HEADLINE OF THE ARTICLE: -SHARDA CHIT FUND SCAM
Author: – Divya khatri, B.A.LL.B., CDLU.
TO THE POINT: –
How can an investment scheme that looks legitimate turns out to be the biggest scam in Eastern India that shakes public confidence, legal framework and political commitment to transparency and oversight? Many such thought-provoking questions will come to your mind when we analyze this topic in exhaustive detail and understand it deeply in the above-mentioned article. Sharda chit fund scam was not only a financial fraud, but it also undermined public trust. It was started as an investment scheme but turned out to be a Ponzi operation which looted money almost from seventeen lakhs hapless investors who were mostly middle class or belonged to lower socioeconomic background. The Sharda group embezzled Rs 2500 crore which they collected from small investors. It violated many laws like SEBI ACT, IPC, MONEY CIRCULATION SCHEMES ACT etc. This scam came to light in 2013 which led to public outrage and high-profile people were arrested, CBI investigated, and Supreme Court also intervened several times.
ABSTRACT
Sharda Chit Fund scam is a massive financial scam which has happened recently. It emerged in West Bengal and spread to Odisha, Assam and several other states. In this scam, Rs. 2500 crore was involved, which was raised by almost 17 lakh investors who mostly belonged to the poor background. The Sharda group promised people that they would return high returns to them. But this was an illegal investment scheme, and this scheme was run without proper registration which violated multiple financial laws. This article will critically examine this article from a legal perspective. Through this article we will explore how this scam was structured, which method was used to gain the trust of the people, how the regulatory body failed to act on time, the role of media ownership, political support which is the main reason behind this scam. This article further highlights case laws, legal reforms, public awareness campaigns, suggestions, and the need for strong implementation of laws.
USE OF LEGAL JARGON
Ponzi Scheme: Ponzi scheme indicates an investment model that is unethical and pays out new funds to old investors rather than the profits earned.
collective investment scheme: – This is a type of investment plan where funds are taken from multiple investors and managed, such scheme is mandatory to be registered under SEBI.
public interest litigation: – Legal action is taken to protect public interest, even though the person who has filed the plea is not directly affected.
Due diligence: – Due diligence is a significant legal term that means coming to a financial decision after proper investigation.
Unexplained wealth: – It means illegal money or money which cannot explain its source of generation.
Tax evasion
Tax evasion means avoiding tax in manipulative ways or by giving false details.
Legal frameworks such as SEBI ACT, 1992, PRIZE CHITS AND MONEY CIRCULATION SCHEMES ACT, 1978, INDIAN PENAL CODE, 1860, PREVENTION OF MONEY LAUNDERING ACT[PMLA], 2002, COMPANIES ACT, 1956 [REPLACED BY THE COMPANIES ACT, 2013], INCOME TAX ACT, 1961 is also used.
THE PROOF
To establish the authenticity of any financial scam, the evidence is investigated through documents, transactions, or official reports. In the Sharda chit fund scam case, a lot of evidence came to light which formed the basis of legal proceeding and the evidence given below serves as the legal and factual founding of the scam: –
Financial evidence
Sharda Group had promised to give 25–50% returns and collected Rs. 2,500 crores, which was collected from almost 17 lakh investors. It operated 239 companies and committed fraud. The company had promised to give high returns, but the actual income of the company was very diminutive. Here it came to light that the company was taking money from new investors and paying the old investors, which is an indication of the Ponzi scheme.
Investigation of SEBI (2010–2013)
In 2010, SEBI observed that the company was running a collective investment scheme without any registration, which was illegal. SEBI sent them a notice, but the company ignored it and continued taking money, which was the primary proof of the violations.
Media Manipulation
Sharda Group owned many TV channels and newspapers and got a lot of fake advertisements published so that they could appear trustworthy. These media companies ignored the fundamental ethical principles of truthfulness and financial reporting.
Complaints from victims
Many people complained in different police stations and were shown how they were cheated by the company in a manipulative manner. And these written reports were used by the police and lawyers so that the company could be proved for fraud and cheating under section 420 and 406.
Money and Properties seized
The enforcement directorate and other agencies shut off many bank accounts and seized many properties such as hotels, land, cars etc. These things were more than the money that the company earned legally, and it clearly shows how the money was earned illegally.
Role of supreme court
Many people filed PIL in the courts. The Supreme Court of India handed over this case to CBI. It said that many states and political parties are involved in this case and hence this case should be investigated with due diligence.
CASE LAWS
Legal case laws help us better comprehend how courts must cope with cases like Sharda scams. Their judgments not only guide investigations but also explain the duties of regulatory bodies like SEBI. Some extremely relevant case laws related to Sharda chit funds are given below.
Subrata Roy Sahara Vs SEBI (2012) 10 SCC 603.
The Supreme Court has delivered the judgement that any company involved in a scheme in which public money is collected is required to get registration from SEBI. It was held in this case that SEBI has full power to take any action against such companies.
Sudipta Sen Vs State of West Bengal (CBI Investigation, 2014)
The Supreme Court transferred this case to the Central Bureau of Investigation because there were multiple political connections in this scam and hence only the central agency would be able to handle it proficiently.
Ankur Mutual Benefit Co. Ltd. Vs Union of India (2004)
The company was taking money in the name of schemes without SEBI approval and was also promising high returns. In this, the court gave a judgement that such schemes will come under the prize chits and money circulation schemes [Banning] Act and are illegal.
INVOLVED LEGAL FRAMEWORK
SEBI ACT, 1992
Section 11AA deals with the Collective Investment Scheme. Sharda group is running CIS without getting registered under SEBI Act. According to this law, if any company takes money from the public, then it should follow SEBI rules and should have its approval too. This group ignored SEBI’s directions and ran the company in an illegal way.
PRIZE CHITS AND MONEY CIRCULATION SCHEMES ACT, 1978
The Sharda group had promised that they will return high returns to the people without doing any real business which makes it a money circulation scheme which prizes chits and money circulation act bans.
INDIAN PENAL CODE, 1860
sections 120B, 409, 406, and 420 of Indian Penal Code were used against those people who were involved in the scam.
PREVENTION OF MONEY LAUNDERING ACT[PMLA], 2002
Whatever money was collected from small investors was used for Purchasing things like expensive cars and assets, and this was an attempt to hide the real source of income. For this reason, last year, ED seized a lot of properties, and an investigation was conducted to find out where all the money went.
COMPANIES ACT, 1956 [REPLACED BY THE COMPANIES ACT, 2013]
The Sharda group ran more than 200 companies which were fake. They did not follow the proper rules for financial reporting and hid the ownership details.
INCOME TAX ACT, 1961
The group did not provide true income reports and did not pay proper taxes, due to which huge amounts of unexplained wealth were found for which there was no tax record. Which allowed the income tax department to investigate the case of tax evasion.
CONCLUSION
Sharda Chit fund scam is a devastating financial mishap in modern India. This case not only showed the failure of the country’s regulatory system but also showed how public trust can be misused. Lakhs of poor people were looted in the name of high returns. What makes this case even worse are political connections, fake companies and fake advertisements through media platforms. However, India has very powerful acts like SEBI ACT, PMLA, IPC which work to prevent such illegal activities and fraud. Lack of timely response by authorities and weak implementation programs is a big setback which turns into multi-state fraud. This scam demonstrated that financial crimes should be treated seriously and should be tackled at an early stage, rather than after the damage has been done. India should upgrade its financial schemes and to monitor them, strong investment schemes should be closely watched, and it should be ensured that—No one is above the law.
FAQ
What is Sharda Chit Fund scam?
This was a financial fraud in which Sharda Group committed a fraud of Twenty-Five Hundred Crores by making false promises of high returns to the people.
Was it a legal chit fund?
Sharda chit fund scam was not legal and it was operated without any taking any approval from the SEBI.
Why did so many people invest in this scheme?
Fake media advertisements and political connections were the main reason for so many inclusions of people investment in this scheme.
Which laws did Sharda Group violate?
It violated various laws such as SEBI ACT, PMLA, MONEY CIRCULATION SCHEMES[BANNING]ACT, IPC AND COMPANIES ACT.
What action did the court take under this scam?
The case was transferred by the supreme court of India to the CBI and allowed the enforcement directorate to act under the PMLA.
Who was the person behind this scam?
The chairman of the Sharda group Sudipta Sen, was considered as the main person behind this scam and later he also admitted it and revealed the name of those persons who were also involved in this scam.
REFERENCES
SUPREME COURT JUDGEMENT ON SHARDA CHIT FUND SCAM
SEBI OFFICIAL ORDERS AND REPORTS ON SHARDA GROUP
ENFORCEMENT DIRECTORATE PRESS RELEASE AND PMLA ACTION
CBI PRESS BRIEFINGS AND CHARGE SHEETS FILED
NEWS REPORTS FROM THE HINDU, INDIAN EXPRESS, AND LIVELAW
