Author :- Amulya kagadal, Siddappa Kambali Law College, Dharwad
To the Point
The Sarada Chit Fund Scam was not just a story of money trickery—it was a sophisticated and sinister game of exploitation of loopholes in the law, regulatory gaps, and faith in government institutions. Camouflaged as a bonafide chit fund business, the Sarada Group had cheated more than 17 lakh investors in West Bengal, Odisha, Assam, and Tripura. The fraud was uncovered in 2013, revealing a scam of about ₹2,500 to ₹3,000 crore. The firm had been running a multi-level Ponzi scheme with the veil of dozens of business sectors—ranging from media to property—all intended to hide illegal collection of deposits from small investors.
The false activities were made possible by the absence of strict regulatory controls, ineffective investor protection measures, and an alarming interface between financial fraudsters and political personalities. The case turned out to be one of the biggest financial scams in Eastern India, leading to legal and policy discussions across the country.
Use of Legal Jargon
It is essential to have knowledge of the legal jargon in the nuances of the Sarada scam in order to understand it:
Ponzi Scheme: A deceitful investment tactic in which earlier investors are rewarded with payments from new investors’ contributions, as opposed to earned business profits.
Chit Fund (according to Chit Funds Act, 1982): A savings scheme where members put money into a pool which is paid out on a regular basis with a bidding or lottery system. It is a legally established scheme but under strict adherence.
Collective Investment Scheme (CIS): In accordance with SEBI guidelines, CIS means schemes or arrangements launched by companies for collecting money from investors and investing the money in any enterprise which shares in the earnings or gives them back.
Misappropriation of Funds: The unauthorized utilization or theft of funds placed in one’s trust, usually by a person in a fiduciary or a financial managerial capacity.
Benami Transaction: Transactions in which the property is in the name of one individual, but the consideration has been given by another, typically to hide illegal money.
Non-Banking Financial Company (NBFC): Banking facilities provided by financial institutions which fail to qualify as a bank according to the law.
White-Collar Crime: A crime that is non-violent in nature and typically perpetrated by professionals or government officials by using fraud, violation of trust, or concealment for gain.
SEBI (Securities and Exchange Board of India): It is the major body that regulates the securities market in India.
CBI (Central Bureau of Investigation) and ED (Enforcement Directorate): India’s top central agencies in charge of criminal investigations and enforcement of financial laws, respectively.
The Proof
The Sarada Group evidence unraveled in stages. Early complaints came from investors in early 2013, due to delays in returns. Later, the extent of the fraud became public and legal awareness, resulting in raids, arrests, and asset seizures. The following are the stages of evidence uncovered by various authorities-
False Investment Schemes:
The Sarada Group lured investors with unrealistic returns—sometimes as high as 30–40%—on deposits in a short time span. The schemes were run without registering with SEBI as a Collective Investment Scheme (CIS), making them illegal under SEBI’s CIS Regulations,1999.
Companies like Sarada Tours and Travels, Sharada Agro Development, and Sarada Real Estates were created to add a façade of legitimacy.
Use of Shell Companies and Benami Entities:
More than 200 shell companies were allegedly floated by the group to divert and siphon investor funds.
These firms had ghost directors, and in some instances, employees were compelled to pose as owners on paper to evade attention.
Traces of Political Patronage:
Investigations uncovered connections between high-level political leaders of West Bengal and the Sarada Group. The firm funded events of major political parties, ranging from sponsoring rallies to media propaganda. A few political personalities were also arrested by the CBI, and some others were caught under the Prevention of Money Laundering Act (PMLA), 2002.
Real Estate and Media Investment Using the Funds:
Sarada Group had various Bengali TV channels, newspapers, and even production houses for films—apparently following the end goal of shaping public opinion and silencing criticism.The money was also invested in real estate properties in the heart of the city, which were later taken into ED custody.
Whistleblower and Internal Testimony:
A letter signed by Sudipto Sen to the CBI unveiled the extent of political entanglement and internal incompetence.
Ex-employees testified against the internal coercion to gather deposits and tampering with books of accounts.
Abstract
The Sarada Chit Fund Scam is a pioneering case in Indian corporate fraud law, pointing to the catastrophic results of unregulated financial instruments. In spite of the existence of regulatory mechanisms such as the Chit Funds Act, 1982, and SEBI regulations on CIS, regulation was severely inadequate. The fraud took advantage of socio-economically disadvantaged investors, a large number of whom were not financially literate or had access to formal banking facilities.
The political links of the scam made it difficult to investigate and caused restitution to delayed victims. The Supreme Court finally directed the CBI to conduct the investigation, indicating judicial disapproval of state-level treatment. The case has since guided several policy reforms and is still a point of reference in India’s constant battle to secure both financial inclusion and protection for investors.
Case Laws
Sahara India Real Estate Corp. Ltd. v. SEBI, (2012) 10 SCC 603:
This ruling held that any activity of public fund-raising, whatever the nomenclature, shall be compliant with SEBI regulations. It made it clear that even if corporations steer clear of conventional descriptions such as “mutual funds” or “CIS,” SEBI jurisdiction can extend as well. This falls squarely on Sarada, where plans were deceptively packaged in business deposits.
PGF Limited v. Union of India, (2013) 15 SCC:
In this pioneer case, the Supreme Court declared that firms cannot escape SEBI regulation by pretending to carry out legitimate business activities when they are basically CIS. This was pivotal in rendering Sarada’s activities illegal.
Sudipto Sen v. Union of India (2014) – SC Transfer to CBI:
Citing the state police’s compromised neutrality arising from political meddling, the Supreme Court mandated that the Central Bureau of Investigation take over the case. This reiterated the judiciary’s responsibility for ensuring fair and unbiased investigation in white-collar crimes.
Rose Valley Scam Parallel (2016):
The Sarada model was followed in Rose Valley, and the legal approach SEBI and ED adopted was an imitation of the Sarada case. Judicial observations in this matter kept on referring to Sarada as a precedent for a failure in regulation.
Conclusion
The Sarada Chit Fund Scam is a case of caution in the history of financial regulation in India. Its magnitude, complexity, and political linkages make it a cause bigger than a white-collar offense—a systemic failure. Small investors, predominantly from rural or semi-urban regions, were left shattered. The use of legal gray areas by the company, including loosely regulated chit fund schemes and shell company infestation, revealed the vulnerability of India’s regulatory machinery to protect small investors.
Despite legal actions, arrests, and asset seizures, investor compensation has been minimal, highlighting the limitations of post-fraud remedies. The case also underscores the importance of inter-agency coordination between SEBI, RBI, ED, and local enforcement for proactive fraud detection.
FAQs
Q1: Was Sarada a registered chit fund company?
No. Though it presented itself as a chit fund, the Sarada Group operated illegally and was not registered with SEBI as a Collective Investment Scheme.
Q2: What was the nature of the scam?
The scam was to accept deposits from the investors on the pretext of offering high returns and channeling the money into media, property, and shell firms.
Q3: What did SEBI and CBI do?
After SEBI initiated adjudicatory proceedings through the issuance of show-cause notices, the Supreme Court, taking cognizance of the matter, directed the Central Bureau of Investigation to undertake a detailed inquiry. Acting under the provisions of the PMLA, the Enforcement Directorate began asset attachment, following a series of charge sheets filed by the CBI.
Q4: How are the investors being repaid?
A state-controlled commission led by retired judges was set up in West Bengal to identify and compensate victims, but disbursement has been slow and incomplete.
Q5: What reforms followed this case?
The Banning of Unregulated Deposit Schemes Act, 2019, was passed to prevent such scams. SEBI’s surveillance powers were also enhanced post-2013.
