The Saradha saga

Kolkata: West Bengal’s mercurial chief minister Mamata Banerjee staged a reversal of her initial apathy towards the fate of those whose savings had disappeared in the collapse of the Saradha Group. Two days after saying that “what has gone, has gone”, Banerjee on Wednesday (24 April) announced a 10 percentage points increase in value-added tax (VAT) on tobacco products to raise money for a 500 crore rescue fund.

add_main_imageIn between, on 23 April, Sudipta Sen, chairman and managing director of the now discredited group, was arrested from a hotel in the Jammu and Kashmir (J&K) tourist destination of Sonmarg, a week after West Bengal launched a manhunt for him. Sen, who was close to key leaders of West Bengal’s ruling Trinamool Congress, was wanted for cheating tens of thousands of depositors in West Bengal of an undetermined amount—believed to run into several thousands of crores of rupees.

Sen and two other Saradha Group executives, who were arrested along with him, were easily identified because a West Bengal-registered utility vehicle in which they had driven to J&K was found parked at the hotel.NextMAds

The episode prompted the federal ministry of corporate affairs to launch a probe by the Serious Fraud Investigation Office (SFIO) into the operations of deposit-taking firms in West Bengal in the wake of the collapse of Saradha, and the state government proposed a new law to protect customers and deter these firms from selling assets and leaving customers in the lurch.

To avoid regulatory glare, these firms do not directly solicit public deposits. Instead, they collect money as an “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. These firms, including those of the Saradha Group, which raised public deposits, registered themselves as “commercial and industrial” enterprises, show their filings to the Registrar of Companies (RoC).

Either the consumer or the provider, or both, of tobacco products will pay for Banerjee’s largesse, which will be distributed among the people worst affected by the demise of the Saradha group, which collected money from customers in West Bengal and neighbouring states with the promise of rich returns. It has claimed at least two lives: an agent and a depositor killed themselves.

Cigarettes and other tobacco products will attract value added tax (VAT) of 35% in West Bengal, higher than in neighbouring states such as Orissa, Jharkhand and Bihar, which tax tobacco products at 20-30%. Tax arbitrage typically encourages inter-state smuggling of cigarettes by wholesalers.

Tobacco firms pay VAT on the price invoiced by them to wholesalers. State-specific pricing is unviable and encourages smuggling even more, so if ITC Ltd—India’s biggest cigarette maker—were to raise prices to protect its margins, smokers across the country will be paying for a financial fraud in West Bengal. If it doesn’t, its margin will contract in West Bengal because the company will have to reduce its selling price to wholesalers.

Banerjee announced her decision amid an escalation in the political blame game between the state and the centre over regulating financial enterprises such as Saradha with a leak to television channels of a letter written by Sen to the Central Bureau of Investigation (CBI).sixthMAds

In that letter, which the CBI in New Delhi confirmed it had received, Sen purportedly gave details of payments made by him to key officials to defuse investigations launched against the Saradha Group’s deposit-taking business, which capital market regulator Securities and Exchange Board of India (Sebi) declared illegitimate, capping a nearly three-year-old inquiry.

Television channels flashed Sen’s letter to CBI, in which he supposedly said he was spooked when Sebi launched its probe against his firms in 2010. Banerjee used this to launch a scathing attack on the centre for not intervening despite being aware of the fast-spreading menace of such get-rich-quick schemes among West Bengal’s rural poor—her core political constituency.

The letter, however, also says why Sen entered the media business, which, according to him, eventually became his nemesis. He says he bought Channel 10, a Bengali news channel, to take on Sangbad Pratidin, a Bengali newspaper owned by Trinamool Congress Rajya Sabha member Srinjoy Bose after it launched an attack on the Saradha Group for its deposit-taking business.

Before long, Sen got into a content-sharing agreement with Sangbad Pratidin and appointed Kunal Ghosh, its editor, as chief executive officer of Channel 10 and eventually of the Saradha Group’s media business, to buy peace. He got into the agreement with Sangbad Pratidin to “protect my business from the government”, Sen says in the letter.

Bose said the Trinamool Congress had nothing to do with the Saradha Group and that his newspaper only had a content-sharing agreement with Channel 10, rebutting allegations he had promised immunity for Sen’s businesses. Ghosh is also a Trinamool Congress Rajya Sabha member.

Sen’s purported letter makes clear the Saradha Group wasn’t left with any money to repay depositors, except for properties spread across West Bengal, Orissa, Jharkhand and Assam, details of which are among legal documents left in six trunks at the group’s head office in Kolkata. The police have recovered the trunks and the property documents, but their worth isn’t immediately known.

Sen estimates his “actual liability” at ₹ 300-400 crore, about one-third of what the Saradha Group’s computer accounts showed: ₹ 1,200 crore. He attributed the difference to a bug in the accounting software, which allowed executives and so-called marketing members—collection agents—of the group to print fake receipts.

Sen’s claim had an air of déjà vu about it. The last big financial fraud in eastern India, the payment crisis at the Calcutta Stock Exchange (CSE) in 2001, was also eventually blamed by the joint parliamentary committee that probed it on a software snafu that allowed stockbrokers to extend their outstanding financial risk without paying the necessary margin.

Sen, who decamped after Saradha failed to repay matured deposits his agents had mobilized for the group in the past five-six years, was arrested by J&K police after being alerted by the West Bengal police, who tracked the cellphones of Sen and his colleagues to Sonmarg. The other Saradha Group officials arrested from Sonmarg were Sen’s executive assistant Debjani Mukherjee and Arvind Kumar Chauhan, who managed the group’s operations in the state of Jharkhand.

Though the police finally managed to detain Sen, there has been no trace of any recoverable money. The 40 bank accounts of the Saradha Group that the West Bengal administration has frozen were found to have no money, according to Arnab Ghosh, a detective department official in Kolkata.

Minister for corporate affairs Sachin Pilot said on 14 March in reply to a question in the Lok Sabha, the lower house of Parliament, that the government had received complaints against 73 companies operating in West Bengal for running “Ponzi/MLM (multi-level marketing) schemes”.

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 scrambled to soothe nerves in a desperate bid to stay afloat.

After the Saradha Group went under, depositors and collection agents had 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 ₹ 2,900 crore of public deposits held in the form of “holiday membership” plans or an advance for enjoying facilities at its hotels, issued advertisements in newspapers—both English and the local language—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.

“Keep your faith on Rose Valley,” the advertisement said. “We are an asset-based firm.”

Sebi had 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.

Key Rose Valley executives met agents at its Mangoe Lane office in Kolkata and told them the firm had enough cash to pay depositors in advance for three years, even if it stopped taking money. The two Rose Valley firms cited above had close to ₹ 1,800 crore in cash at the end of fiscal 2012, show RoC filings.

MPS Greenery 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 MPS could not have launched 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.

MPS said it had more than 1.6 million depositors and a collective liability of ₹ 1,600 crore at the end of fiscal 2013. CIS norms require it to invest at least 90% of public deposits in fixed assets, the firm said, assuring investors their money was safely parked in properties currently worth ₹ 3,900 crore.

West Bengal’s proposed new law to protect depositors could potentially offer a model for initiatives elsewhere in the country as states seek to tweak and introduce laws to rein in similar pyramid schemes that fall between the regulatory cracks to protect depositors.

A provision has been added to an aborted 2009 Bill by West Bengal to enable the state to seize even those properties that are sold by a defaulting financial enterprise in the run-up to its collapse, according to an official, who did not want to be identified.

Under existing laws, the state can only seize assets that a firm continues to own, but the administration is concerned that other deposit-taking companies could now start selling assets fearing that they could run aground, said the official.

This new law is expected to act as a deterrent, discouraging anyone from buying properties from deposit-taking companies because it will “jeopardize third-party interest”, according to a leading lawyer.

There are provisions that relate to the situation in the Companies Act as well. Under these, a court can review asset sales of a company being wound up if certain creditors are found to have been favoured by the ousted management, said Debanjan Mandal, a partner at Fox and Mandal, one of Kolkata’s leading law firms.

Transactions concluded as much as six months in advance of the filing of a winding-up petition, on which a court eventually orders liquidation of a company, can even be declared null and void.

The state’s proposed law appears to follow the same principle, Mandal added.

As envisaged by the 2009 Bill, the state will set up a special court to deal with financial frauds, and as advised by the centre, the maximum penalty for those found guilty will be increased from 10 years of rigorous imprisonment to life in jail.

Even so, it could take six months to implement the new law And its most significant provision could turn out to be its Achilles’ heel.

Bankers say they will challenge the new law because of the provision that will enable the state to override mortgages and seize any asset from fraudulent financial enterprises to protect customers’ interests.

If banks lose their right to liquidate assets mortgaged with them, they will immediately recall their loans, said Subhalakshmi Panse, chairman and managing director of Allahabad Bank, adding that going forward no one will make loans to firms that raise public deposits.

But banks are likely going to move court to stop the law from being implemented, she and another banker said.

“How can a government promulgate a law and seize properties that are already mortgaged to lenders?” Panse asked, adding that it would have made sense if the Bill said this provision would be applicable to mortgages taken after the law was enacted.

Banerjee has urged depositors to maintain courage.

“Don’t panic,” Banerjee said on 26 April, addressing depositors. “Brace for the storm… We will always stand beside devastated depositors.”