It’s all about Saradha chit fund scam! Beware of Ponzi Schemes.

As long as people are there to be fooled, so long there will be people to fool them. Day-in and day-out one would hear about people losing money from Ponzi (fraudulent) schemes. But still people get attracted to such schemes and land in financial loss. What a pity. Sorry guys (for those who have lost their money). For others – please be careful while investing your hard earned money. For the benefit of our readers, here is a glimpse of the Saradha scam (one of such Ponzi money making models)

About the company – Saradha Group, a group of over 200 private owned companies based out of Kolkata was allegedly operating investment schemes, similar to chit fund schemes.

The money collected by the group – It is reported that the group has collected over Rs.30000 Crores from 17 lakh people!

How the scheme worked?

Type A – issued secured debentures (say loan document) and redeemable preference bonds to the public in 2006. A private company of this kind is supposed to seek permission from the regulator SEBI (Securities Exchange Board of India). But the company collected the funds without the approval of SEBI. Somehow SEBI came to know about it and confronted Saradha in 2009.

Type B – When SEBI questioned, Saradha changed their model. They called the new scheme as ‘Collective Investment Scheme (CIS) involving retail products such as tourism packages, hotel booking, real estate, etc. Again here, they promised astronomical returns on the investments, but without revealing their nature of investment.

Type C – They also took shelter under the ‘Chit fund’ scheme. Chit fund schemes are not monitored by SEBI but by the state government.

What they did with the money? (Note : These are allegations, of course)

Paid huge amount of money (say, between 25% and 40%) as commission to agents.

Spent huge amount of money on advertisements and brand building exercise.

The rest of the money was issued to buy and sell shares of listed companies.

They also used the money for laundering to Dubai, Africa and other countries.

Involvement of high profile people – In the process of brand building exercise, the company got many high profile politicians on board. With the help of these people, the company ventured into non-core areas such as setting up media house, TV channels, etc. Basically the company did everything to catch the eyes of people.

Action by SEBI

By 2012, SEBI was convinced that the schemes are not in the nature of Chit fund but in the nature of Collective Investment Schemes (CIS). So, the regulator asked the company to stop all operations and return the money to the investors. But the company didn’t bother to adhere to the order of SEBI and continued its operation till April 2013.

Confession by Managing Director before CBI

The investments in media started making losses. The deposit collection started to reduce and the payouts started to increase. Obviously, the company was finding it difficult to meet the commitments (including repayment to deposit holders). At that time (April 2013) the Chairman and Managing Director (MD) Mr. Sudipto Sen confessed before CBI about the deals and also the involvement of politicians in the scam. (Note: He is the one who purchased Ms. Mamata’s Painting for Rs.1.80 Crore)

What next? Should l write about it? An Investigation by CBI and then a long drawn legal battle (like any other case).

But before closing this article, let’s understand why our people invest in fraudulent schemes? Despite the history of fraud schemes run by goons, masked corporates why our people fall for it? Maybe the lack of financial awareness, low interest offered by financial institutions such as Post Office, blind trust on the people on such schemes, etc.

Maybe, Jan Dhan Yojana and Payment banks will help to bring poor people to banking system.

What you and I can do?

We can educate our drivers, housemaids, helpers and financially illiterate people about Ponzi schemes. Today, the normal return on safe investment will fetch anywhere between 8-10% interest per year, the normal return on high risk investment such as stock/mutual funds will fetch anywhere between 12- 18%. So, any schemes which offer return over this rate, maybe a fraudulent scheme.

Secondly, suggest people to invest in Banks (preferably nationalized and top rated private banks) and avoid investing in Chit or locally managed financial groups.