Saradha Group financial scandal

By Jubin Jose
(TMS-16001)

Industry

Financial services, infrastructure management, automobiles, manufacturing

Genre

Deposit mobilising company

Fate

Allegations that this consortium of companies is aPonzi scheme

Founder

Sudipto Sen

Defunct

April 2013

Headquarters

Kolkata, West Bengal, India

Key people

Sudipto Sen, Chairman and MD

Debjani Mukherjee, , Director
Kunal Ghosh, Sudheera Gunawardane CEO, Media Div.

Number of employees

16,000+

Divisions

Saradha Realty
Saradha Exports
Global automobiles
Saradha media group

Website

Background:

saradhagroup.biz

India has a large, low-income, rural population with limited access to formal banking facilities. A
web of parallel, informal banking arose to fill the vacuum. At its centre were moneylenders, who
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.
[17]
Some commentators place the blame for these kinds of Ponzi schemes on greed rather than
exclusion from formal banking systems.
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 in speculative ventures such as Sanchayita
Investments, Overland Investment Company, Verona Credit and Commercial Investment
Company. Together, these scams eliminated close to 10 billion (US$150 million) in investor
wealth. Despite a history of Ponzi schemes, the continuing decline in interest rates, rapid
financialisation of household savings, lack of financial literacy and investor awareness, political
patronage, absence of adequate legal deterrence, and regulatory arbitrage encouraged the growth
of similar companies. These companies either raised their funds through legitimate channels
such as collective investment schemes, non-convertible debentures and preference shares, or
illegitimately through hoax financial instruments such as teak bonds, potato bonds or fictitious
ventures in agro-export, construction and manufacturing. As of 2013, 80% of multi-level
marketing and finance schemes against which complaints have been received are based in West
Bengal, giving the state the title of "Ponzi capital of India". It is estimated that these Ponzi funds
have amassed around 10 trillion (US$150 billion) from unsuspecting depositors in Eastern
India.

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. She was well known locally for her generosity to her
community.

In Brief:

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 astronomical returns in
fanciful but credible investments. 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.
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.

Collapse:
The earliest public warnings about the reckless and fradulent CIS in West Bengal started in 2009 from
MPs Somendra Nath Mitra and Abu Hasem Khan Choudhury and TMC leader Sadhan Pande. 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 initiate suo motu 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.
In his absence, the Ponzi scheme unravelled. On 17 April, around 600 collection agents claiming to be
associated with Saradha Group assembled at the headquarters of TMC and demanded government
intervention. Despondency quickly spread across Bengal. A Times of India interviewee said, "'The entire
Dakshin Barasat today looks like it was hit by a cyclone. Every home has a bankrupt depositor or a fugitive
agent. People who were once friends became enemies. Happy households became miserable. Students stopped
going to school. Traders lost interest in opening shutters. There is a sense of treachery that has replaced the
warmth of a neighbourhood. Suddenly everything has become vicious."[89] By this time, the Saradha Group
financial scandal had colloquially become known as "Bonzi"a portmanteau of the words Ponzi and Bengal.

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.

Convictions and sentences:

In February 2014, Sudipta Sen was convicted in a case where he was charged, under various provisions of
employment law, as a director of Saradha Group for his failure to deposit with the provident fund authorities
INR 0.03 million that his firm owed to its employees; he was sentenced by the trial court to three years in jail,
it was the first conviction in a series of civil and criminal cases, relating to corporate fraud and non-payment of
deposits, pending against him.