You are on page 1of 6

Tue, Jun 28, 2011 | Updated 05.


Sruthijith KK,ET Bureau

Rs 20,000 crore deposits & a land bank the size of Bangalore: 'Realtor' PACL's 'illegal schemes' may drown millions' money
NEW DELHI: On a recent Saturday afternoon, the A6 DDA market in West Delhi's Paschim Vihar looked desolate. Rows of shops remained shut and a few people milled about unhurriedly as the summer heat soared. On the third floor of the complex, up a dark flight of stairs with betel-juice-stained walls, the office of an obscure real estate company called PACL India Ltd was an oasis of activity. Hundreds of people had gathered there, giving it the appearance of a busy bank branch on payday. Transactions abounded across counters, people chatted animatedly in small groups, and streamed in and out amid long, snaking queues. From this office and 279 more across India, PACL runs an operation that the Securities and Exchange Board of India (Sebi) deems illegal because it considers it a collective investment scheme in the garb of a real estate company. But the final word has not yet been said about what kind of an animal PACL actually is. That dispute will be settled by the Supreme Court, where the case has lain for eight long years. ET spent six weeks interviewing about two dozen people to piece together the picture of a company that looks suspiciously like a pyramid scheme and whose downfall could wipe out the savings of millions of people. While the dispute waits to be resolved by the Supreme Court, PACL has grown a 100-fold, aided by customers who have given money to the company ostensibly to book a plot of land they can't see or choose. Deposits with PACL-the company calls them 'customer advances'-have ballooned to Rs 20,000 crore. It has used the money to buy land in various parts of the country, including barren desert land. Its land bank, PACL said in a filing with the Registrar of Companies, is 1.85 lakh acres, roughly the size of Bangalore (In comparison, large realty firms such as DLF or Unitech typically own 12,000-15,000 acres). More than the prospect of owning land, customers are more likely lured by the 'expected value of land' the company indicates for investment terms ranging from 5 to 10 years. This works out to more than a 12.5% annual return on investment. PACL's deposits are brought in by a network of about 8 lakh agents, who are organised in the manner of a classic pyramid scheme, or "chain system", and stake their credibility for the company in return for attractive commissions on deposits brought in by them and other agents linked to them in the chain. If the Supreme Court decides in favour of Sebi and says PACL indeed operates a collective investment scheme that must be strictly regulated, several million small investors risk losing the savings they have invested in the hope of an attractive return. Those at the bottom of the pyramid will be the worst affected. PACL is perhaps only the largest among a number of such schemes mushrooming across the country.

NFIFWI, Tirunelveli Division

Their growth is fuelled by the universal lure of getrich-quick schemes, protected by lackadaisical enforcement and, in some cases, ambiguous rules. Arrests have occurred on consumer complaints in a few cases. The ministry of corporate affairs has launched an awareness campaign through major newspapers across the country, warning investors against collective investment schemes.

Looks, Walks & Talks Like Pyramid Plan

MCA secretary DK Mittal said the government's advertising campaign was prompted by a number of complaints against online schemes and other collective investment schemes. They have not received complaints against PACL, he said. Elsewhere, there have been complaints. Gwalior collector Akash Tripathi said he has received more than 10,000 complaints against 16 companies running collective investment schemes, including PACL. His administration last month moved to freeze the bank accounts of PACL and similar companies, and started sealing the properties owned by them. "This is a big menace. These companies are saying they are collecting deposits for land or cattle or what not, but they are essentially a finance operation," Tripathi said. PACL may look like a pyramid scheme, walk like a pyramid scheme and talk like a pyramid scheme, but it is not called a pyramid scheme. "We are a real estate company. We are in the sales purchase business of land. Customers pay us to buy land," said PACL director S Bhattacharya. "Customers pay for the land in instalments and at the end of their term, they can decide to either get a randomly allotted plot, or we will NFIFWI, Tirunelveli Division

help them sell that plot and get whatever is the value of the land at that time." Irrespective of where the plot is-suburban Mumbai or rural Madhya Pradesh-the company treats them alike, and assigns identical expected returns. A brochure of the company distributed by its agents says PACL has more than 10 crore 'plot owners'. Bhattacharya said the company has no more than 50 lakh customers. Even that estimate means one in every 170 Indians over 15 years of age is a PACL customer. PACL is unique in that not only are its plots randomly allotted, but when money is paid, the company issues a certificate with the amount the customer is expected to get at the end of the plan term. If a customer puts down Rs 50,000 for a 500 square yard plot, he or she can expect to get back Rs 1,01,365 in six years, or Rs 1.85 lakh in 10 years. Bhattacharya said 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. From a customer's point of view, he or she can entirely ignore the plot of land that is supposed to back their investment, walk into a PACL branch, deposit money and expect to get a very attractive return at the end of the plan term. It is not hard to see how this plan quickly gets morphed into a "double your money in six years" scheme. That is exactly what happens. Through the army of agents who get up to a 15% commission on investments they help bring in, PACL's schemes have acquired a cult-like following in many parts of the country, particularly in small towns and rural India. Anyone who joins a PACL scheme can become an agent. It is these agents, a network of exponentially growing microentrepreneurs, who give word-ofmouth publicity for PACL, staking their credibility among friends, relatives and community for the company. From Paschim Vihar to Madurai to Navi Mumbai, their elevator pitch remains the same. "PACL is a public limited company". "It is a company under the Ministry of Corporate Affairs". "It's a company operating since 1983 and has never missed a payment". A number of agents across the country repeated these claims, indicating systematic training.

Any company with more than 50 shareholders is deemed a public limited company, even though PACL agents use this term to insinuate some kind of government backing or the sanction of law. Same is the case with the MCA claim, as all companies have to register with the ministry's Registrar of Companies. The claim of a 28-year record is a more complex truth, as the company was registered only in 1996. It is perhaps a reference to a related company- PGF Ltd-that was indeed founded in 1983 and was asked to wind up and pay back investors in 2002. Bhattacharya said the agents may make many promises or talk up the company to maximise commissions but the company cannot be blamed for it. But at the Paschim Vihar office, where this correspondent spent the better part of two days, plenty of agents were peddling the "double your money" line quite openly, using brochures and pamphlets that had complex charts showing return on investments and agent commissions across levels. Little effort seemed underway by the company to regulate these pitches. The agents perpetuate the PACL cult, and the company benefits from it the most. Thirty-one-yearold Anil Verma, who contracted polio as an infant and walks with the aid of crutches, is one such agent. Verma said working as an independent agent for PACL has given him hope and a steady income. Unable to pass the Class X exam, he dabbled in many jobs, including as a plumber.

NFIFWI, Tirunelveli Division

But Verma said it was not until he became a PACL agent that he started dreaming of a better future. The PACL network of agents around him was a testimony to that. Verma knows one agent who used to be a vegetable vendor at the Azadpur wholesale vegetable market in North Delhi. "Now he is big. He bought his own house, he has a car... you know, steady income every month," Verma said. Two levels above Verma in the pyramid is a man who clears Rs 10 lakh in commissions every month. "He has shown everyone the cheques." Under an incentive scheme, PACL gifts motorcycles and cars to agents who recruit the most investors. Typical of such networks, the few who make big money are motivation to the majority, like Verma, who make a few thousand rupees every month in commission. On each deposit, as much as 33% is paid out as commission by the company to the network of agents linked to the person recruiting the investor, according to the commission chart with the company's agents. Bhattacharya said the company pays 7-8% as commission on each deposit. The company's balance sheet suggests this figure is at least 12%. Bhattacharya is not comfortable with the description of his agent network as a pyramid scheme or a ponzi scheme. "There is a chain system, that's true," he said. There are agents with thousands of agents below them-one agent in Madurai spoke of his boss who has 8,000 people under him. Along with the millions of investors, lakhs of these agents will suffer if PACL runs into trouble and payments are disrupted. It is a prospect that Verma said he cannot even imagine, but is sure will never happen. "If for the sake of argument let's say the company is not returning your money. The land is still yours, no?" But there is no title deed to the land, only a computer-generated receipt. Verma said there is still no problem. "You can always go to the MCA and show the slip. They are bound to give you the land because this is a company under the MCA." This is the kind of disinformation that sustains and perpetuates the PACL network.

HISTORY AND PROMOTERS PACL started life in 1996 as Gurwant Agrotech Ltd, a company selling magnetic pillows and other therapeutical products. (It subsequently changed its name to Pearls Agrotech Corporation NFIFWI, Tirunelveli Division

Ltd and PACL India Ltd). Between 1996 and 1998, Nirmal Singh Bhangoo was a director of the company. Bhangoo was also the chairman and managing director of Pearls Golden Forest Ltd (subsequently named PGF Ltd). PGF Ltd and PACL Ltd both followed similar business models, even though at the time PGF was a much larger entity. In 1997, there was a huge uproar against plantation companies, agro companies and other similar schemes that promised a high rate of return and disappeared with investors' money. The government announced that such companies would be regulated, and efforts commenced with the formation of acommittee chaired by former UTI chairman SA Dave. The committee's report formed the basis of Sebi's Collective Investment Scheme Regulations, 1999. The Dave committee defined CIS schemes by three important characteristics-pooling of investments, management by a separate entity and absence of day-to-day control of investors. "The principle of no day-to-day control of the investor in management of the property should be the prime criterion in determining the status of such schemes," the committee said. When Sebi notified the CIS regulations in 1999, more than 1,000 companies were asked to wind down and refund investors. Both PACL and PGF found themselves in the list. Both petitioned high courts-PGF Ltd in Punjab and PACL Ltd in Rajasthan, where it is registered. The Punjab High Court ruled that PGF Ltd was clearly a collective investment scheme, and asked it to shut shop. The court said PGF's claim that its sole activity was the sale, purchase and development of agricultural land was "a sham and a mere paper transaction" carried out "with the aim and object of screening its real activity". In 2008, a Sebi inquiry found that the company had not complied with the order to refund investors, and banned its promoters and executives from the securities markets for 10 years. Those thus banned include Bhangoo, PACL's Bhattacharya (then a general manager at PGF) and PACL company secretary SK Gaur, who was also company secretary of PGF Ltd. The schemes of PACL and those that PGF ran were identical. Gaur said they were different in that in the case of PGF, plot sizes were much larger. But the Rajasthan High Court took the view that PACL could not be considered a collective investment scheme. Sebi appealed against this decision in the Supreme Court. The securities market regulator declined to comment for this story While the question of the legality of PACL's operations went to the Supreme Court, two things happened that helped PACL grow dramatically. One was that the company now had a virtual monopoly as most competing schemes wound up because of Sebi action. Another was that the group started a TV channelP7-in 2005. The channel runs advertisement for PACL, giving the company the sheen of a credible brand."It's on TV all the time. Don't you watch P7?" an agent in Navi Mumbai asked. In the demographic PACL draws its business from, many claims go unquestioned, and television news is highly credible. The exact relationship between PACL and group companies such as Pearls Infrastructure Projects Ltd and the company that runs the Hindi news channel P7 are not clear. Bhattacharya said they are all associate companies, refusing to comment on the ownership. The ownership of PACL and other Pearls companies is hard to determine. PACL, for instance, is owned by 73 different entities, many of them shell companies owned by other companies in the list. It's an elabo-rate network that disguises the real owners of the company, and because Indian laws don't mandate the disclosure of beneficial ownership, it works. Some clues are to be NFIFWI, Tirunelveli Division

found in regulatory filings with the Registrar of Companies. There are at least 17 companies that are shareholders in both PACL Ltd and Bhangoo-promoted PGF Ltd.

In April 2010, Bhangoo and his wife Prem Kaur transferred 14,78,000 shares (amounting to 7.36% of the company's paid-up capital) held by them in PACL to a number of different entities. PACL MD Sukhdev Singh is a relative of Bhangoo, Bhattacharya revealed on persistent questioning, although he maintained that Bhangoo has nothing to do with the company. The website of an entity called Pearls Australasia is more instructive. The Australia-based company, "launched by New Delhibased Pearls group", owns the Sheraton Mirage hotel on the Gold Coast. Bhangoo and son Harvindar Singh sit on the board of that company, which describes the Pearls group on its website as one of India's "largest private landowners" and as "one of India's fastest-growing corporate groups". Pearls Infrastructure, PACL India, Pearls Broadcasting Corporation, Pearls Spices, Pearls Tourism and the Gian Sagar Medical College are listed on the website as part of the Pearls group. While PACL does not advertise heavily, associate company Pearls Infrastructure Projects has done some high-profile marketing. The company is now the lead sponsor of IPL team Kings XI Punjab, and has hired Australian pacer Brett Lee as the brand ambassador. The "Pearls Group" is also the title sponsor of the India-West Indies one-day international and T20 tournaments underway in the Caribbean islands. "HYPOTHETICAL QUESTION" Bhattacharya and Gaur dismissed as "a hypothetical question" the prospect of an adverse Supreme Court ruling, which will instantly plug the cashflow required to keep up with the company's burgeoning commitments. "We will obey the law and follow whatever instructions we receive," Bhattacharya said. The company has started valuing the vast land bank it owns with help from two global real estate consulting firms. Bhattacharya claims provisional reports from the companies- Jones Lang LaSalle and CB Richard Ellis-say the company's land bank is worth at least Rs 70,000 crore. Last year, stakeholders received an inadvertent peek into a small sample of the company's land bank. On January 25, 2010, The Times of India reported about a curious incident that had alarmed officials in the ministry of defence. They realised that a company had been buying up land in the barren desert in Barmer district in Rajasthan, close to the sensitive India-Pakistan border. Through 681 separate transactions, the company had accumulated 10,000 acres of desert land, typically not known to appreciate and regarded useless for all practical purposes. That company was PACL Ltd.

NFIFWI, Tirunelveli Division