CASE STUDY

CASE STUDY 1: Saradha Chit Fund Ponzi scheme

The Ponzi scheme run by Saradha Group collected money from investors by issuing
redeemable bonds and secured debentures and promising incredulously high profits
from reasonable investments. Local agents were hired throughout the state of West
Bengal and given huge cash payouts from investor deposits to expand quickly,
eventually forming a conglomerate of more than 200 companies. This syndicate was
used to launder money and confuse regulators like SEBI. In April 2013, the scheme
collapsed completely causing a loss of approximately US $5 billion and bankrupting
many of its low-income investors.
SEBI first detected something suspicious in the groups activities in 2009.
It challenged Saradha because the company had not complied with the Indian
Companies Act, which requires any company raising money from more than 50
investors to have a formal prospectus, and categorical permission from SEBI, the
market regulator. The Saradha Group sought to evade prosecution by expanding the
number of companies, thus creating a convoluted web of interconnected players.
This created innumerable complications for SEBI, which labored to investigate
Saradha in spite of them. In 2012, Saradha decided to switch it up by resorting to
different fundraising activities, such as collective investment schemes (CIS) that
were disguised as tourism packages, real estate projects, and the like. Many
investors were duped into investing in what they thought was a chit fund. This, too,
was an attempt to get SEBI off its back, as chit funds fall under the jurisdiction of
the state government, not SEBI. However, SEBI managed to identify the group was
not, in fact, raising capital through a chit fund scheme and ordered Saradha to
immediately stop its activities until cleared by SEBI. SEBI had previously warned the
state government of West Bengal about Saradha Groups hoax chit fund activities in
2011 but to no avail. Both the government as well as Saradha generally ignored
SEBI until the company finally went bust in 2013.
After the scandal broke, an inquiry commission investigated the group, and a relief
fund of approximately US $90 million protected low-income investors. In 2014, the
Supreme Court transferred all investigations in the Saradha case to the Central
Bureau of Investigation (CBI) amid allegations of political interference in the stateordered investigation.

Sarada Devi was the wife of famous spiritual guru Sri Sri Ramkrishna Dev (Swami
Vivekanandas spiritual guru) and she is a highly revered spiritual icon not only in

West Bengal but also in whole of India and even world. The cheats have used the
name of Mother Sarada so that by the name of Sarada the ordinary people will put
faith on the fund. The group used to collect money through agents with high
commissions ranging from 15 to 20 percent and even in some cases 40% of the
funds mobilized by them. They agreed to pay back unusually high returns. If a
person invests Rs.1 lakh for 14 years he/she might get Rs.10 lakh by 14 years which
was next to impossible by normal any other deposits (observed from field
investigation). The same could fetch maximum Rs.3.50 to 4.00 lakh in case of a
Bank or Post office deposit. On the other hand, sometimes the investors had been
allured by promising flat or land in return of their deposits. Due to the exorbitant
commission the number of agents rose to thousands and even lakhs. Saradha Group
opened as many as 200 companies to create cross-holdings after getting a warning
bell in 2009 from SEBI which created an extremely complex corporate structure. It
made difficult to put blame on any one of the companies. It is learnt that the chief
advisor of the company who was basically a chartered accountant cum top level
administrator in police of the state government of West Bengal used to look after all
these illicit games. After 2010 Saradha changed their way of collecting money
rather started Collective Investment
Schemes (CIS), such as package tourism, forward travel and hotel booking,
motorcycle manufacturing, , real estate, infrastructure finance etc. In 2011 when
SEBI had given further warning to Saradha Group it changed its modus operandi
again. This time, it picked up and traded hefty number of shares of several listed
companies, siphoning off the proceeds of the sale to accounts which are under the
scanner of CBI, at present and have not been identified till date.
Role of SEBI
As per the Chit Fund Act of 1982 the chit funds are regulated by the state
governments rather than the SEBI. Recently, the chairman of SEBI Mr. U.K.Sinha has
stated that the State Governments have immense powers, if utilized well, to bring
to book such entities (The Statesman, 15th September, 2014).

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.[46]

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 September 2014 have not been identified. Meanwhile, Saradha
Group started laundering a large portion of its funds to Dubai South Africa and

Singapore.
By 2012, SEBI was able to classify the group's activities as collective
investment schemes rather than chit fundsand 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.

Action by SEBI
By 2012, SEBI was convinced that the schemes are not in the nature of Chit fund
but in the nature of Collective Investment Schemes (CIS). So, the regulator asked
the company to stop all operations and return the money to the investors. But the
company didnt bother to adhere to the order of SEBI and continued its operation till
April 2013.

Exhibit
From the Desk of SEBIs Chairman
Illicit money-pooling schemes sprout across nooks and corners of the country;
State governments should provide the first line of defense against such
activities and provide early warning systems for cases requiring action by the
SEBI;
There will be full support of SEBI in fighting this menace where fraudsters
have collected thousands of crores of rupees through various Ponzi and other
illegal schemes.
The chairman has urged all state governments to pass the State Deposit
Protection Act, which would allow the state governments to take stern action
against illegal deposit taking activities within their jurisdictions. Many states
have already passed this Act.
The governor of RBI and the chairman of SEBI have already requested the
chief secretaries of states to take action against those running illegal moneypooling schemes under the State Deposit Protection Act.
Under a new law, SEBI has been authorized to take action against all
unregulated money pooling schemes with a corpus of Rs.100 crore or more.

What you and I can do?

We can educate our drivers, housemaids, helpers and financially illiterate people
aboutPonzi schemes. Today, the normal return on safe investment will fetch
anywhere between 8-10% interest per year, the normal return on high risk
investment such as stock/mutual funds will fetch anywhere between 12- 18%. So,
any schemes which offer return over this rate, maybe a fraudulent scheme.
Secondly, suggest people to invest in Banks (preferably nationalized and top rated
private banks) and avoid investing in Chit or locally managed financial groups.

CASE 2: Sahara Group

Since 2009, when the Sahara Groups activities first came under the radar of SEBI
leading up to the arrest of Sahara India Pariwar founder Subrata Roy in 2014, both
parties have been engaged in an aggressive regulatory conflict. SEBI alleged that
Sahara India Real Estate Corp Ltd (SIRECL) and Sahara Housing Investment Corp Ltd
(SHICL), which issued Optional Fully Convertible Debentures (OFCD), illegally
collected investor money. Meanwhile, Sahara denied SEBI had any jurisdiction in the
matter.

Note-Any company that wants to issue equity shares or Debentures or

any other market related instrument to the public through the IPO
Process has to file a Draft Red Herring Prospectus or DRHP to SEBI to
tell them the details of the public issue, why they are doing so, their
financial position etc. It is pretty standard procedure in India.
SEBI went on to order Sahara to issue a full refund to its investors, which was
challenged by Sahara before the Securities Appellate Tribunal (SAT). When the SAT
upheld SEBIs order, Sahara moved to the Supreme Court in August 2012, which
ordered Sahara to refund investors money by depositing it with SEBI. Sahara then
declared that most of the US $3.9 billion had already been repaid to investors, save
for a paltry US $840 million, which it handed over to SEBI. This was disputed by
SEBI, which claimed that the details of the investors who were refunded had not
been provided. When Sahara failed to deposit the remaining money with SEBI and
Subrata Roy skipped his hearing, the Supreme Court of India issued an arrest
warrant for the Sahara chief in February 2014.

Amid rumors of black money laundering and the misuse of political connections,
Sahara vehemently denied all charges and continued to defy SEBI. The regulator
persevered through what the Supreme Court referred to as the ridiculous game of
cat and mouse and finally managed to pin down Sahara chief Subrata Roy in 2014.
In this rare victory, SEBI not only brought Sahara to justice, but also made an
excellent case for why the regulator, and others like it, require greater autonomy
and penalizing powers.
Role of SEBI in Sahara case

1. Between 2008 and 2011, two unlisted Sahara group companies (SCSCL and
SHICL) raised around Rs 18,000 Cr issuing OFCDs (Optionally Fully
Convertible Debentures) to roughly 30 million shareholders. In
2011, SEBI ordered the group to refund this money to investors with 15%
annual interest. This order was upheld by the Supreme Court.
2. SEBI asked Sahara to refund investors because it felt Sahara was raising
money in violation of capital raising norms and certain sections of the
Companies Act. SEBI found that under the garb of an OFCD the company was
running an extensive parabanking activity without conforming to regulatory
disclosures and investor protection norms pertaining to public issues.
3. Sahara challenged SEBIs order saying the capital markets regulator did not
have any jurisdiction over the group companies since they were not listed.
The court dismissed Saharas petition, also hauling it up for not complying
with its orders.
4. The court directed Sahara to furnish details of the OFCDs it had issued
including subscriptions and refunds within 10 days and submit these to SEBI.
It also gave Sahara 90 days to deposit roughly Rs 24,000 Cr. SEBI which was
given powers to freeze Saharas accounts, attach properties etc. Sahara has
repeatedly missed deadlines to comply with the Supreme Courts orders. It
claims the total money due is only Rs. 5,200 Cr, as the balance amount has
already been repaid. SEBI meanwhile, told the court that while it had begun
the refund process; it couldnt trace many of Saharas investors as details
submitted by Sahara were not in the prescribed format, with addresses and
other details missing in some cases.
5. Since Sahara hasn't been able to deposit the Rs. 24,000 Cr amount with SEBI,
the Supreme Court has asked Sahara India to submit a bank guarantee for
Rs. 20,000 Cr before October 28th which is the date for the next hearing of
the case. Sebi had earlier rejected Saharas offer to secure the difference

(between Rs 5,200 and 24,000) through immovable property entrusted with a

bank trustee.
We can get to know the role of SEBI in following timeline:
* September 2009: Sahara Prime City files Draft Red Herring Prospectus (DRHP)
* October 2009: Sahara India Real Estate Corporation Ltd (SIRECL) and Sahara
Housing Investment Corporation Ltd (SHICL) file Red Herring Prospectus with
Registrar of Companies.
* December 2009: Complaint received from Professional Group for Investor
Protection against Sahara group for illegalities in fund raising SIRECL and SHICL
* January 2010: Similar complaint received against Sahara group from one Roshan
Lal through National Housing Bank
* November 2010: Sebi passes interim order against the two firms
* June 2011: Sebi passes final order
* October 2011: Securities Appellate Tribunal upholds Sebi order
* August 2012: Supreme Court passes order asking the two companies to deposit
over Rs 24,000 crore to Sebi for refund
* December 2012: Supreme Court allows Sahara to deposit money in 3 installments.
It deposits first installment of Rs 5,120crore
* February 2013: Sebi issues attachment orders against the group after companies
failed to pay remaining two installments
* March 2013: Sebi seeks arrest of Subrata Roy
* April 2013: Roy appears before Sebi after summons
* July 2013: Sebi moves Supreme Court against Sahara group for non-compliance
with the court's direction
* November 2013: Subrata Roy barred from leaving the country
* February 20, 2014: Supreme Court asks Roy to appear personally
* February 26, 2014: Supreme Court issues non-bailable warrant after Roy's fails to
make personal appearance; Sahara chief cites mother's illness for non-appearance
* February 28, 2014: Roy arrested by Lucknow police.

Why Did the Courts Come to such a Drastic Decision to Arrest Mr. Roy?
SEBI Even tried freezing Saharas assets with banks but that measure wasnt
successful. They reached out to 58 banks in India and they were able to recover
a total of 1 Crore. Yes, you read it right Just 1 crore. It is surprising how little
money such a large corporate had in its accounts. Sahara had pledged an Asset
700 plus Acres of unbuilt land in Ambey Valley in the outskirts of Mumbai.
Sahara claimed that this asset was worth over 3400 crores. But when State Bank
of India tried to estimate the value of the Asset their valuation was a mere 870
crores. Other assets that Sahara was pledged were even hard to locate for SEBI.
Sahara had claimed that they had 46 lakh sq. ft of land in Gurgaon but based on
the Land Survey numbers given, the size of the plot was just 19 lakh sq. ft. On
top of this, according to governmental records the land may not even belong to
Sahara. SEBI got back to the Supreme Court that, they were not even able to
find out some of the assets pledged by the group. On top of all this, Mr. Roy
never appeared in person to explain the situation. Of course, this was up until
last week when the Supreme Court got really frustrated and issued a Non Bailable Arrest Warrant against Mr. Roy which eventually resulted in him finally
gracing the Supreme Court with his Presence.