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There's more to Sahara & other Ponzi scams than bribery allegations against PM

Arun K Agrawal | Updated on: 10 January 2017, 16:18 IST

Sahara, Sharada, Rose Valley - each of these Ponzi schemes has become a household name in India, and for all the wrong reasons.

In fact, such schemes have robbed 10 crore Indian depositors of approximately Rs 2 lakh crore of their hard-earned money.

And yet, save for the arrest of Trinamool Congress MPs Tapas Pal and Sudip Bandyopadhyay, the Central government is not addressing the losses suffered by these people, almost all of whom live on the margins of society. Why is this the case?

Key questions

Even Prime Minister Narendra Modi's name has cropped up in connection with the Sahara scam - he is alleged to have been bribed in his time as the Chief Minister of Gujarat.

But the question to be asked is not what payoffs were made to whom for the "smooth functioning of the Ponzi scheme", as stated by Enforcement Directorate.

The key question is: will the poor and hapless depositors who put their savings in these Ponzi schemes never recover them, because of these payoffs?

Here are some other important unanswered questions about these scams:

- Are the allegations of Sahara's payoffs to Modi true? Or are they merely allegations being used to blackmail those at the helm of affairs in the country? And since these are serious allegations against the Prime Minister of the country, shouldn't they be investigated, especially if they are untrue?

- Why has the Securities and Exchange Board of India (SEBI) refunded only Rs 54.43 crore in four years to 11,956 depositors (annual report 2015-16), when the amount deposited with it in the Sahara case is Rs 14,000 crore, and around 2.2 crore depositors have been duped?

- Why were Ponzi schemes allowed to flourish without being checked for so long?

- Why is Sahara the only Ponzi scheme still in business?

- What was the nature of violation of the law?

- Why was the paying of protection money as bribes part of 'business expenses'?

- And, most importantly, despite these companies having assets, why won't the marginal depositors be able to recover their money?

The undersigned attempted to intervene in the Sahara case (Civil Appeal No. 9813 and 9833 of 2011), but was unsuccessful due to a lack of locus. However, a PIL drafted by this writer [Writ Petition (civil) 928 of 2013] filed by Humanity Salt Lake on Ponzi schemes, with particular reference to Sharada and Rose Valley, is pending in the Supreme Court. Thus, he is in a position to shed some light on these complex questions.

What is a Ponzi scheme?

A Ponzi scheme is one in which deposits are actively solicited from the public through commission agents. As the current deposits received from the gullible public are far more than the payments to be made on past deposits, this excess deposit is treated by the promoters of the Ponzi scheme as their own money.

Take, for example, the case of the Pearl group of companies, also known as PACL. Its deposits grew from Rs 800 crore to more than Rs 49,000 crore over a period of 12 years, due to the oversight of the authorities and delays involving the courts. The authorities belatedly put an end to the Ponzi scam, but not before all the money was diverted by the promoters for personal use.

Legal proceedings were delayed at various levels which, in turn, gave breathing space to PACL to grow its deposits phenomenally by thousands of crores. This is another scam, but then that is beside the point.

Why were Ponzi schemes successful in India?

The main reason for a Ponzi scheme to be successful is the absence of a banking structure in rural areas, and lack of financial inclusion for low-income daily wage earners in urban areas, along with the lack of foresight by the regulatory authorities.

For crores of depositors, the Ponzi companies provide easy accessibility to para-banking services with doorstep service, through their deposit agents.

Unscrupulous companies exploit this situation by appointing locals as deposit agents, and paying them handsome commissions.

It is important to note that the Ponzi scamsters failed to flourish in three southern states, where there was better administration and a larger penetration of banks in the rural areas.

How many people have lost their savings?

Sahara alone accounts for wiping out the savings of 2.2 crore people. However, the Sahara scam is not the largest in the country.

That dubious distinction belongs to PACL, which had about 4.63 crore depositors.

About 300 other large and small Ponzi companies, including Rose Valley and Saradha, operated in states like West Bengal, Odisha, Assam and Bihar, which accounted for about three crore depositors.

That brings the total number of depositors duped by Ponzi schemes to about 10 crore.

What is the total amount of money involved in these scams?

The amount in the PACL case is Rs 49,000 crore. In the Sahara case, it is over Rs 30,000 crore. The Rose Valley scam is said to be worth another Rs 20,000 crore.

If all the other Ponzi schemes and collective investment schemes (numbering more than 300) are considered, the principal and the interest due, which has been misappropriated by these Ponzi companies, is around Rs 2 lakh crore.

It is the largest scam India has seen, since it has cheated 10 crore depositors, and even the total amount is comparable to scams like 2G and coal.

What is the difference between keeping money in a bank and investing in a Ponzi scheme?

Ponzi schemes were operating like banks, without having any of the responsibilities and safeguards that banks have. They did not provide for statutory liquidity ratio or cash reserve ratio. They did not have to adhere to credit deposit ratio norms, or to capital adequacy norms.

Most importantly, they were not subject to any lending norms, let alone priority lending norms. Nor were they subject to multiple rigorous audits.

These companies were free to do whatever they liked with the deposits of the victims of their Ponzi schemes.

Around 4% was paid to the deposit agents, which was less much than the salary bill banks have to foot. The rest of the money was siphoned away as commissions, loans to sister companies and investment through benami companies.

A small part was also spent on buying the silence of the powers that be.

What laws have been violated?

Companies which are in the business of misappropriating the savings of the marginal saver are in breach of Section 3 of the Company Deposit Rules, 1975, made under section 58A of the Companies Act, which prohibits all companies from accepting deposits which are unsecured instruments (debentures or otherwise) for more than 10% of their net worth.

The law has a rationale - an entity should not borrow beyond its capacity to repay and innocent savers should not be exploited by unscrupulous elements.

The violations, however, in some cases, were up to 80 to 1600 times the permissible limit. But these went unnoticed by the Registrar of Companies, the Serious Fraud Department, the Income Tax Department, SEBI, and even the Reserve Bank of India. .

The law enforcers' failure to enforce the law lies at the root of the scam. This omission was deliberate, and the concerned officers are far more accountable than politicians belonging to the Trinamool Congress.

The violations in some cases, were up to 80 to 1600 times the permissible limit

In the case of one Sahara group company, Sahara India Real Estate Corporation Limited (SIRECL), the balance sheet of the company for the year ended 30/6/11 shows the paid up capital and reserves of Rs 2,325 crore. Hence, the permissible limit for the company was Rs 230 crore. However, deposits of Rs 19,000 crore was raised as unsecured debenture. This deposit exceeded the limit by a whopping 18,770 crore, which is more than 80 times the permissible limit.

In the case of PACL, the company's balance sheet for the year ending 31/3/11 shows Rs 23,550.81 crore as 'customer advance'. This money is nothing but unsecured deposits. According to the same balance sheet, the paid up capital of the company on 31/3/11 was Rs 40.1 crore, and reserve and surplus was Rs 117.4.crore. Thus, the total paid up capital plus reserve capital was Rs 157.5 crore, and the company was thus permitted to accept deposits of Rs 16 crore only. The permissible limit of 10% was exceeded by more than 1,600 times.

Had it not been for KM Abraham, then Whole Time Member of SEBI, and Justice JS Khehar, now the Chief Justice of India, the scam would not have been brought out in the open.

Both were criticised for their brave acts - the former by Sahara and SEBI chief UK Sinha, and the latter by Sahara lawyers, which led to Justice Khehar recusing himself from hearing the matter further. In fact, he had reportedly directed the registry not to put any matter related to Sahara before him.

What is the criminal liability under the Companies Act?

Under Section 58-A (6) (b) of the Companies Act (old), if the overall collection of deposit is beyond the permissible limit, it is punishable by five years' imprisonment.

Why has this clause not been enforced against any of the Ponzi companies?

This shows that the government is complicit in allowing these Ponzi companies to cheat the 10 crore marginal depositors.

Do these companies have sufficient assets to pay back the depositors?

In most cases, even after accounting for the cash used for bribes, commissions, and diversion of funds abroad, around 50% of the money was invested in land, real estate and hotels. These appreciated over a period of time, and made up for the losses incurred under the above heads.

Thus, there are sufficient assets to pay back the hapless depositors, as the assets can be easily traced. However, it is more important to identify the depositors.

What is 'protection money'?

The entire Ponzi business is based on continuing the fraud of misappropriating the hard-earned deposits of the marginalised sections of society. If the violations of laws are grave, then so are the earnings. It is money for jam as crores of rupees are collected each day without any concern that the amount is to be returned.

Paying protection money to politicians, political parties and the bureaucracy is a part of the expense of the Ponzi business, so that their activities are not inquired into. This protection money is a legitimate expense of an illegitimate business.

It is for this reason that these Ponzi schemes have continued for decades, and would have continued for a longer period had it not been for the orders of SEBI, upheld by the Supreme Court.

How is Sahara the only Ponzi still in business?

Despite Sahara chief Subrata Roy having spent substantial time in prison, it is the only Ponzi company that is carrying on business as usual by metaphorising its business model, as rightly predicted by KM Abraham, while he was alerting other regulators in his order.

The following quote from the SEBI order, carried by a newspaper, has come true:

"Sahara agents will now peddle several new investment schemes to raise money under the name Sahara Credit Co-Operative Society. The society has its headquarters and registered office in Sahara India Bhawan, Lucknow, where most Sahara group entities are based."

Sahara's insurance and media businesses are intact, a large part of the deposits having been converted into co-operative deposit. It is business as usual.

Why has SEBI paid back just Rs 55 crore out of Rs 14,000 crore to Sahara depositors?

In 2012, the Supreme Court had ordered the refund of the scammed money to the depositors, and for SEBI to supervise it. It also appointed a former Supreme Court justice to oversee the refund.

What happened then? In spite of SEBI receiving Rs 14,000 crore (with interest on money deposited), only 11,596 depositors out of 2.2 crore have received a total of Rs 54.43 crore (as per its annual report for 2015-16) out of this Rs 14,000 crore in the last four years.

This is because SEBI wants immaculate documentary proof from illiterate, gullible depositors. These were never given to the duped depositor! If the depositor could prove his/her identity and the deposit, would he/she be depositing the money with Sahara?

At another level, one suspects that the SEBI chief, too, is hand in glove with the promoters of Sahara (refer to the letter written by Abraham, who wrote the Sahara order, to the then PM, Manmohan Singh), and is out to reinforce Sahara's contention that it has paid the depositors.

Why must allegations against the Prime Minister be investigated?

As CJI Khehar says, no document of Sahara can be trusted, as there are very few who would know more about the character of Sahara than he does. After all, he had spent months hearing their lawyers before recusing himself.

But then, that is precisely the point. That's exactly why the allegation based on documents should be investigated. Not because they may or may not be true, but because the good name of the Prime Minister needs to be cleared in a scam involving a company which is the mother of all scams. Why should the name of the PM be sullied by Sahara?

The fact that Sahara is the only functioning Ponzi scheme, the fact that its insurance and media business are flourishing, the fact that its assets are intact and no one is bidding for them, the fact that refunds of only Rs 55 crore have been made to just 12,000 out of 2.3 crore depositors over the last four years by SEBI, the fact that the neither the Serious Fraud Office not the Registrar of Companies have applied Section 3 of the Deposit Rules and taken action under section 58 A (6) (b) of the old Companies Act providing for five years' imprisonment, and more recently, the fact that the Settlement Commission has passed a very lenient order, strikes at the very credibility of various institutions, and shows that Sahara continues to be a favoured group.

Surely, the impression that these failures of various government agencies are because of Sahara having falsified documents to falsely implicate the Prime Minister needs to be brought out in the open, as the institution and the office of the Prime Minister is far more important than a powerful Ponzi company out to destroy the credibility of the Prime Minister.

What can be done for the poor depositors?

Sections 120B and 420 of the Indian Penal Code can be used against the deposit agents and the employees of the Ponzi operators, in order to identify the depositors and refund them their money.

These sections have been invoked by the CBI in arresting Trinamool Congress MPs, but not against the deposit agents.

It is a fact that accurate details of the depositors' identities were not recorded, and adequate proof of having received deposits were not given by the deposit agents. Most of the depositors were gullible and illiterate. The agents forced the depositors to renew their deposits, or made them do the rounds before refunding a discounted amount.

The Ponzi operators, in turn, never intended to return the bulk of the deposits, and therefore found it convenient not to keep proper records, so that they could deny the claims of the depositors.

It is precisely this trap of the Ponzi operator and the colluding deposit agents that has led to the meagre refund of 55 crore out of Rs 40,000 crore held by SEBI in the case of Sahara.

In the case of PACL, SEBI, in its order, has abdicated the responsibility of making the refund, and left it to the company!

Agents trying to get backdoor entry into PIL, assuring depositors the PIL will get them their refund

Deposit agents, fearing the wrath of the depositors, have united and formed an association to align themselves with the efforts of the depositors to get the refund. There are reports of their getting a backdoor entry into the pending PIL referred to above, and assuring the depositors that the PIL will get them their refund.

Sadly, the present status of the PIL is on implementing future reforms, as suggested by SEBI, to prevent future scams. There is absolutely no concern in the PIL for evolving effective strategies for refunding the money to the depositors who have been duped.

The depositors can be identified by the deposit agents alone. And it is for this reason that Section 120B and Section 420 should be invoked against them at the district level, and the name and the identity of the depositors should be obtained and tallied with the amounts remitted by the deposit agents.

It is totally impractical to expect that the semi-literate depositors to approach SEBI and comply with their rigorous procedure to prove their deposit and claim a refund.

What can other governments learn from the Odisha govt?

The Odisha government has taken the lead in identifying the depositors duped by Ponzi firm Rose Valley, to make way for the refund of their money, by passing the Odisha Protection of Interests of Depositors (in Financial Establishments) Act, 2011.

In May 2016, Cuttack's additional district magistrate Bibhuti Bhusan Das issued a notification in different newspapers for the identification of duped depositors, with a warning of prosecution against those who make false claims.

This model, along with invoking Section 420 against the deposit agents, is the only way in which the duped depositors can be identified and paid back their deposits from the seized benami assets of the Ponzi operators.

Once behind bars under Section 58A of the Companies Act, these Ponzi operators will sing like a canary and identify all their assets.

In conclusion, the good name of the Prime Minister needs to be cleared from being associated with these scammers, and justice needs to be done to the 10 crore marginal depositors, who have lost Rs 2 lakh crore.

Edited by Shreyas Sharma

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First published: 10 January 2017, 16:18 IST