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Wednesday, April 24, 2013

HOW 'SARADHA' BUILT A 'BRAND' AND DUPED PEOPLE?

By M H Ahssan / Kolkata

Sudipta Sen, the man behind the Saradha group, who has been on the run, was finally arrested  yesterday in the beautiful alpine valley of Sonamarg in Kashmir. Sen is accused of running a Rs 20,000  crore Ponzi scheme.

A Ponzi scheme is essentially a fraudulent investment scheme where money brought in by the newer  investors is used to pay off  older investors. This creates an impression of a successful investment  scheme. Of course, as long as money entering the scheme is greater than the money leaving it, all is  well. The moment the situation is reversed, the scheme collapses.
 

The scheme gets its name from an Italian American called Charles Ponzi who in 1919 ran an  investment scheme in  Boston, which promised to double the investor’ s investment in 90 days. This  was later cut to 45 days. At its peak the scheme managed to collect around $40 million and had  nearly 15,000 investors.

Ponzi thought he had figured out an arbitrage opportunity which would help him earn stupendous  returns. In the end he couldn’t execute the arbitrage and started using the money being brought in by  newer investors to pay off  older investors whose money needed to be returned.

While every Ponzi scheme is different from another in its details, there are certain key characteristics  that almost all Ponzi schemes tend to have. And Saradha was no exception to this.

The rate of return promised is high and is fixed at the time the investor enters the scheme: For an  individual to get interested, the returns on offer in a Ponzi scheme need to be higher than the returns  he can hope to earn from other modes of investment available at that point of time.

An order issued by the Securities and Exchange Board of India yesterday, explains this point  beautifully. This order has asked Saradha Reality, one of the companies being run by  Saradha Group,  to wind up operations in three months.

Saradha Reality catered to all kinds of investors. It had  installment plans with tenure varying from 12  to 60 months where minimum investment was Rs 100 per month. It raised money from investors  with contributions ranging from Rs 10,000 to Rs 1 lakh for a tenure of 15 months to 120 months. It  also had a lump sum investment scheme (with minimum amount of Rs 1,000 and multiple thereof)  with tenure varying from 12 months to 168 months. The rates of interest on offer where different for  different investment plans.

At the end of the tenure the investor had the option to get allotment of land or a flat or to simply get  a refund of the money he or she had put in, along with the promised interest. And what were the  returns on offer? As the Sebi order points out “The average return offered by the noticee (i.e.  Saradha), in lieu of the land when the investor opts for returns were between 12% to 24%.”

So clearly the returns being offered by Saradha were higher than the returns on offer through other  investment avenues. And most investors seem to have opted for the absolute return option rather  than claiming land or a flat at the end of the investment tenure. As the Sebi order points out “As  informed by the noticee (i.e. Saradha), not many of investors have opted for allotment of land rather,  more investors have opted for the pre-determined returns as promised by it.”

The higher returns clearly got investors to invest in Saradha.

The most important part of a Ponzi Scheme is assuring the investor that their investment is safe.

How did an upstart like Saradha managed to assure investors that their investment would be safe?  The story that seems to be coming out is that Saradha employed agents of Peerless General Finance  and Investment Co. Ltd. Peerless, formed in 1932 had pioneered the collection of small savings in  eastern India, primarily West Bengal. Hence, it had a reasonable reputation among the people of  West Bengal.

As  Mint points out “Though it didn’t ever default on repayments, Reserve Bank of India (RBI) forced  Peerless to stop taking deposits in 2005-2006. This spawned the growth of unregulated deposit- taking companies in West Bengal and other eastern Indian states.”

Agents of Peerless were used to collect money for the Saradha group. In that way the brand name of  Peerless rubbed onto Saradha. The Mint story cited earlier talks about one Debasish Banerjee, who  used to work for Peerless and then became the blue eyed boy of Sudipta Sen, and presided over  10,000 sub-agents working across eight districts in West Bengal.

The instrument in which the scheme will invest appears to be a genuine investment opportunity but  at the same time it is obscure enough, to prevent any scrutiny by the investors.

If you go to the website of Saradha Group you will find that they were in multiple lines of business.  From real estate to two wheelers to media to tours and travels to even bio gas. The company had  presence across sectors. But where they doing any business? Largely, the answer is no. The various  businesses were just used as a façade to collect money from investors. They were used to show  investors and agents as to what the company was doing with the money it was collecting.

As the Sebi order points out in the context of the reality division “It was prima facie observed that  under the scheme of the noticee(i.e. Saradha) the real objective is to mobilize funds from public by  showing some real estate projects to the investors and the noticee indirectly promises return of funds  with high interest rates.”

The company had even bought a two wheeler company called Global Motors to show off to its  agents. As the Business Standard points out “The Hooghly factory of Global Motors, acquired by  Saradha sometime back, had closed down in 2011. But 150 of its employees had been kept on rolls to  show, when agents made visits, that all was hunky dory and operations were on in full swing.”

All this was enough to create an illusion that the company was putting the money it collected from its  investors to some use. Turned out it was not. It was simply rotating money.

The period between the investment and the pay out in a Ponzi Scheme is short. This ensures that the  word spreads fast and more money comes in. Every additional investor gives legitimacy to the Ponzi  Scheme. As we can see in case of Saradha, the minimum tenure on offer was around 12-15 months.  While there is no conclusive proof to say that most investors opted for the minimum tenure or lower  tenures, it would be safe to say that most new investors who were checking out the scheme would  have opted for lower tenures. And gradually as the scheme spread and got some legitimacy only then  would the investment tenures have gone up.

The fact that the scheme has collapsed tells us at some level that not many investors opted for long  investment tenures. If they had, money would still be coming in and Saradha would have managed to  continue operations. The fact that its more or less shutdown tells us that money has clearly stopped  coming in.

Brand building is an inherent part of a Ponzi Scheme. Sudipta Sen ensured that the Saradha Group  had huge presence in the media. “His first entry into the space was through Channel 10 and  thereafter he expanded into dailies—Bengal Post & Sakalbela—in 2010.  Sen bought out Tara  channels, as well. At the time of closing down, the group had 10 media outfits — news TV channels,  newspapers and magazine,” the Business Standard points out. This gave the group a lot of credibility  and helped build its brand. The cine actor Mithun Chakraborty was the brand ambassador for  Channel 10.

Trinamool Congress was also seen to be close to the group. As Reba Mitra, a Saradha agent told  NDTV.com “We put our faith in Saradha because big leaders of the Trinamool, like Madan Mitra,  Didi…the chief minister, Kunal Ghosh, Shatabdi Roy, Mithun Chakraborty – when these big people are  with them, government people, then would this money be stolen from us?”

Julie Potua, another agent of Saradha told NDTV that “they told clients in their pitch that other  companies could collapse but Saradha would not as “Kunal Ghosh is with us, Mamata didi is with us,  so invest in us.”

Kunal Ghosh, was editor and chief executive of Saradha Group’s media business. He is also a member  of the Rajya Sabha nominated by the Trinamool Congress. Shatabdi Roy is a Bengali actress who is  also a Lok Sabha MP from the Trinamool Congress. Being seen close to the leading political party of  the state was like the icing on the cake and attracted investors by the drove.

There are some indications being given now that the Reserve Bank of India had warned the state  government on the mushrooming of chit funds in West Bengal.  What is interesting is that market  regulator Sebi has been investigating the Saradha Group since June 2010. The Saradha Group, like  Sahara now, had managed to delay the process by submitting voluminous documents. At various  points of time in 2012, Saradha submitted 16 cartons, 19 cartons, 170 boxes and 35 cartons, as a  strategy to avoid submitting the specific information being asked for by Sebi.

After this Saradha Group was directed to provide information in excel sheets. This helped Sebi to nail  the group. As the Sebi  order points out “On sample study of the data (in excel) provided by the  noticee (Saradha), veracity of which cannot be verified, it is noted that agreements for sale was  entered into with two investors namely Dhruba Bose and Arindam Pani on January 01, 2010 for flats  having number 1A and 1C, respectively, both admeasuring 1437 sq ft. area in the same building i.e.,  Ten Katha. It is further noted that the consideration amount for flat number 1A was Rs 37,69,000 and  for flat number 1C was Rs 1,17,75,850. It is highly unlikely that in a real estate business the difference  between consideration amounts for sale of two similar flats at the same building on the same day  shall be in the ration of 1:4. In view of these facts the possible inference will be that the allotment of  plots/flats are simply a farce, and might have been done to mislead the regulatory authority.”

But by the time the Sebi order came out, Saradha had already collapsed. What is intriguing is that the  investigation against Saradha started in mid 2010, but it took the company more than two years to  submit the relevant data. If Sebi had cracked the whip and acted a little faster, the situation might  have been a little better.

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