A Ponzi empire crumbles in Bengal

The inevitable has happened. The Saradha Group, perhaps the largest of the Ponzi players in West Bengal, has collapsed. So, what is this unravelling Ponzi story all about?

Sometime in the last decade, Ponzi investment schemes sprouted in ones and twos in remote districts. In quick time, they became a parallel financial empire, spread across the Eastern and North-Eastern region.

With rising financial clout and an army of depositors — many also doubling up as agents — under their fold, they acquired political influence, which lent legitimacy to their methods.

The rise, as in Saradha’s case, was meteoric. And, if Saradha is any indication, the fall of many other Ponzi equivalents will be quite as dramatic.

A Ponzi scheme is one that promises extraordinary returns by recycling depositors’ money, instead of investing in a productive enterprise.

In West Bengal, some of them promised to grow money by 34 times in 25 years by investing in plantations. Others offered doubling money in 15 months by investing in fictitious potato trade or real estate.

Initially, the rural poor were the target group. As the days went by, people from both rural as well as urban areas climbed on to the Ponzi bandwagon.

MODUS OPERANDI

How did these schemes escape the regulator, or SEBI’s, glare? SEBI bans collective investment schemes such as, say, buying a stake in a plantation, which is typically what Ponzi players offer to do.

So, Ponzi players offer ‘time-shares’ on promise of return on surrender of membership. For instance, a depositor could be buying into comfortable hotel accommodation for a few days in a year, somewhat like a club membership. These do not qualify as financial schemes.

To entice more deposits, those operating these schemes promised to pay not just high returns (18-20 per cent) but a hefty commission (Rs 30-35 on Rs 100 collected) on deposit money mobilised by the depositor/his recruits. Huge numbers of people turned up at the doorstep of Saradha and its ilk.

As the cash registers started ringing, Ponzi owners opened plush offices in Kolkata.

They generated no less than half the advertisement revenue for vernacular TV channels; some even bought into large media houses.

The trend was strengthened with the transfer of political power to the Mamata Banerjee-led Trinamool Congress. The public discourse and media space was overwhelmed by entertainment, news, football and ‘chit funds’.

The Chief Minister’s presence at newspaper launches by Saradha; the open support of her Government to the media house; involvement of top party leaders in the affairs of the group; and alleged participation of ground level activists to mobilise funds for Saradha, boosted Saradha’s reputation and credibility. The Saradha Group was forced to regulate collections following the launch of the Serious Fraud Investigation Office (SFIO) in 2012.

According to available estimates, the Group may have collected over Rs 20,000 crore of deposit — all in cash — through approximately 100-odd companies. Investigations so far, however, traced transactions worth a couple of hundred crores.

Lakhs of investors from West Bengal and the rest of the Eastern and North Eastern region are demanding justice. At least two persons have committed suicide. The common people are blaming Mamata Banerjee for it all. The party is already in damage control mode. Party General Secretary Mukul Roy made it clear that the “presence of leaders at programmes organised by Saradha does not mean we have endorsed their activities”.

He has also blamed the Left Front government for the growth of such schemes, and the Centre for not creating a legal framework.

Passing the buck

The Left Front argues that it has proposed a new law ‘West Bengal Protection of Depositors Interests in Financial Institutions’ in 2003 to ensure preventive action through district level vigilance.

After carrying out due changes as proposed by the Centre, the Bill cleared by the State Assembly was sent for Presidential assent in 2009.

That did not arrive until May 2011, after which the Left Front demitted office. Mamata Banerjee has reportedly demanded a return of the Bill to enact an even “stronger” Act.

But to lakhs of investors, all this makes little sense. A top police officer, who fell out of Mamata Banerjee’s favour, reportedly alerted the State government against activities of chit funds and the possible actions that could be taken under an existing law to curb them.

The officer, a leading newspaper reports, listed a number of funds including a major one operated by another Trinamool bigwig.

The Saradha episode is a foretaste of more closures to come.

Read our Editorial: >Case of oversight

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