Economic Highlights

New Delhi, 26 April 2013

Chit Funds Expose

FINANCIAL SYSTEM AT RISK

By Shivaji Sarkar

Chit funds thrive in West Bengal and North-East due to the deprived poor. In fact, the Saradha group is not the lone chit fund or Ponzi scheme operating in the country. There are many others, 73, according to Minister of State for Corporate Affairs Sachin Pilot with unclean if not doubtful records.

Significantly, Saradha’s failure has exposed the vulnerability of the financial system. Even public sector banks are on a tinder box ready to explode any time with their non-performing assets rising dangerously. The New Pension Scheme is a potential risk for Government employees and other depositors. If the US government-owned AIG could fail, any system in India can too!

Each year, people are losing thousands of crores to mutual funds like Aegon Religare. In Bengal and North-East alone, 26 such groups have raised over Rs 17,000 crore, many having assets over Rs 500 crore each. Saradha is stated to have been the most aggressive and had collected over Rs 22,000 crore.

Remember, Sahara group also started initially as a chit fund. Today, they are locked in legal battle with SEBI and the Supreme Court has ordered them to pay back Rs 24,000 crore to their depositors.

The list is endless. Peerless, Sanchayika etc have duped not only the poor and middle class but also many politicians. A former Chief Minister reportedly lost all his money, few thousand crores, to one chit fund which grew as a large corporate house.

Pertinently, Ponzi schemes mushroomed in 1970s-1990s in India. It is named after Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, commonly known as Charles Ponzi, an Italian businessman and con artist in the U.S. and Canada, who swindled billions till his death in 1949.

Since Saradha and most funds operate in urban areas inhabited by the poor and villages, their initial operations often evade public gaze. Indeed, in 2009 the RBI warned the nationalized banks to watch out for these firms which pose as multi-level marketing (MLM) agencies for consumer goods and services and manage to mobilize large deposits from the unsuspecting public with promises of ridiculously high returns.

See. Saradha promised Rs 14,000 redemption value in five years on an investment of Rs 1,000. With bank interests sinking, this emerged as extremely lucrative for innumerable poor and middle class people. Also, what lent credence to their operations were the post-dated cheques of reputed banks issued to the depositors as per a RBI circular. Recollect, in 2009 RBI named six companies but none operating in the East and North-East including Saradha.

Notably, most of these groups have direct or indirect real estate and media business. Many work through “property dealers” in Delhi, Noida, Gurgaon and Faridabad and are running TV channels. According to Saradha Chairman Sudipto Sen, these help them get in touch with politicians who use these shady companies to get easy money and run newspapers and TV channels as mouthpieces of their Parties.

Consequently, it is no surprise that Sen named a woman TV channel owner in Guwahati, a former Minister from Assam in the late PM Narasimha Rao Government and a Central Cabinet Minister’s wife along-with some MPs and politicians.

Undeniably, all these Ponzi schemes, including Guru Charles Ponzi functioned in close collaboration with political leaders of all shades and hues. Certainly, the demise of Saradha is not the end of the story. Many such frauds have happened and the RBI circulars stand testimony of our weak regulatory system, surveillance and capacity of official agencies to stop such operations.

Shockingly, SEBI and the Registrar of Companies have little power. Think. SEBI issued notice to Saradha in December 2011 but the group ignored it. Sudipto Sen in his letter to CBI has said, “A SEBI official was on his pay-roll”.

The modus operandi is simple. These groups mobilize high deposits and for the first few years redeem the mobilizations. This earns them credibility. But as the deposits are for many years, the company’s cheques start bouncing, as it did with Saradha.

Another catch is that at least a sizable number of depositors never turn up to redeem their monies. This only adds to the company’s coffers. This “frozen” fund also becomes easy to swindle and the collaborators stash these large sums which helps them in getting protection.

In West Bengal, those who got compensation for their land at Singur parked their money with Saradha. Whose method was simple: It appointed agents from among the poor men who collected funds from remote areas. Today, these poor people are the target of mob fury all over West Bengal and North-East. Some of them have committed suicide.

Not only this. The Saradha group like many other chit funds across the country made claims to multiply deposits by investing in real estate and other sectors. It also offered to double the money by investing it in fictitious trades. Alongside, the firm sold one plot to a number of buyers.

Importantly, Saradha’s recent growth started with Mamata’s Trinamool Congress Singur movement against land acquisition. Wherein many of its employees and agents are from the Party. Also, its media group is headed by people with known political affiliations. The way Sen purchased paintings made by Chief Minister Mamata for Rs 2 crore is no secret as he admitted this in a TV interview.

Like Saradha, ditto is the case in UP and Bihar where large groups started as chit fund companies during the 1980s and 1990s and became successful foraying into other businesses.

Furthermore, the New Pension Scheme (NPS) launched by the Government has all the traits of becoming a Ponzi scam. Its provisions for investment in equities and other shady schemes could turn in to a risky proposition. The Government employees’ deposits are at risk. The NPS does not assure a guaranteed return like the Employees Provident Fund Scheme.

In reality, bank funds are being swindled under political pressure putting them in the most unenviable position. They have not been transferred funds waived by them for farm loans totaling Rs 53,000 crore. Scandalously thus, their total non-performing assets exceed Rs 450,000 crore --- all public money.

During the late 1990s and early 2000, people lost Rs 64,000 crore in UTI scam, over Rs 1.5 lakh crore in the Harshad Mehta scandal, Ketan Parekh, cooperative bank and other scams involving securities and the finance system.

Clearly, deposits of the aam aadmi are at risk at all levels. This might increase as the Government allows foreign operations in pension funds and insurance. With chit funds and other financial instruments running into jeopardy the country’s investment climate is vitiating.

In sum, this is a danger signal. Not only are small investors at risk but it has created an atmosphere of circumspection of large depositors. The solution is not easy, but neither is it difficult. Time the political and financial system look for a proper solution. Alas, that is missing! ----- INFA

(Copyright, India News and Feature Alliance)