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Fraud office task force to probe ‘chit funds, schemes’

SFIO to look into operations of deposit-taking companies in West Bengal in wake of Saradha Group collapse
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First Published: Thu, Apr 25 2013. 04 05 PM IST
Saradha Group is among several companies that run so-called collective investment schemes that don’t come under the remit of any of the country’s financial regulators. Photo:  Indranil Bhoumik/Mint
Saradha Group is among several companies that run so-called collective investment schemes that don’t come under the remit of any of the country’s financial regulators. Photo: Indranil Bhoumik/Mint
Updated: Mon, Apr 29 2013. 06 54 PM IST
Kolkata/New Delhi: The ministry of corporate affairs launched a probe by the Serious Fraud Investigations Office (SFIO) into the operations of deposit-taking companies in West Bengal in the wake of the collapse of one of the biggest in the trade, even as the union government maintained that it was the responsibility of the state governments to regulate “chit funds”.
Interestingly, though, the firms that it finally agreed to put under the scanner of a special task force of SFIO are not chit funds in the first place, show filings with the Registrar of Companies (RoC). All these firms, including those of the now-discredited Saradha Group, which raised public deposits, registered themselves as “commercial and industrial” enterprises, show their RoC filings.
Under the Chit Funds Act, promulgated in 1982, firms that run chit funds or schemes are to be regulated by the states, the ministry of corporate affairs said in a statement. Yet, in view of the “larger public interest” and “the possibility that the promoters of these companies may strip” them, the probe by SFIO was launched, the government said.
“The regulator calling them chit funds is ridiculous,” said a West Bengal state government official, asking not to be named. In reply to a question in the Lok Sabha, Sachin Pilot, the minister for corporate affairs, had himself said on 14 March that the government had received complaints against 73 companies operating in West Bengal for running “Ponzi/MLM (multi-level marketing) schemes”.
“It is hard to believe the government yet does not know about their modus operandi,” said the state government official, adding that firms that are likely going to face the SFIO probe were all on the list given by the minister in March. Pilot didn’t respond to calls and messages seeking comment.
To avoid regulatory glare, these firms do not directly solicit public deposits. Instead, they collect money as “advance from customers” for allotment of land or against the promise of hospitality at hotels owned by them. Depositors are given the option of receiving cash on maturity, instead of land or hotel accommodation.
With political pressure mounting on the centre and its regulatory agencies to take action and the West Bengal government threatening to introduce a new law, deposit-taking companies in the state are scrambling to soothe jagged nerves in a desperate bid to stay afloat.
Since the Saradha Group went aground, wiping out at least Rs.1,200 crore of people’s savings, depositors and collection agents have been thronging the offices of other firms such as Rose Valley Hotels and Entertainments Ltd, MPS Greenery Developers Ltd, ICore E-Services Ltd and Prayag InfoTech Hi-Rise Ltd.
Rose Valley, which at the end of fiscal 2012 had at least Rs.2,900 crore of public deposits, held in the form of “holiday membership” plans, or an advance for enjoying facilities at its hotels, has been issuing advertisements in newspapers—both English and local language—in the past few days, saying it was “eager and capable to keep our promises”.
It appealed to the administration, political parties and the media for cooperation so that it could continue to ply its diverse businesses.
One of Rose Valley’s offices at Tamluk town in East Midnapore district was vandalized on Monday, but the group said the attack was launched by “hooligans” and not by disgruntled agents and depositors. “Keep your faith on Rose Valley,” its advertisement says. “We are an asset-based company.”
“Not a single person got duped by us,” says Rose Valley, which has been in operation for 17 years.
The Securities and Exchange Board of India (Sebi), the capital market regulator, issued an order in January 2011 asking one of its arms, Rose Valley Real Estates and Constructions Ltd, to stop taking “earnest money…in equated monthly instalments” for purchase of land because it was viewed as an illegitimate collective investment scheme (CIS). The company disputed the order in 2011 and remains in operation.
Early this week, key Rose Valley executives met its collection agents at its Mangoe Lane office in central Kolkata and told them the company had enough cash to prepay depositors for the next three years, even if it stopped taking more money. The two Rose Valley firms cited above had close to Rs.1,800 crore in cash at the end of fiscal 2012, show RoC filings.
MPS, too, issued an advertisement saying it was not a “fly-by-night” financial enterprise, and that it has been running CISes for the past 14 years in full compliance with regulations and court orders. Sebi, though, contends that MPS cannot in the first place launch such schemes because it does not have the necessary licence and has started a legal battle to force it to return the money it has already mobilized.
The battle with MPS dates back more than a decade, and came to a head when Sebi issued a cease-and-desist order last year. Thereafter, the dispute moved to the district courts in West Bengal and MPS got injunctions against the regulator’s order.
MPS claims it had over 1.6 million depositors and a collective liability of Rs.1,600 crore at the end of the fiscal 2013. CIS regulations require it to invest at least 90% of the public deposits in fixed assets, the firm said, assuring investors that their money was safely parked in properties currently worth Rs.3,900 crore.
Rating agency Icra Ltd, however, had pointed out in November, commenting on MPS’s operations in fiscal 2012, that its cash flows had been “inadequate to service debt in the past”, making the firm dependent on fresh deposits for repayment of old ones.
ICore, which two years ago admitted to owing customers at least Rs.305 crore under an “advance product booking scheme”, faced an army of angry agents at its Rafi Ahmed Kidwai Road office in central Kolkata earlier this week.
The founder’s wife and director Kanika Maiti addressed agents, reassuring them that the company had enough money to repay depositors. Outstanding payments were immediately released, said agents, who did not want to be named.
She told ICore’s agents that the company had enough assets such as shopping malls and garment factories that could be liquidated to repay depositors.
However, it was becoming increasingly difficult to generate “fresh business” since ICore started delaying redemption of matured deposits from the beginning of this year, they said. “Yet, in the wake of this crisis, we have no option but to tell depositors that all is well,” one of them said.
Maiti refused to be interviewed. She asked her company’s agents, too, to avoid interactions with the media.
Confronted by agitated agents, executives of Prayag Infotech said this week that the company could repay all deposits with 5% interest even if it had to wind up its businesses immediately. This company had received advances from customers of Rs.341 crore, and had other unspecified current liabilities of Rs.102 crore two years ago, according to the latest RoC filings. Its management refused to comment.
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First Published: Thu, Apr 25 2013. 04 05 PM IST
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