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India Savings Deposit Scam Collapse Leaves Thousands Penniless

By Yoolim Lee
January 06, 2014 5:00 PM EST 63 Comments
Saradha Investors Protest in Kolkata
Saradha Investors Protest in Kolkata

Sudipta Sen was on the run when police arrested him on April 23 at Hotel Snow Land, a resort with views of the Himalayas in Sonamarg, India, about 2,700 kilometers northwest of his Kolkata base.

Sen’s Saradha Realty India Ltd., the anchor of an empire that took in small deposits and promised payouts of land, apartments or a refund of clients’ money with interest rates as high as 24 percent, was defaulting on thousands of deals. Employees of Sen’s media companies hadn’t gotten paychecks in months. As cash dried up, 1.74 million customers saw savings vanish, Bloomberg Markets magazine will report in its February issue.

The upheaval didn’t end with Saradha. Panicked depositors rushed to pull money from similar companies. Since April, more than 34 people have committed suicide, 13 of them Saradha agents and investors. A 50-year-old domestic helper south of Kolkata in Baruipur, one of many hubs of Sen’s activities, set herself ablaze after losing 30,000 rupees ($482).

Saradha Group, the parent of Saradha Realty, was among hundreds of unlicensed deposit-taking enterprises that serve India’s poor -- and skirt regulators.

Clients scraped up as little as 100 rupees a month in a country where the World Bank’s Global Financial Inclusion Database found just 35 percent of adults had a bank account and 8 percent borrowed through formal channels in 2011.

Goat Farmers

India requires such quasi-banks to register with state or federal authorities. Many don’t. Saradha and others avoid oversight by disguising themselves as real estate developers, goat farmers and emu raisers, says U.K. Sinha, chairman of the Securities and Exchange Board of India, the nation’s capital markets regulator, known as SEBI.

Sen, chairman and managing director of Saradha Group, said he owned 160 companies. About 15 operated as real firms, Sen’s lawyer Samir Das says.

Unlawful deposit companies proliferate in India. Saradha took in at least $200 million based on preliminary figures, Sinha says. Actual numbers may be bigger, he says. Such firms have raised a total of more than $2 billion, Sinha estimates.

Sen has been jailed since his arrest. Police have filed 155 charge sheets, formal documents of accusation, against Sen, Das says. Sivaji Ghosh, additional director general of the West Bengal police’s criminal investigation department, said in mid-December he expects a special court that will handle all Saradha-related cases to be set up soon.

Saradha Fallout

What makes Saradha’s collapse noteworthy is the turmoil it spread across six states, a territory the size of Spain in eastern India, where access to banks is limited.

Depositors protested and mobs ganged up on agents. Abhimanyu Nayak, who worked for another unregistered collection firm called Seashore Group, jumped in front of a train in Odisha state in May as investors hounded him for their cash.

Saradha and its aftermath hurt so many people that the government had to step in, says Pratip Kar, who served as SEBI’s executive director from 1992 to 2006 and now works as a World Bank consultant.

“Ponzi schemes like Saradha create widespread havoc, like a tsunami,” says Kar, describing ploys in which companies repay depositors with money from new investors. “When the shopkeeper and the household helper and the rickshaw pullers are robbed of their minuscule savings, it is painful.”

New Powers

The Saradha fiasco sparked an overhaul of SEBI’s powers. The regulator has shut 15 companies and barred the owners from the capital markets. It’s investigating 20 more, Sinha says.

That’s a fraction of India’s fraudulent collection businesses, says Prithvi Haldea, chairman of researcher Prime Database in New Delhi.

“There are countless scams currently in operation in various sizes, shapes and forms,” he says. “Saradha led to a new law and that’s a good thing, but is it geared toward conquering all scams? Certainly not.”

In India, several regulators supervise banks and financial companies -- creating gaps that scammers exploit. SEBI monitors so-called collective investment schemes, known as CISs, which typically deal with money pooled from customers.

SEBI, which had power to investigate but not enforce, can now search and seize property and recover wrongful gains, Sinha says. The government can also classify pools of more than 1 billion rupees as CISs and put them under SEBI’s purview. In the past, no threshold existed.

‘Nothing Escapes’

As for smaller scams outside SEBI’s radar, Sinha says, some states have passed a measure to protect depositors against unauthorized money raising. SEBI will share information with states, the corporate affairs ministry and the Reserve Bank of India to help fight fraud.

“We want to ensure nothing escapes,” Sinha says.

The reforms don’t go far enough, says Satyajit Das, author of a dozen books on financial risk, including “Extreme Money: Masters of the Universe and the Cult of Risk.”

“The regulatory infrastructure doesn’t actually keep up with reality,” he says, adding that scammers will simply create dozens of small companies to avoid the 1 billion rupee threshold.

“The authorities need to accept that in the modern financial system, these quaint distinctions between banks, nonbanks and CISs are a complete waste of time,” he says. Das says India needs one powerful financial regulator.

Ajay Shah, an economist at the National Institute of Public Finance and Policy in New Delhi, says hasty laws may not address the scope of a malfeasance.

‘Ponzi Schemes’

“Laws are enacted as a knee-jerk response to an event and often poorly thought through,” he says, commenting about the government’s reactions to financial scandals. “Ponzi schemes like Saradha are a visible sign that the government’s strategy is fundamentally broken.”

Lax law enforcement and India’s slow judicial system aid fraudulent companies, says Prime Database’s Haldea, who is also an investor-protection activist with a website listing economic offenders.

“People assume that they will never be caught or will get off lightly,” he says. “Ultimately, the fear of law has to go down the throats of fraudsters.”

Financial scams are hurting India as it battles an economic slump. The central bank predicts growth will remain at 5 percent in the 12 months ending on March 31, the same pace as in the previous fiscal year and the slowest growth in a decade.

Undermining Confidence

Harm to small investors undermines confidence in the financial system. When Indians lose cash, they put money into physical assets such as gold, which India imports, Shah says. That reduces household capital that powers the economy.

India raised the tax on gold imports three times in 2013 to curb demand and tackle a record $87.8 billion current-account deficit that weakened the rupee in August to an all-time low of 68.845 to the dollar.

“Beyond the actual dollars lost, these Ponzi schemes contaminate people’s confidence, and the financial markets become weak,” Shah says. “To have a comprehensive, vibrant economy, you need to have households that have confidence in an array of financial institutions and products, whether it’s a bank or mutual funds.”

Tuku Biswas lost her life savings to Saradha. Biswas, a sex worker in Kolkata’s Sonagachi neighborhood of multistory brothels, was 28 in 2012, when she discovered she had the HIV virus.

‘Sister’s Future’

Determined to support her 11-year-old sister, Biswas deposited 7,500 rupees a month with Sen’s Saradha Tours & Travels Pvt. Biswas expected a lump sum of 131,250 rupees -- including the promised 17 percent interest -- by August 2013. When Saradha imploded in April, she got nothing.

“That money was my sister’s future,” she says. “All I want is my money back. I don’t know how long I have left to live.”

Saradha lured clients with an array of pitches. Saradha Realty took cash as an advance for properties that the company didn’t identify at the outset, according to an April 23 statement from SEBI.

Investors chose land, an apartment or a refund of their money with average interest of 12 to 24 percent at the end of the agreement. Saradha also took as little as 100 rupees a month for 12 to 60 months. Some investors put in 10,000 to 100,000 rupees for 15 to 120 months or lump sums for 12 to 168 months.

Sen documented his own downfall in an April 6 letter to India’s Central Bureau of Investigation, four days before he fled Kolkata.

‘Women, Wine’

He said he made a costly foray into the media industry by acquiring television channels and newspapers in 2011. Close aides kept a major chunk of depositors’ money, he wrote. And marketing officials who recruited agents were illiterate, he said.

“They only understood money, women and wine,” Sen wrote.

Sen described his aspirations in the letter. “I never thought about my limitations,” he wrote.

“A few of my well-wishers cautioned that it is not possible to organize a big empire. But I did not hear anyone’s advice.”

Starting as a property agent in the 1990s, Sen became the owner of Saradha Construction Co. in West Bengal, according to local newspapers.

In July 2008, he established Saradha Realty as his deposit-taking business, hiring thousands of agents in four months. Saradha paid them about 30 percent of the cash they brought in -- sparking a stampede for customers.

SEBI began questioning Sen’s business in 2010. He went on a takeover spree, his letter and corporate filings show.

Bogus Factory

He bought debt-ridden motorcycle assembler Global Automobiles Pvt. and kept 150 employees on the payroll, who pretended to work when people visited. The factory never produced a single motorcycle, former employee Lakhinder Ram says.

Sen denied to SEBI that he was running a collective investment scheme. He handed over 63 cartons of irrelevant information in 2012 to delay the regulator, according to SEBI’s statement.

In an April 1 letter, Sen again denied Saradha was running CISs, saying he was receiving money from sales and advance bookings with the help of brokers -- a claim SEBI rejected.

Sen was with two associates when he was arrested in April, including Debjani Mukherjee, who joined Saradha Tours in 2008 and by 2011 was a director of 38 companies. As of early December, clients and employees had filed 390 so-called first information reports against Sen and his aides to police, which set criminal investigations in motion.

As officials dissect Sen’s enterprise aided by expanded powers, economist Shah says the lesson for India must extend beyond Saradha.

“Our entire approach to financial regulations today is completely wrong because it hurts the people and the economy,” he says.

To contact the reporter on this story: Yoolim Lee in Singapore at yoolim@bloomberg.net

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net

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