Author: Mayukha Kommoju, Student at Damodaram Sanjeevayya National Law University.
ABSTRACT
Who doesn’t want more money? If someone promises to double your investment quickly, it’s tempting to fall for such schemes. This greed leads to some of the biggest financial scams, especially in India. The Indian stock market often sees major scams, but other types of fraud also shock those who invest their hard-earned money without thinking about potential losses. One such scam is the Saradha Group scam.
The Saradha scam emerged from limited access to formal banking systems. Moneylenders created informal banking networks due to their need for money and lack of banking knowledge. Without control over these moneylenders, clever fraudsters introduced Ponzi schemes, which promise high returns with no risk. These schemes pay returns to older investors with new investors’ money.
INTRODUCTION
The Saradha Group, established in 2006, offered outrageous profits and seemed like a reliable investment, attracting many people. Agents received up to 30% incentives on deposits and gifts, building a large network. The scam relied on gaming to swindle money. To avoid detection, Saradha diversified into various businesses. They raised funds by issuing secured bonds and preferential debentures, making their fraudulent activities appear legitimate. The collapse of this Ponzi scheme caused a significant financial and political crisis, showing the dangers of such fraudulent schemes.
BACKGROUND
In the early 2000s, businessman Sudipto Sen launched a scheme in West Bengal, a region known for Naxalite activities and dubbed India’s “Ponzi Capital.” Operated by the Saradha Group, a conglomerate of 200 private entities, the scheme targeted modest investors with promises of significant profits. Agents who collected money from investors earned over 25% in commissions. Within a few years, the Saradha Group raised approximately Rs 2500 crore.
The company built its brand using various marketing techniques, including celebrity endorsements and sponsorship of traditional events like Durga Puja and football clubs, to attract public attention. The scheme quickly expanded to Odisha, Assam, and Tripura, amassing around 1.7 million investors.
Initially, funds were raised through redeemable bonds and secured debentures. However, the Indian Securities Regulations and the Indian Companies Act require companies to issue proper documents and obtain SEBI’s permission when raising capital from more than 50 people. In 2009, SEBI questioned the company’s operations, prompting Sudipto Sen to open around 239 companies to evade SEBI’s scrutiny and continue the chit-fund scheme.
The Saradha Group employed various methods to raise funds, including tourism packages, travel, hotel bookings, timeshare credit transfers, real estate, infrastructure finance, and motorcycle manufacturing. Many investments were sold as chit funds, regulated by the state government rather than SEBI, but SEBI closely monitored these activities.
By January 2013, the Saradha Group faced a crisis as its cash outflows exceeded inflows for the first time. By April, the scam collapsed, prompting agents and investors to report it to the authorities. The West Bengal government initially set up a Special Investigation Team (SIT) led by Rajeev Kumar, the former Kolkata Police Commissioner, to investigate. In 2014, the Supreme Court transferred the case to the Central Bureau of Investigation (CBI). The CBI accused Kumar of withholding important documents and considered him a potential defendant. In February 2019, the Kolkata police blocked the CBI from questioning Kumar, leading to a three-day sit-in protest by Bengal Chief Minister Mamata Banerjee against the CBI’s actions.
The scam unfolded in two phases:
PHASE 1
- They leveraged the revered image of Sarada Maa, the wife of the renowned religious leader Ramakrishna, to gain trust in rural West Bengal.
- Agents received substantial incentives, sometimes up to 40% of the total amount collected from locals.
- This strategy quickly built a large network of investors, agents, and word-of-mouth referrals.
PHASE 2
- This phase involved sophisticated marketing and the use of politicians and celebrities. The Saradha Group became a major sponsor, with its ads running continuously on Bengali channels. They created over 250 companies, aiding in money laundering. The Securities Exchange Board of India (SEBI) began sending notices as it became aware of their activities.
- Saradha Group launched an aggressive campaign to attract more investors, investing in real estate, tourist resorts, food processing, and other ventures to enhance their reputation. They formed strong relationships with celebrities like Mithun Chakraborty and Shatabdi Majumder, who became brand ambassadors.
- According to the Companies Act of 1956, raising capital from more than 50 investors requires SEBI approval, which the Saradha Group did not obtain. SEBI had been warning the state government about the possibility of a Ponzi scheme since at least 2010. In their first three years, the Saradha Group nearly tripled the money they collected. The unprecedented alliance of celebrities, politicians, and the government facilitated the massive theft of people’s hard-earned money.
CELEBRITIES JOIN THE GROUP
Sudipto Sen raised about 2500 crores by attracting investors, each contributing around Rs 50,000. He bolstered Saradha Group’s image by appointing celebrities like Mithun Chakraborty and Satabdi Roy as brand ambassadors.
ACQUIRING MEDIA THROUGH POLITICIANS
Under Kunal Ghosh’s leadership, the Saradha Group acquired Bengali news channels like TARA News and Channel 10, along with general entertainment channels such as Tara Music, Tara Bangla, Tara Punjabi, TV Southeast Asia, and an FM radio station. They also purchased several local TV channels and newspapers, including Sakalbela, Kalom, Seven Sisters Post, Bengal Post, Prabhat Varta, Ajir Dainik Baturi, Azad Hind, and the weekly magazine Parama.
POLICE AND POLITICAL CONNECTIONS
Despite SEBI monitoring, it lacked authority to investigate without magisterial permission. Sudipto Sen allegedly had close ties with TMC leaders, bribing politicians and police officers to avoid fraud charges. He hired police officers’ wives and gifted patrol motorcycles to Kolkata Police. The government also distributed Saradha-sponsored ambulances and motorcycles in Naxal-hit areas.
ARGUMENTS
The counsel for SEBI argued that SEBI has the necessary tools and experience to manage property sales, having successfully completed many transactions. He suggested SEBI should auction the assets after receiving offers. The counsel for the applicants contended that her client’s offers exceed the property values and should be allowed to purchase at the cited prices. She also proposed SEBI conduct the auction through a bid process.
JUDGEMENT
- Calcutta High Court:
After considering the arguments, the Calcutta High Court ordered that the matter be overseen by a one-man committee led by retired Justice S.P. Talukdar. The authorities are required to deposit all corporate funds with the committee or an institution as directed, after deducting costs and fees. SEBI will follow its standard procedure to sell the company’s properties mentioned in the applications. Applicants are allowed to submit their offers. SEBI can accept the highest bid or hold an auction for a better offer. The authority will then prepare a report and submit it to the committee. The transaction requires the committee’s approval. If necessary, the committee may instruct SEBI or another institution to conduct new advertisements or auctions. The accepted offer will be presented to the court for final approval.
- Supreme Court:
Public Interest Litigations (PILs) calling for a CBI inquiry against the Saradha Group and other chit fund companies were filed by RTI activist Akhil Gogoi in the Guwahati High Court and by Adv. Basabi Roy in the Calcutta High Court. The Calcutta High Court’s division bench noted that “a central authority would also do justice to the probe” given the fraud’s implications in other states. The court gave the state legislature a week to submit its investigative report to ensure fairness. Unhappy with the decision, petitioners appealed to the Supreme Court via a Special Leave Petition (SLP). The state and local governments of Orissa, Jharkhand, and Tripura requested the Supreme Court to order a CBI investigation into all money collection organizations in India.
On May 9, 2014, the Supreme Court’s divisional bench directed the CBI to investigate all Ponzi schemes in Eastern India, including Saradha. The court also ordered suspicious Ponzi companies to repay depositors after the conclusion of judicial proceedings initiated by the Enforcement Directorate and various state agencies. The Supreme Court emphasized that the investigation should extend beyond those directly involved to include others linked to the scheme, as part of uncovering the larger conspiracy.
In the Subrata Chattaraj appeal, the Supreme Court highlighted the need to investigate broader conspiracy theories. Three different petitions were submitted. The court ruled that the combined petitions should be handled by the Lower Court as a “Specially Assigned Matter.” Recently, Debabrata Sarkar, a defendant in the fraud case, had his bail application under Section 439 of the Criminal Procedure Code denied by the Supreme Court for reasons of public interest.
ARREST OF THE SCAMSTER
After uncovering the scam, the state government established a Rs 500 crore relief fund for small investors to prevent bankruptcy. Sudipto Sen’s written confession implicated several politicians. This incident prompted SEBI, RBI, Income Tax Department, and corporate affairs ministry to collaborate on further investigation. Saradha Group was swiftly ordered to cease public funding, leading to arrests and property seizures. Regulators united to streamline investment scheme regulations, leading to SEBI Act amendments granting SEBI search powers without magisterial permission. A Special Investigation Team was formed by the West Bengal government to probe the case. Sudipto Sen received a seven-year prison sentence, with ongoing efforts by the CBI to recover funds sent abroad. SEBI is currently auctioning Saradha Group’s properties and assets to reimburse investors, many of whom were from the poor and middle class, leading to strained relationships and financial hardship.
CONCLUSION
The Saradha Group Scam has claimed many lives, including agents, depositors, executives, and directors. It will be a lasting reminder of the financial frauds people should be cautious of. Such enticing schemes and high-yield investments may seem attractive, but they can devastate the lives of common people. This scam exposed vulnerabilities in the financial system, calling for reforms, investor education, and stronger regulatory measures to protect investors and uphold the integrity of the Indian financial system.
While Indians work hard, those in power often obstruct progress. The Rs 2000 crore SHARADA Scam stands out as one of India’s largest, impacting 25 lakh trusting investors. It’s characterized by drama and suspense, with implications reaching into political realms. While declaring TMC/Mamata Banerjee criminals prematurely is unjust, granting bail to those involved could impede investigations and hinder justice. The court must ensure an unbiased inquiry that prioritizes public interest over individual interests to uphold justice and fairness.
FAQ:
- What is the biggest chit-fund scam in India?
One such financial scam or the chit fund scam that happened in India is SARADHA GROUP SCAM. The Collapse of the Ponzi Schemes operated by the Saradha Group led to a significant political crisis and financial stability in the economy.
- What was the modus operandi of the Saradha Group?
The group used a nexus of companies to launder money and evade regulators. Initially, the frontline companies collected money from the public by issuing secured debentures and redeemable preferential bonds.
