Saradha Chitfund Scam | Political Involvement | 1.7 Million People were Affected

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KOLKATA:  West Bengal Chief Minister Mamata Banerjee found herself on a collision course with the centre after a huge showdown on Sunday evening between the state police and officials of the CBI or Central Bureau of Investigation. The CBI officials, who had come to question Kolkata police chief Rajeev Kumar on two Ponzi schemes, were temporarily detained by the police. Accusing Prime Minister Narendra Modi and the BJP of political vendetta, a furious Ms Banerjee started an overnight dharna to "save the constitution". While various BJP leaders have called for President's Rule in Bengal, opposition leaders have rallied around Ms Banerjee, making for a huge flashpoint with the centre.

1. Daring the BJP to impose President's Rule in West Bengal, Mamata Banerjee called it a "total constitutional breakdown". "How dare you come to a police commissioner's home without a warrant? Mr (Ajit) Doval is doing whatever PM wants him to do, he is the one giving all the instructions to CBI," Ms Banerjee said, referring to the National Security Advisor.
2. "This is a Satyagraha and I'll continue till the country is saved," Ms Banerjee said. She spent the night at the designated spot for protests in central Kolkata, accompanied by city police chief Rajeev Kumar. Ms Banerjee skipped meals and remained awake the entire night as she sat on the makeshift dais. She will proceed to the assembly later this morning for the state budget. "We have full confidence in the judiciary, media and the people... If they want to impose President's Rule, we are ready for it," she said.
3. The CBI is expected to go to the Supreme Court today, accusing the West Bengal government of impeding a court-ordered probe into the chit fund scams, said the agency's interim boss, M Nageswara Rao. The state government is also likely to appeal to the top court about the issue. The CBI officials are planning to meet West Bengal Governor Keshari Nath Tripathi.  
4. Rajeev Kumar - who headed a Special Investigation Team probing the Saradha and Rose Valley Ponzi scams of 2013 - was asked to help the investigation after several documents allegedly went missing. He has received several summonses for questioning.  This time, a section of media reported that he could be arrested for evading questioning and was "absconding". The Kolkata Police said they would take action for the defamatory reports.
5. Senior Trinamool leader Derek O'Brien said on Sunday evening, 40 CBI officers turned up at the Park Street House of Rajeev Kumar. But they were refused entry by the police guards posted there and the team was taken to a local police station. Ms Banerjee and top police officers held an emergency meeting at Mr Kumar's house.
6. Accusing the BJP of engineering the crisis, Ms Banerjee said the trouble flared up after her mega rally of 23 opposition parties in Kolkata last month. "The Kolkata Police Commissioner is among the best in the world. His integrity, bravery and honesty are unquestioned. He is working 24x7 and was on leave for only one day recently. When you spread lies, the lies will always remain lies," she tweeted.
7. The chief minister also accused PM Modi of using unparliamentary language during his recent rallies in the state. The Prime Minister had claimed the West Bengal government was killing the aspirations of the middle class through "Triple T - Trinamool Tolabazi Tax". 'Tolabazi'' roughly translates to an act of organised extortion.
8. The state's BJP lawmaker Babul Supriyo tweeted: "President's Rule should be imposed on West Bengal to control this 'Rogue' #TMchhi Govt under a corrupt CM Mamta Banerjee. This is a constitutional crisis 'created' by Mamta to shield her corrupt & tainted accomplices (sic)".
9. The opposition has rallied around Ms Banerjee, with various leaders -- including Arvind Kejriwal, Tejashwi Yadav, Lalu Yadav and HD Deve Gowda tweeting their outrage. Mr Kejriwal, Omar Abdullah and Congress chief Rahul Gandhi called up Mamata Banerjee and offered her full support. Several opposition leaders are likely to visit her today.
10. "Spoke with Mamata Di tonight and told her we stand shoulder to shoulder with her. The happenings in Bengal are a part of the unrelenting attack on India's institutions by Mr Modi & the BJP. The entire opposition will stand together & defeat these fascist forces," Rahul Gandhi tweeted.

Saradha Group financial scandal

The Saradha Group financial scandal was a major financial scam and alleged political scandal caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium of over 200 private companies that were believed to be running collective investment schemes popularly but incorrectly referred to as chit funds in Eastern India.

The group collected around ₹200 to 300 billion (US$4–6 billion) from over 1.7 million depositors^[7] before it collapsed in April 2013. In the aftermath of the scandal, the State Government of West Bengal where the Saradha Group and most of its investors were based instituted an inquiry commission to investigate the collapse. The State government also set up a fund of ₹5 billion (US$70 million) to ensure that low-income investors were not bankrupted.

The central government through the Income Tax Department and Enforcement Directorate launched a multi-agency probe to investigate the Saradha scam and similar Ponzi schemes. In May 2014, the Supreme Court of India, inter-state ramifications, possible international money laundering, serious regulatory failures and alleged political nexus, transferred all investigations into the Saradha scam and other Ponzi schemes to the Central Bureau of Investigation (CBI), India's federal investigative agency. Many prominent personalities were arrested for their involvement in the scam including two Members of Parliament (MP) - Kunal Ghosh and Srinjoy Bose, former West Bengal Director General of Police Rajat Majumdar, a top football club official Debabrata Sarkar, Sports and Transport minister in the – Madan Mitra.

The scam has often been compared to the Sanchayita investment scam, a multi-crore rupees scam that occurred in West Bengal in the 1970s, complaints related to which led to the formation of the Prize Chits and Money Circulation Schemes (Banning) Act of 1978.

Background

India has a large, low-income, rural population with limited access to formal banking facilities.^[17] This leads to the absence of two major helplines for poorer people - that of placing their money safely in deposits and secondly of being able to borrow money for their needs which may be as simple as buying seeds for the next crop or their children's marriage. The second aim is achieved instead by a web of parallel, informal banking in the form of money lenders (pawnbrokers) who have existed in India for a few centuries. At its centre are moneylenders, mostly unregulated, often also wealthy landlords or now politicians, used to charge exorbitant rates of interest. To curb this practice, several Moneylenders Acts were enacted by the State governments of India by the 1950s. However, failure to replace the role of moneylenders gave rise to unscrupulous financial operators that operated Ponzi schemes. Some commentators place the blame for these kinds of Ponzi schemes on greed rather than exclusion from formal banking systems.

However, this does not address the former issue of being able to save their money easily, keep it in safe keeping and invest it so that it grows. While post offices have tried to address this through postal savings banks, people are often lured by Ponzi schemes that promise much higher returns.

The relatively prosperous rural economy of West Bengal had previously relied on small savings schemes run by the Indian Postal Service. However, low rates of interest in the 1980s and 1990s encouraged the rise of several Ponzi schemes in speculative ventures such as Sanchayita Investments, Overland Investment Company, Verona Credit and Commercial Investment Company. Together, these scams eliminated close to ₹10 billion (US$140 million) in investor wealth. Despite a history of Ponzi schemes, the continuing decline in interest rates, rapid financialisation of household savings, lack of financial literacy and investor awareness, political patronage, the absence of adequate legal deterrence, and regulatory arbitrage encouraged the growth of similar companies. These companies either raised their funds through legitimate channels such as collective investment schemes, non-convertible debentures and preference shares or illegitimately through hoax financial instruments such as teak bonds, potato bonds or fictitious ventures in agro-export, construction and manufacturing. As of 2013, 80% of multi-level marketing and finance schemes against which complaints have been received are based in West Bengal, giving the state the title of "Ponzi capital of India". It is estimated that these Ponzi funds have amassed around ₹10 trillion (US$140 billion) from unsuspecting depositors in Eastern India.

Financial operations

The companies that were comprised by Saradha Group were incorporated in 2006. Its name is a cacography of Sarada Devi, the wife and spiritual counterpart of Ramakrishna Paramahamsa—a nineteenth-century mystic of Bengal. This duplicitous association gave Saradha Group a veneer of respectability. Like all Ponzi schemes, Saradha Group promised astronomical returns in fanciful but credible investments. Its funds were sold on commission by agents recruited from local rural communities. Between 25 and 40% of the deposit was returned to these agents as commissions and lucrative gifts to quickly build up a wide agent pyramid. 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. Under Indian Securities regulations and section 67 of the Indian Companies Act (1956), a company cannot raise capital from more than 50 people without issuing a proper prospectus and balance sheet. Its accounts must be audited and it must also have explicit permission to operate from the market regulator Securities and Exchange Board of India (SEBI).

SEBI first confronted Saradha Group in 2009. Saradha Group adapted by opening up to 200 new companies to create more cross-holdings. This created an extremely complex tiered corporate structure to confound SEBI by hampering their ability to consolidate blame. SEBI persisted in its investigation through 2010. Saradha Group reacted by changing its methods of raising capital. In West Bengal, Jharkhand, Assam and Chhattisgarh, it began operating variations of collective investment schemes (CIS) involving tourism packages, forward travel and hotel booking timeshare credit transfer, real estate, infrastructure finance, and motorcycle manufacturing.  Investors were rarely informed about the true nature of their investments. Instead, many were told they would get high returns after a fixed period. With other investors, the investment was fraudulently sold in the form of a chit fund. Under the Chit Fund Act (1982), chit funds are regulated by state governments rather than SEBI.

SEBI warned the state government of West Bengal about Saradha Group's chit fund activities in 2011, again prompting Saradha Group to change its methods. This time, it acquired and sold large numbers of shares of various listed companies then embezzled the proceeds of the sale through accounts which as of September 2014have not been identified. Meanwhile, Saradha Group started laundering a large portion of its funds to Dubai, South Africa and Singapore. By 2012, SEBI was able to classify the group's activities as collective investment schemes rather than chit funds—and demanded that it immediately stop operating its investment schemes until it received permission to operate from SEBI.  Saradha Group did not comply with this ruling and continued to operate until its collapse in April 2013.

Political patronage

Allegedly several political leaders received financial support from Saradha Group, including MPs of TMC, the incumbent ruling party of West Bengal. MP Kunal Ghosh drew a salary of ₹1.6 million (US$22,000) per month from Saradha Group, as an employee of the group. MP Srinjoy Bose was directly involved with the group's media operations. Transport Minister Madan Mitra headed the employees' union of the group and publicly encouraged people to invest their savings with it. Sudipto Sen, the group's chairman and managing director, reportedly spent ₹18.6 million (US$260,000) to buy paintings by Mamata Banerjee, whose government later issued a notification that public libraries should buy and display Saradha Group newspapers. The group bought the loss-making company Landmark Cement, which was co-owned by textiles minister Shyamapada Mukherjee. The group also had financial dealings with Ganesh Dey, the confidential assistant of the finance minister of the erstwhile Left Front government, who was later expelled.

Politicians outside West Bengal also benefited from Saradha Group. Himanta Biswa Sarma, the Health and Education Minister of Assam, may have profited personally from the Ponzi scheme. Sen said he paid ₹250 million (US$3.5 million) to Manoranjana Sinh, wife of former Congress MP from Assam and Central Government Cabinet minister Matang Sinh, ₹30 million (US$420,000) to her father K.N Gupta to buy shares in a television channel—allegedly at an inflated price. According to officials investigating the case, the actual amount paid could be almost double of what is being claimed. Some commentators state that this Ponzi scheme survived for so long because of its heavy political patronage.