Sarada Scam in West Bengal – Behind a Shadow economy

By Amit Chakraborty (New Democracy News)
The Sarada scam in West Bengal has created a sensation. The Sarada group, a consortium of over 200 companies that claimed to run a wide variety of schemes, has bankrupted lakhs of small investors robbing them of their life savings. The multi-level marketing scheme of the group — a Ponzi scheme — has taken its toll.
The scam highlights the failure of the Trinamool Congress led government and its regulatory agencies to rein in the mushrooming of multi level marketing companies in the name of chit fund companies in West Bengal. It also brings under the scanner the Trinamool Congress’ close relationship with the group.
The group collected an estimated amount of INR 200–300 billion (USD 4–6 billion) from over 1.7 million depositors before collapsing in April 2013. The Government of West Bengal, where the Sarada Group and the majority of investors were based, constituted an Enquiry Commission to investigate the scam. They set up a fund of INR 5 billion ($92M) to ensure that low-income investors are not bankrupted. The Central Government through the Income Tax Department and Enforcement Directorate also launched a multi-agency probe to investigate the Sarada scam, as well as other similar Ponzi schemes. In May 2014, the Supreme Court of India, citing inter-state ramifications, possible international money laundering, serious regulatory failures and alleged political nexus, transferred all investigations in the Sarada Scam to Central Bureau of Investigation (CBI).
Like all Ponzi schemes, Sarada Group promised astronomical returns. Its funds were sold on commission by agents who were recruited locally. As much as 25–40% of the deposit was returned to these agents as commissions and lucrative gifts distributed to quickly build up a widespread agent pool. The group used a nexus of companies to launder money & evade regulators.
Initially, Sarada collected money from the public by issuing secured debentures, 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. Their accounts must be audited and it must also have explicit permission from SEBI to operate.
In 2009 SEBI first sought clarification from Sarada Group. Sarada Group adapted by opening as many as 200 new companies to create more cross-holdings. This created an extremely complex tiered corporate structure in order to prevent SEBI, by disturbing their ability to consolidate blame. Sarada Group changed its methods of raising capital. In West Bengal, Jharkhand, Assam and Chhattisgarh, it began operating variations of collective investment schemes (CIS) involving tourism, forward travel and hotel booking, real estate, infrastructure finance, timeshare credit transfer, and motorcycle manufacturing. Investors were not informed about the true nature of their investments. With other investors, the investment was fraudulently sold in the form of a chit fund.
In some schemes, the group promised that on a deposit of Rs 1 lakh an investor will get Rs 10 lakhs after 14 years. If the same amount of money was kept in a fixed deposit in a bank for the same period, the amount accrued would be Rs 4 lakh. This means that the rate of return promised by the group was more than double of that promised by commercial banks. According to some media estimates, the number of agents employed by Saradha group may be around 2,7 lakhs, while the total amount of money mobilized by the group can run into thousands of crores. The huge collection of money from the agents was deposited with the main company which floated 160 companies (according to the letter submitted by Sudipto Sen to the CBI), including a large number of newspapers and TV channels.
The money mobilization technique of the group was very complex for a number of reasons. Firstly, in none of the documents did the group mention anything about mobilizing money from the public, and hence kept itself out of the purview of either the Reserve Bank of India (RBI) or SEBI. The SEBI report mentions that the group never sought any permission from it to run such a scheme. The promise of providing a plot of land, or a flat after the maturity of the scheme was also a hoax. The SEBI found that the land/flat allotted to the investors was not pre-determined, and the investors had no control over the scheme, or the property. Even after repeated prodding by the SEBI, the group failed to furnish the required information, and tried to mislead SEBI by providing voluminous and irrelevant data. Finally when they furnished the information, it was found that it contained details of only 5 projects while the group claimed to have acquired land in 31 sites. The details of allocation were not provided, SEBI was bound to conclude that “It is highly unlikely that the projects are actually in progress”. The investigation disclosed that a motorcycle factory run by the group did not carry out any manufacturing. The workers were told to act as if they were producing the bikes when the Sarada management brought in investors to showcase the factory as an important asset of Sarada. The group worked by blatantly violating all regulations and laws shows complete failure of the regulatory authority of both the central & state government.
In April 2010, the Left Front government sent a letter to the SEBI to investigate the group’s activities. The Left Front government had passed a bill first in 2003, and then in 2009, to protect the interest of depositors and rein in such fraudulent companies. The bill has sections under which the property of such companies could be confiscated and auctioned to repay investors and charge the companies with criminal culpability. But even after four years, the bill still awaits Presidential assent. It is also interesting to note that many prominent district leaders of CPI(M) had close relationship with Sarada group. Before 2010 Sudipta Sen, the Sarada top brass had very cordial relationship with CPM leaders & had easy access to Alimuddin street office of state committee of CPI(M) .
Sarada Group invested heavily in sectors, such as the Bengali film industry, there they recruited famous actor and Trinamool Congress (TMC) MP from Birbhum, Ms. Satabdi Roy, as their brand ambassador. Famous Bollywood actor & Rajya Sabha MP from Trinamool Congress became brand ambassador of Sarada Group’s media platform. Noted film actor Aparna Sen was made the editor of Parama, a magazine for women.
Mr. Kunal Ghosh, another Trinamool Congress Member of parliament, presently languishing in jail, worked as the CEO of the media group. There was a time when not a single appointment in Sarada led media or newspaper was possible without Kunal Ghosh’s permission. That time Kunal Ghosh was closest associate of Ms. Mamata Banerjee. Under Kunal Ghosh, the group went on a spree of acquiring and establishing local television channels and newspapers, investing around INR 9.88 billion in the media group. By 2013 it employed over 1500 journalists and owned eight newspapers published in five regional languages. It also owned two Bengali news channels (Tara Newz and Channel 10), two Bengali general entertainment channels (Tara Muzic and Tara Bangla), one Punjabi general entertainment channel (Tara Punjabi), one international channel aimed at Indian diaspora (TV South East Asia) and one FM radio station.
In 2011, Sarada Group bought heavily indebted companies like Global Automobiles, West Bengal Awadhoot Agro Private Ltd, located in North 24-Parganas, and Landmark Cement in Bankura to bluff agents and depositors and convince them that the Sarada Group had diversified their business.
As part of their corporate social responsibility program, Sarada Group donated motorcycles to the Kolkata Police. They also donated ambulances and motorcycles for the Jangalmahal area of West Midnapore. Sarada Group invested in the best known football clubs in Bengal: Mohun Bagan A.C. (INR 18 million in 2010–11) and East Bengal F.C. (INR 35 million since 2010). Mr.Debabrata Sarker, Secretary of East Bengal Club has been arrested in connection with Sarada scam and is alleged to have played the role of middleman between Sarada & SEBI officials. The group also generously sponsored various Durga Puja celebrations organized by local political leaders.
The CBI investigations & Kunal Ghosh’s recent press briefing hints at the personal involvement of All India TMC general secretary Mukul Roy, West Bengal Transport minister Madan Mitra, Haldia MP Subhendu Adhikary & CPI(M) leader Rabin Deb. The contract between IRCTC & Sarada group during Ms. Mamata Banerjee’s tenure as Railway Minister has also tarnished the ‘Clean’ image of West Bengal Chief Minister. Several political leaders received financial support from Sarada Group, including members of the Parliament of Trinamool Congress, the incumbent ruling party of West Bengal.
Parliament member Kunal Ghosh drew a salary of INR 1.6 million per month from Sarada Group. Member of Parliament Srinjoy Bose was directly involved with the media operations of Sarada Group. Transport Minister Madan Mitra headed the employees’ union of Sarada Group Sudipto Sen. reportedly spent INR 18.6 million to buy paintings by Mamata Banerjee. Mamata government later issued a notification that public libraries should buy and display newspapers of Sarada group. The loss making Landmark Cement company co-owned by textiles minister Shyamapada Mukherjee, was bought by Sarada Group. The group also had financial dealings with Ganesh Dey, the confidential assistant of the Finance Minister of the erstwhile Left Front government who was later expelled from party.
Politicians from other states also benefited from Sarada Group. The Health and Education Minister of Assam, Himanta Biswa Sarma, may have profited personally from the Ponzi scheme. Sen claimed that he paid INR 250 million to Manoranjana Singh, wife of former Congress member of Parliament from Assam and Union Cabinet minister Matang Singh, INR 30 million to her father K.N Gupta to buy shares in a TV channel, allegedly at an inflated price. According to officials investigating the case, the actual amount paid could be almost double of what is being claimed. Leaders of BJD in Odisha, many high ranking police officials of WB, Odisha & Assam has been investigated & arrested.
The abnormally high rate of return promised by Sarada was either not feasible or involved too much risk. The rate of return of more than 20%was highly impossible. If we look at the second half of last decade we find that the financial assets of household sectors in India increased to15.6% of GDP while physical assets declined from12.9% to 11.8% of GDP. But during this period, in spite of greater degree of financialization of savings, the share of small savings schemes declined to 2.6% from 19.5% than the first half of last decade. West Bengal was worst hit by fall in small savings deposits. The data collected from small savings deposits shows that net collection from small savings declined by Rs. 9000 crores between 2011and 2013.
The higher rate of return promised by Sarada must have sucked this money from small investors during that period.RBI working group has mentioned several reasons why the people do not want to keep their money in banks; the newly added factor is the impact of liberalization. In West Bengal decline of organized financial sector has helped small savings investors of rural areas to fall prey to institutions like Sarada, Rose Valley, MPS, Alkemist etc.
The question to be answered is why people trusted Sarada & why people enrolled as their agents. In spite of false promise of higher return by Sarada, customers had faith on Sarada because this group and all other similar groups built their trust by keeping proximity to ruling parties of different states. In government sector government plays the role of gurrantor & that brings the trust of common people. But this type of companies, where there is information asymmetry and fraudulent promises, are bound to run a nexus between corrupt officials of SEBI, RBI, state administrators, police officials & political leaders in power. Initially Sarada had close proximity with CPI(M) leaders & then with change of government in West Bengal they developed close ties with Trinammol Congress party & its associates.
The reason for enrolment of people as Sarada agents can be explained by the following: liberalization has led to informalization of labour force all over India. The labour in informal sector of west Bengal is 86% in rural &71% in urban sector which is higher than all india average. In West Bengal the manufacturing sector & agricultural sector are declining, NREGA also failed to raise the real wage of rural population. This phenomenon led the people to join these institutions in search of better livelihood. Trinamool Congress and its government appeared as guarantor to people. The common people believed them and were finally cheated. In the absence of intervention by regulatory authorities and at the same time due to active patronage by Trinamool Congress and other ruling party leaders of different states, this Multi level marketing organization in the name of ‘development’ robbed off the small savings of common people.
This saga of “shadow economy’ is part and parcel of the economy of liberalization and can never exist without the patronization of ruling political parties, bureaucrats and state machinery.