The Saradha Chit Fund Scam: Explained

21 Dec 2020  Read 1260 Views

Imagine this: You're walking down the street, and suddenly, you meet someone, who stops you and says, "We have this scheme, where you invest with us and your money doubles in three years." Will you be tempted to invest in such a scheme? Will you invest your hard-earned savings in a scheme like this? 

In this article, we will discuss one such scheme that exploded in the face of Bengal in 2013 – the Saradha Scam led by Sudipto Sen, who duped lakhs of rural investors to the tune of Rs. 20 to 30 billion (USD 4-6 billion) before its ultimate collapse. Let's dive straight in. 

How did Saradha Chit Fund Scam begin?

How do you get people to believe in a Ponzi scheme? You play on their emotions and beliefs, and play he did! Sudipto Sen named his scheme Saradha, after Sarada Devi, wife and spiritual counterpart of the nineteenth-century mystic Ramakrishna Paramahamsa. This duplicitous name association gave Saradha Group instant respect from the rural people. The stage was now set.

Sen employed numerous agents from various rural areas and tasked them with the selling of funds. They were incentivized with a commission of 25-40% of the deposits, along with other lucrative gifts. With the commissions and gifts, he was able to build up a massive agent pyramid.

An instantly recognizable name, a promise of astronomical returns, and an army of super-motivated agents helped the Saradha group to soon expand outside of Bengal and in the states of Odisha, Assam, Tripura, Jharkhand, and Chhattisgarh.

How did it operate?

Just like any Ponzi scheme, Saradha Group also operated by accepting money from new investors and using it to pay off the older investors. The crux of such a scheme is the inflow of money from new investors. Once that stops, the scheme begins to collapse.   

What did the glory period of Saradha Group look like?

Sudipto Sen invested the money raised in building the brand's image. The investments were made in high-visibility sectors like the Bengal Film Industry through celebrity endorsements from prominent faces like Trinamool Congress (TMC) leader and Member of Parliament (MP) Satabdi Roy and TMC-MP Mithun Chakraborty as brand ambassadors. It heavily invested in local television channels, FM radio channels, and newspapers (eight), investing around Rs. 9.88 billion (USD 140 million) under the CEO of the media group, another TMC-MP, Kunal Ghosh. 

The Saradha Group bought several shell companies like Global Automobiles, West Bengal Awadhoot Agro Private Ltd., and Landmark Cement to put up a charade of a diversified business before prospective investors. It was reported that after its acquisition by Saradha, the heavily indebted Global Automobiles shut its production activities but kept 150 workers on the payroll who would pretend to work when 'truckloads' of prospective investors would come to see first-hand before investing.

As a part of its CSR activities, the Saradha group donated motorcycles to Kolkata police and offered ambulances for the Naxalite areas. It invested in various football clubs and also sponsored Durga Puja pandals. 

The beginning of the end

Initially set up as a chit fund, the Saradha group, in 2009, started issuing debentures and redeemable preferential bonds to the public. This was a direct violation of SEBI regulations that required companies to issue a prospectus and a balance sheet for raising capital from more than 50 people. When SEBI intervened, the Saradha group incorporated up to 239 companies to hamper SEBI's ability to consolidate blame. 

The Saradha Group changed its tactics of raising capital in 2010, because of SEBI's persistent interventions. It started operating various collective investment schemes (CIS) that involved tourism packages, real estate, infrastructure finance, and motorcycle production. Investors remained uninformed of the true nature of their investments as they were only promised high returns. 

Saradha again changed its methods in 2011, when SEBI warned the West Bengal state government of its chit fund activities. It acquired and sold shares of many listed companies and embezzled the sale proceeds through a series of accounts that remain unidentified. Saradha laundered huge sums to Dubai, South Africa, and Singapore.

In 2012, SEBI demanded that Saradha immediately stop all its investment operations until it received permission to operate from SEBI. The group did not comply with this demand and continued to operate until its collapse in 2013.

                                                    

The Collapse of Saradha Group 

A Ponzi scheme is said to have run its course when the cash inflows become much less than the cash outflows. Saradha first witnessed this in January 2013. Sudipto Sen tried to calm the depositors and agents but failed to raise any additional funds.

On April 6, 2013, Sudipto Sen wrote an 18-page confessional letter to CBI in which he admitted to paying large sums of money to many politicians. He accused Kunal Ghosh of blackmailing him into investing in loss-making businesses. 

He then absconded after posting the letter on April 10. When the scheme unravelled in his absence, about 600 agents claiming to be Saradha employees assembled at TMC headquarters demanding government intervention. 

An arrest warrant was issued for Sen on April 18. After evading capture for a week, Sudipto Sen and two of his associates Debjani Mukherjee and Arvind Kumar Chauhan were arrested in Kashmir on April 23, 2013.

The Aftermath of Saradha Scam 

The aftermath of the collapse of the Saradha scam saw Mamta Banerjee announce a four-member judicial inquiry commission and a USD 70 million relief fund for low-income depositors. A special investigation team (SIT) was formed to speed up the process. It was investigated for a year. 

The Supreme Court ordered that federal investigation agencies carry the investigation. West Bengal initially opposed this decision but transferred the case to CBI after other states like Assam and Tripura did the same.

The Twist

The CBI investigation soon revealed that many politicians from TMC were involved in the scam. These included MP Kunal Ghosh, MP Srinjoy Bose, and transport Minister Madan Mitra who were salaried employees of Saradha and publicly encouraged people to invest. 

Mamta Banerjee was also brought to the picture when Sudipto Sen claimed to have spent USD 26,000 to buy her paintings. Connections to the centre were also revealed when a charge sheet was filed against Nalini Chidambaram, wife of former finance minister P. Chidambaram, for allegedly accepting a bribe of Rs. 1.4 crore.

Further investigation revealed irregularities in SIT's investigation. CBI claims SIT didn't transfer all evidence, some of which would have proved to be crucial in the investigation. CBI made 18 attempts to question the SIT team to no good. 

After the Supreme Court intervention, the SIT head Rajeev Kumar showed up for questioning; meanwhile, Mamta Banerjee staged a three-day 'save democracy' protest back in Bengal.

The fate of the guilty

Presently, Sudipto Sen has spent about 7 years behind bars, with over 98 cases pending against him. He's attempting to stand trial as soon as possible as he has already served the maximum prison punishment awarded in such cases.

What about all the money?

The CBI has not been able to trace the money invested by the Saradha group and believes it to be lost, albeit the money invested abroad.

Closing Remarks

Was there a political cover-up? Will the money be ever recovered? Is there any way by which such scams can be avoided in future? 

These are the questions that we educated folks can ponder on from the comfort of our homes. The ultimate sufferers in all this are those rural people who had invested in this scheme in good faith.

In the end, it all comes down to how careful the investors are and how wisely they decide to spend their hard-earned money.

About the Author: Shrey Salwan | 34 Post(s)

Shrey is an MBA student at FLAME University, Pune majoring in Finance. He is also pursuing Chartered Accountancy (CA) and Company Secretaryship (CS). He is a detail oriented, analytical and self motivated individual seeking to become a financial analyst. He has a knack for telling stories and does so through his quirky way of writing.

Liked What You Just Read? Share this Post:

Finology Blog / Invest / The Saradha Chit Fund Scam: Explained

Wanna Share your Views on this? Comment here: