), India's federal investigative agency. Many prominent personalities were arrested for their
involvement in the scam including two Members of Parliament (MP) - Kunal Ghosh and Srinjoy Bose, former
West Bengal Director General of Police Rajat Majumdar, a top football club official Debabrata Sarkar, Sports
and Transport minister in the – Madan Mitra.

Background
India has a large, low-income, rural population with limited access to formal banking facilities. This leads to
the absence of two major help lines for poor people - that of placing their money safely in deposits and
secondly of being able to borrow money for their needs which may be as simple as buying seeds for the next
crop or their children's marriage. The second aim is achieved instead by a web of parallel, informal banking in
the form of money lenders (pawn brokers) who have existed in India for a few centuries. At its centre are
moneylenders, mostly unregulated, often also wealthy landlords, used to charge exorbitant rates of interest. To
curb this practice, several Moneylenders Acts were enacted by the State governments of India by the
1950s. However failure to replace the role of moneylenders gave rise to unscrupulous financial operators that
operated Ponzi schemes.
While post offices have tried to address this through postal savings banks, people are often lured by Ponzi
schemes that promise much higher returns. The relatively prosperous rural economy of West Bengal had
previously relied on small savings schemes run by the Indian Postal Service. However, low rates of interest in
the 1980s and 1990s encouraged the rise of several Ponzi schemes. The continuing decline in interest rates,
rapid growth of household savings, lack of financial literacy and investor awareness, political patronage,
encouraged the growth of similar companies.

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Key people
Sudipto Sen was the chairman and managing director of the Saradha Group. Sen was described as a softly
spoken, charming, and forceful orator. At the time of his arrest, he was in his mid-50s. In his youth, he was
known as Shankaraditya Sen, and was part of the Naxalite movement in West Bengal. He changed his name to
Sudipto Sen and may have had plastic surgery sometime in the 1990s, after which he became associated with
land development projects in South Kolkata. The land bank he formed in around 2000 became the catalyst for
enticing early customers into his Ponzi scheme.

Debjani Mukherjee was one of the executive directors of Saradha Group who could sign cheques on behalf of
the group. She was arrested together with Sudipto Sen. At the time of her arrest Debjani was in her early 30s.
She had studied at the St. John's Diocesan Girls' Higher Secondary School, and the Sivanath Sastri
College. She trained as an air hostess. Mukherjee originally joined Saradha Group in 2010 as a receptionist,
and rose rapidly to be the group's executive director. A story in India Today described her as a person with a
reputation for generosity to her community.

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Financial operations
The companies that were comprised by Saradha Group were incorporated in 2006. Its name is
a cacography of Sarada Devi, the wife and spiritual counterpart of Ramakrishna Paramahamsa—a nineteenth-
century mystic of Bengal. This duplicitous association gave Saradha Group a veneer of respectability. Like all
Ponzi schemes, Saradha Group promised high returns. Its funds were sold on commission by agents recruited
from local rural communities. Between 25% and 40% of the deposit was returned to these agents as
commissions and lucrative gifts to quickly build up a wide agent pyramid. The group used a nexus of
companies to launder money and evade regulators

Initially, the frontline companies collected money from the public by issuing secured
debentures and redeemable preferential bonds. Under Indian Securities regulations and section 67 of
the Indian Companies Act (1956), a company cannot raise capital from more than 50 people without issuing a
proper prospectus and balance sheet. Its accounts must be audited and it must also have explicit permission to
operate from the market regulator Securities and Exchange Board of India (SEBI)

SEBI first confronted Saradha Group in 2009. Saradha Group adapted by opening up to 200 new companies to
create more cross-holdings. This created an extremely complex tiered corporate structure to confound SEBI
by hampering their ability to consolidate blame. SEBI persisted in its investigation through 2010. Saradha
Group reacted by changing its methods of raising capital. In West Bengal,
Jharkhand, Assam and Chhattisgarh, it began operating variations of collective investment schemes (CIS)
involving tourism packages, forward travel and hotel booking timeshare credit transfer, real estate,
infrastructure finance, and motorcycle manufacturing. Investors were rarely informed about the true nature of
their investments. Instead, many were told they would get high returns after a fixed period. With other
investors, the investment was fraudulently sold in the form of a chit fund. Under the Chit Fund Act (1982),
chit funds are regulated by state governments rather than SEBI.

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(Money collected by Saradha Group of companies per year in billion INR. 95% of the fund was collected in 2011-2013 of the scam. Source: 2014
SIT Report)

SEBI warned the state government of West Bengal about Saradha Group's chit fund activities in 2011, again
prompting Saradha Group to change its methods. This time, it acquired and sold large numbers of shares of
various listed companies then embezzled the proceeds of the sale through accounts which as of now have not
been identified. Meanwhile, Saradha Group started laundering a large portion of its funds to
Dubai(clarification needed), South Africa and Singapore. By 2012, SEBI was able to classify the group's
activities as collective investment schemes rather than chit funds—and demanded that it immediately stop
operating its investment schemes until it received permission to operate from SEBI. Saradha Group did not
comply with this ruling and continued to operate until its collapse in April 2013.

Building brand and non-financial businesses

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Saradha Group invested heavily in the building of its brand. With enormous funds at its disposal, Saradha
invested in high visibility sectors, such as the Bengali film industry, where it recruited actress and Trinamool
Congress (TMC) Member of Parliament (MP) Satabdi Roy as its brand ambassador. Bollywood actor and
TMC MP Mithun Chakraborty was brought in as the brand ambassador of Saradha Group's media platform.
Saradha Group also enlisted Kunal Ghosh, another TMC MP, as the CEO of the media group. Under Kunal
Ghosh, the group acquired and established local television channels and newspapers, investing around Rs-
9.88 billion (US$140 million) in the media group. By 2013, it employed over 1,500 journalists and owned
eight newspapers printed in five languages: Seven Sisters Post and Bengal Post (English
dailies), Sakalbela and Kalom (Bengali dailies), Prabhat Varta (Hindi daily), Ajir Dainik
Baturi (Assamese daily), Azad Hind (Urdu daily) and Parama (Bengali weekly magazine). It also owned
Bengali news channels Tara Newz and Channel 10, Bengali general entertainment channels Tara
Muzicand Tara Bangla, Punjabi general entertainment channel Tara Punjabi, an international channel aimed at
the Indian diaspora, TV South East Asia and one FM radio station. Author Aparna Sen was made the editor
of Parama.
As part of its corporate social responsibility program, Saradha Group donated motorcycles to the Kolkata
Police. On 19 July 2011, it persuaded Mamata Banerjee, the Chief Minister of West Bengal, to use its
ambulances and motorcycles for the Jangalmahal area of West Midnapore. To further etch itself in the socio-
cultural milieu of Bengal, Saradha Group invested in football rivals and the best-known football clubs in
Bengal: Mohun Bagan A.C. (Rs.- 18 million in 2010–11) and East Bengal F.C. (Rs.- 35 million since
2010). The group also sponsored various Durga Puja celebrations organised by local political leaders.

Collapse
Apart from the SEBI investigation, no executive actions were taken at this time. On 7 December
2012, Reserve Bank of India (RBI) governor Duvvuri Subbarao said the West Bengal government should
take action against companies that were indulging in financial malpractice. By that time, the Saradha Group
Ponzi scheme was already beginning to unravel. In January 2013, the group's cash inflow was, for the first
time, less than its cash payouts. This outcome is inevitable in a Ponzi scheme that is allowed to run full
course. Sudipto Sen tried but failed to calm uneasy depositors and agents, and could not increase inflow of
funds.
On 6 April 2013, Sen wrote an 18-page confessional letter to the CBI, in which he admitted that he had paid
large sums of money to several politicians. He also stated that TMC leader Kunal Ghosh had forced him to
enter into loss-making media ventures and blackmailed him into selling one of his television channels at
below market price. Sen fled after posting this letter on 10 April.
On 18 April, an arrest warrant for Sudipto Sen was issued. By 20 April, the news of potentially the largest
Ponzi scheme in India had become headline news in West Bengal, and then front-page news nationally. After
evading the authorities for a week, Sudipto Sen, Debjani Mukherjee and Arvind Singh Chauhan were arrested
in Sonmarg, Kashmir, on 23 April 2013. On the same day, SEBI stated that both chain marketing and forward
contracts are forms of CIS, and officially asked Saradha Group to immediately desist from raising any further
capital and return all deposits within three months.

Economic effects
Companies illegally moving deposits diverted an estimated sum of Rs.-240 billion (US$3.5 billion) from
small savings funds promoted by state government since 2010. Official data show a steady decline in small-

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savings deposits and a rise in withdrawals, which left a reduced amount from which the state government
could borrow. This affected the overall macroeconomic situation of the state; instead of being used by
government for public funding, the money went into Ponzi schemes that were either diverted to foreign
locations or were put to use for private gains.
It was feared that legitimate non-banking financial companies and micro finance institutions would be
stigmatised, leading to a vicious cycle of low depositor trust, higher interest rates, lower lending and a
localised credit crisis. Because most of the Saradha Group depositors came from the lowest economic strata,
the loss of the investment would cause a further decrease in social mobility. The scandal drew attention to
similar illegal deposit mobilising companies, which are facing increased regulatory pressure. Many of these
companies have been variations of time share travel schemes, of which there are few clear regulations. These
companies tried to register as cooperative societies to continue their financial operations.

What We Could Do
• If we did fixed deposit this amount in SBI for 5 years, then the value in 2018 comes-
• Interest rate for FD of 5 years is 8.75%

• Therefore, the value in today’s date= 20,000 cr x (1.0875)5 = 30,421.2 cr

 Below poverty line Indian => 170 million. If we simply donate 30,421.2 cr, they would get Rs.- 1800
each. Which is about their half month income.
 In Bharatmala Pariyojana Highway Project (2018) 83,677 km of NH will be constructed at a cost of
5.35 trillion. Approx. Rs.- 6.39 cr / km. That means we could make 4760 km of NH. As a comparison
total length of NH in Gujrat 5017 km.
 As per outcome budget (by MHRD) of 2016-17, IITs were given 4548.51 cr and 2510 cr to NITs to
 import world class teaching in UG, PG, Ph.D.
 Upgradation of infrastructure.
 Increase Ph.D output.

If we could utilise scam money in higher education sector we could improve our college infrastructure lot
more.

Discussion
For those looking at chits as a saving option, a bank fixed deposit or a recurring deposit will offer better
returns. Only if you do not have access to regular banking should you consider a chit fund. Automate your
investment if you lack the discipline to save.
Unregistered chit funds are popular among traders and small businessmen because they are able to put the
unaccounted for money to use. In most such cases, the money is paid in cash. Small shopkeepers find it easy
to part with Rs 50-100 on a daily basis so that they can get a lump sum 18-24 months later.

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