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The rise and fall of deposit-taking firms

The collapse of the Saradha Group in West Bengal, once one of eastern India’s biggest deposit-taking companies, could mark the first of a wave of such failures, leaving behind a trail of destruction and heartbreak as people see their savings disappear

Saradha Group’s Debasish Banerjee (in red shirt) with depositors demanding their money. Photo: Indranil Bhoumik/Mint (Indranil Bhoumik/Mint)Premium
Saradha Group’s Debasish Banerjee (in red shirt) with depositors demanding their money. Photo: Indranil Bhoumik/Mint

(Indranil Bhoumik/Mint)

Kolkata: What has gone, has gone.

Scant words of comfort from West Bengal chief minister Mamata Banerjee on 22 April, Monday, for those who have lost their money in the Saradha Group’s deposit schemes. The collapse has already claimed two lives—an agent and a depositor killed themselves towards the end of last week.

The Saradha Group’s commission agents, depositors and employees maintained a futile daytime vigil last week at Midland Park, the six-storey building that houses the headquarters of the company in Salt Lake Sector V in Kolkata.

The building was vandalized on 17 April, Wednesday, according to the policemen guarding the office. “There’s no one here," one of them told a woman, who broke down on hearing this.

Perhaps, it’s a sign of human frailty, especially in these times of economic uncertainty, that pyramid schemes seem to be thriving all over the world. They exist across India, too, but their proliferation has been most noticeable in the past few years in eastern states such as West Bengal. The Securities and Exchange Board of India (Sebi) has written to the finance ministry saying the task of overseeing such companies should be given to a regulatory agency.

At risk is at least 20,000 crore, mostly in small savings from the poor, who can ill-afford the loss, state officials said.

Their estimate is based on the decline in deposits in state-run small savings schemes in the past five-six years. This amount is thought to have been diverted to private firms such as those of the Saradha Group, which promised higher returns.

“Companies like these have ruined household savings in West Bengal in every decade since the 1980s, but this crisis is completely different because of its magnitude," a state government official said, requesting anonymity.

The schemes operate by collecting deposits from an ever-widening base of customers. As long as income exceeds payouts, the system works splendidly. After that comes the inevitable chaos and heartbreak.

The collapse of the Saradha Group—once one of eastern India’s biggest deposit-taking companies—could mark the first of a wave of such failures, according to officials. The state administration ordered the arrest of Sudipta Sen, the group’s 54-year-old chairman and managing director, for defaulting on repayments.

Sen, who was arrested on 23 April, Tuesday, could not be contacted for comment.

West Bengal is planning to introduce a new law to flush out deposit-taking companies, said chief minister Banerjee. However, such a law will take at least six months to be implemented because it would need the consent of the Union government, officials said.

The image of the Trinamool Congress, led by Banerjee, has taken a severe beating on account of the undeniable proximity of some key Trinamool Congress leaders to deposit-taking companies such as the Saradha Group.

Kunal Ghosh, a Rajya Sabha member nominated by the Trinamool Congress, was editor and chief executive of the Saradha Group’s now mothballed media business.

Ghosh, who could not be contacted despite repeated attempts, said in a Facebook post on 19 April, Friday, that he had joined the Saradha Group as an employee after it entered into an alliance with Sangbad Pratidin, a Bengali newspaper that he edited and that was owned by Srinjoy Bose—another Trinamool Congress Rajya Sabha member.

It isn’t immediately known how much money the Saradha Group owes its depositors. According to some estimates, including by the state administration, it could run into thousands of crores of rupees.

Very little is known about founder Sen’s family, education or roots. One person called the promoter of the closely held group a “smooth talker". Sen is “quite a rabble-rouser", said a former employee of the group, recalling his January 2011 address to at least 12,000 agents at Kolkata’s Netaji Indoor Stadium.

Sen kept a low profile at work and shared a desk with his executive assistant, this person added, asking not to be named.

None of the directors of the Saradha Group could be contacted for comment.

Pressure on the group’s finances had forced it to wind up, over the past few weeks, at least 10 media organizations—newspapers and television channels—that it had launched or acquired since 2010-11. The closure made at least 1,000 journalists and technicians redundant in Kolkata, making it among the biggest layoffs in the media industry in the country.

The administration swung into action on 17 April, Wednesday, after at least 200 commission agents of the Saradha Group from across the state came en masse to Kolkata to meet Roy.

They asked for the state government’s immediate intervention to recover money from the group, which, according to these agents, started defaulting on repayments last month.

The state government assured them that it would take the steps necessary to seize all assets of the Saradha Group by the weekend, the agents said after their meeting with Roy. Even so, they fear the state may not be able to recover anything from the 100 or so companies that the group ran.

The Saradha management had already started liquidating assets and there may not be much left on the books of its firms, they said.

The agents are the ones facing the ire of depositors. Some have already been attacked, others are in hiding.

Debasish Banerjee, an agent from Sonarpur in Kolkata’s suburbs, said 6 crore was immediately required to repay matured deposits. “Our team leaders are scared of being lynched," he added.

Another agent, Shaukat Ali from Murshidabad, said agents were initially asked to settle repayment claims on their own from fresh deposits collected by them, “but we soon realized that it was impossible for us to sustain that for a long time".

Ali, who along with his sub-agents used to collect 60-70 lakh a month until the end of last year, said he and other agents feared they would soon be driven from their homes by the depositors.

“Some agents have already fled their homes," he said.

Agents from the northern part of West Bengal said the Saradha Group started defaulting on repayments in January. Some cheques bounced because there wasn’t enough money in the group’s bank accounts, they said. These agents refused to be identified.

Some agents managed to get an audience with Sen at his office in Kolkata last week. They were told they would be given a power of attorney, or legal authority, to sell land held by the company to repay depositors, said an agent from Dakshin Dinajpur district. He did not want to be identified. It’s not known how much land the group owns.

While the agents of the group fear an imminent collapse, this hasn’t stopped several other companies in West Bengal from raising public deposits in the name of fictitious business ventures, selling instruments that are beyond the jurisdiction of India’s securities market and banking regulators.

Most of the older deposit-taking groups were founded in 2007-08, and the instruments they initially sold were mostly of five-year maturity. These deposits are now due for repayment, according to the state finance department official.

Historically, the collapse of a deposit-taking company leaves a trail of ruin and suicide in its wake. The biggest such collapse in West Bengal thus far has been that of Sanchayita Investments, a partnership firm that went bust in the early 1980s. Several depositors took their own lives after they failed to recover their savings.

West Bengal’s finances have been indirectly impacted by the growth of deposit-taking companies because it now receives a much smaller amount than earlier as a long-term loan from the government’s small savings collections.

All states receive 80% of incremental small savings deposits (net of redemptions) every year in the form of a 25-year loan that comes with a five-year moratorium.

West Bengal, which has traditionally had a high savings rate, used to receive in excess of 6,000 crore every year as loan from small savings deposits.

Because of the moratorium on repayments through the first five years, this loan was invaluable for cash-strapped states such as West Bengal, though in the long run it also increased public debt.

Chief minister Banerjee has been crying foul over the state’s indebtedness (West Bengal owes more than 2 trillion) and the paucity of funds for development initiatives. Her difficulties have intensified because of the falling collection in small savings schemes, said an economist who did not want to be named.

Over the past few years, net small savings collections have plunged—they are expected to fall to 100 crore in the current fiscal year from around 1,000 crore last year and from 8,000 crore in 2010-11.

Gross deposits have not taken a hit as yet, according to Jameel Asghar, regional director of small savings in Kolkata. “But people are not reinvesting matured deposits with us," he said. “The money, I suspect, is going to deposit-taking companies, which pay much higher returns."

The leading firms have taken in thousands of crores of rupees from millions of investors.

Rose Valley Hotels and Entertainments Ltd—one of the biggest deposit-taking companies in West Bengal—for instance, had at the end of fiscal 2012 around 2,900 crore of public deposits, according to latest available filings with the Registrar of Companies (RoC). The company is part of the Rose Valley Group.

MPS Greenery Developers Ltd, another big deposit taker, owed 1.6 million depositors 1,320 crore, according to its chairman and managing director Pramatha Nath Manna.

Rose Valley, however, denies taking public deposits. In an emailed statement, it said that all its “businesses are legitimate". Rose Valley takes money under its “holiday membership plan for booking of room at our various hotels/resorts on time-share basis", the company said. It repays people only if they “surrender" their membership plan. “This…does not violate any rules and regulations applicable in India," it added.

In January 2011, Sebi issued an order asking Rose Valley Real Estates to stop taking “earnest money in equated monthly instalments" from the public for the purchase of land, because the market regulator viewed it as a collective investment scheme (CIS). The firm did not have the necessary licence to pursue such a business, Sebi said in its cease-and-desist order.

This firm told the market regulator, explaining its business, that “in case if any intending purchaser (doesn’t) opt to purchase the land so booked by them, we refund the earnest money along with credit value". The Rose Valley Group’s reply was cited in its petition to the Calcutta high court disputing the Sebi order.

This firm, at the end of fiscal 2012, had long-term liabilities of 1,540 crore and current liabilities of 545.5 crore. How much of this is on account of advances taken from “intending purchasers" isn’t clear from the RoC filings.

These two Rose Valley Group firms had large cash deposits: Rose Valley Hotels had a cash equivalent of 1,222.5 crore, while Rose Valley Real Estates had a cash balance of 572.4 crore at the end of March 2012.

MPS’s Manna said his company had obtained “appropriate legal advice" against Sebi’s allegations of wrongdoing. Under the Constitution of India, the 17-year-old firm had the right to pursue business and had so far repaid 1,000 crore to depositors, he added.

MPS runs various agricultural ventures using public deposits as working capital. The collective revenue from these businesses was 481.56 crore in fiscal 2012, up from 258 crore in the previous year. MPS made a net profit of 37.62 crore in 2011-12, according to the latest available RoC fillings, and plans to invest at least 2,000 crore over the next five years to ramp up its agriculture and allied businesses.

Credit rating agency Icra Ltd had said in a report published in November that despite the growth in MPS’s revenue in 2011-12, the firm’s cash flow has been “inadequate to service debt in the past", making it dependent on mobilization of fresh debt. In three years till March 2012, MPS’s deposit base has grown from 275.6 crore to 1,321.75 crore, Icra said in the report.

Because the deposit-taking firms offer significantly higher returns than High Street banks, they have to constantly address one key concern—how are they able to pay so much?

Some have invented businesses—producing cement; constructing hotels and resorts; investing the deposits in exotic financial instruments such as potato bonds to make extraordinary profits.

For instance, Sumangal Industries Ltd takes public deposits offering up to 50 lakh on a deposit of 1 lakh in 15 years. It even offers investment schemes of shorter duration—it promises an annualized return of 15.6% on a seven-day deposit. And it says that the money it mobilizes goes into trading of potato bonds—warehouse receipts issued by cold storages—which in 2012 gave it a 58% return on capital employed.

A recent state-level inquiry, however, disclosed that Sumangal’s business had “nothing to do with potato bonds", said Subrata Biswas, secretary in West Bengal’s agricultural marketing department. “It is like any other deposit-taking company," he added. Sumangal refused to comment on its business.

All these firms have been running aggressive publicity campaigns through newspapers and television channels for the past few years. But lately, some channels carried ads after agencies representing deposit-taking firms gave post-dated cheques.

There appears to be a “serious liquidity crisis", said the Kolkata head of a national television network, adding that quite a few agencies have in the past few weeks expressed their inability to honour cheques issued by them because their clients didn’t pay up.

Has the bubble been pricked?

“From the trend that I have closely followed in the past few months, the slowdown (in revenue from these companies) is worrying—I have already made it clear to my network that the revenues from these firms could fall to a trickle in fiscal 2014," he added.

The mushrooming of deposit-taking firms began after the Reserve Bank of India (RBI) stopped Kolkata-based Peerless General Finance and Investment Co. Ltd from managing small savings, according to economists and experts.

Peerless was a so-called residuary non-banking company that used to raise money from the public and invest in RBI-mandated instruments.

RBI’s decision made Peerless’s 60,000 field agents redundant, and most of them founded or became part of the collection network of the deposit-taking companies that have flourished in the past few years.

They took advantage of poor bank penetration in the state’s rural areas and a lack of understanding among savers about financial markets, the economist added. Whereas Peerless used to pay 1-1.15% of deposits collected as commission to its agents, those in business now initially paid as much as 18-24%. Competition forced the commissions up even higher, with some of the newer entrants even paying up to 40%, the agents said.

Top performers are regularly rewarded with incentives such as foreign trips, cars and gold bars, according to a large number of agents who spoke on condition of anonymity.

Some companies of the weaker companies, which do not have a large deposit base, are under pressure to repay depositors. Some that didn’t expand beyond a few villages or a district have already gone bust, according to agents, so there is rising scepticism about such schemes.

“Even if you are into gambling or drug trafficking, you can’t offer such a high return to investors and even higher commission to agents for long," said a regulatory agency official. Which is why Sebi wants to arrest the growth of such companies before they acquire a scale that can pose a risk to the financial system.

Though key Trinamool Congress leaders assured the Saradha Group’s agents that the state government will do everything possible to help people realize their dues, it may not be possible to even determine how much money it raised from the public.

The reason: deposits were taken in cash, and the companies that issued certificates of deposits do not acknowledge them as liabilities in their books—a departure from the usual practice of treating public deposits as debt.

In West Bengal and other north-eastern states, deposit-taking companies typically claim to invest in agriculture, real estate and hotel projects.

As the balance sheets of these companies do not reflect public deposits, it is a “distinct possibility" that the Saradha Group would disown them, calling the receipts issued to depositors forgeries, according to a leading chartered accountant in Kolkata. “I am not sure whether he (Sen) can get away with it legally, but clearly it is almost impossible to determine how much he has siphoned off," he added, asking not to be named.

Several agents confirmed that deposits were only taken in cash.

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Updated: 26 Apr 2013, 01:16 AM IST
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