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Business News/ Market / Stock-market-news/  Deposit-taking companies make hay in West Bengal

Deposit-taking companies make hay in West Bengal

Though they exist across India, proliferation of deposit-taking firms has been most noticeable in eastern states

An advertisement by Sumangal Industries in a Bengali newspaper offers attractive returns on potato bonds. Photo: Indranil Bhoumik/Mint (Indranil Bhoumik/Mint)Premium
An advertisement by Sumangal Industries in a Bengali newspaper offers attractive returns on potato bonds. Photo: Indranil Bhoumik/Mint

(Indranil Bhoumik/Mint)

Kolkata: India’s capital market regulator has written to the Union finance ministry at least twice in the recent past to appoint a watchdog to oversee the rapid expansion of deposit-taking companies.

Though they exist across the country, their proliferation has been most noticeable in the past few years in eastern Indian 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 body, but hasn’t made a case for itself to be made the watchdog, said a Sebi official.

The development comes in the wake of Sebi’s protracted legal battle against at least two such companies, MPS Greenery Developers Ltd and Rose Valley Real Estates and Constructions Ltd in West Bengal, to stop them from collecting public deposits under so-called collective investment schemes (CIS).

Despite issuing cease-and-desist orders a number of times, Sebi has not yet been able to stop these firms.

Reserve Bank of India (RBI) governor D. Subbarao and deputy governor K.C. Chakrabarty have said several times in the recent past that these companies, though receiving public deposits, do not come under the banking regulator’s jurisdiction.

The products these firms mostly sell to raise money from the public are so designed that under the current legal framework, neither Sebi nor RBI can regulate them. Indeed, CIS falls within Sebi’s jurisdiction, but most of these companies take money selling products that cannot be classified under such schemes.

The problem partly stems from the convoluted definition of CIS, said the Sebi official who declined to be named.

Sebi’s campaign against CIS operators in West Bengal has not had much success because of the intervention of district courts in the state. As many as six district courts passed injunctions last year on Sebi’s cease-and-desist order against MPS Greenery Developers, the Sebi official said.

Only the Securities Appellate Tribunal has the jurisdiction to review orders passed by Sebi, but that contention has been challenged many times in court, including at the Calcutta high court two years ago by the Rose Valley Group. Sebi even moved the Supreme Court against such firms, but could not make much headway.

The growing exasperation at not being able to control these companies is now visible within the West Bengal state administration as well.

West Bengal is planning to introduce a law to regulate deposit-taking firms, one that’s more effective than the 2009 legislation that could not be implemented for want of the President’s nod, H.K. Dwivedi, principal secretary in the state finance department, said on Saturday while addressing a chamber of commerce.

Under existing laws, the state administration can initiate criminal cases of fraud and cheating only on receiving complaints from depositors. The 2009 legislation, if implemented, would have enabled the state to intervene even before such a complaint was received.

But taking on these firms could have “huge political implications", according to a Kolkata-based professor of economics, who did not want to be identified.

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 Mamata 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 the economist cited above.

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 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, 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.

The company, according to its website, owns and operates a large chain of hotels, most of which are in West Bengal. From them, it received in fiscal 2012 a consolidated revenue of 24.35 crore, according to RoC filings, whereas income from other sources, mostly interest on bank deposits, was 64.22 crore.

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 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 RoC filings.

These two Rose Valley Group firms had huge 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, his 17-year-old firm had all legal rights to pursue its businesses, and it 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 that do not exist—some claim to be producing cement; some constructing hotels and resorts; while yet others say they invest the deposits in exotic financial instruments such as potato bonds to make super-normal 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 claims 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 for the past few years aggressive publicity campaigns through newspapers and television channels. Some of them even launched their own TV channels and dailies, though by now most such media organizations are moribund—some have even been shut.

Lately though, revenues from deposit-taking companies have significantly slowed down, said three advertising professionals, one of them the regional head of a national television network. These people did not want to be named.

Newspapers and TV channels were initially circumspect when dealing with these deposit-taking firms—they would ask them to pay in advance for their advertisements to be carried, these people said.

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 the 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 revenues 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.

What spawned the growth of these firms is RBI’s decision to stop Peerless General Finance and Investment Co. Ltd from managing small savings, according to the economist cited above. Peerless was a so-called residuary non-banking company, like Sahara India Financial Corp. Ltd, which used to raise money from the public and invest in RBI-mandated instruments. The banking regulator first took on the Kolkata-based company and later Sahara India Financial.

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 18-24%, but competition has forced these companies to raise their commission—some new entrants even pay 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.

With commissions rising, the weaker ones that do not have a large deposit base are already under pressure to repay depositors. Some small ones that did not expand beyond a few villages or a district have already gone bust, according to the agents, so people are beginning to get sceptical.

However, not a single case of default has been reported against the big ones, although this does not mean that everything is fine with these companies. “Even if you are into gambling or drug trafficking, you cannot offer such a high return to investors and even higher commission to agents for long," said an official of a regulatory agency. 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.

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Updated: 28 Mar 2013, 08:09 PM IST
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