Ponzi schemes and alleged Sahara payoffs


I. Why is the Central Government Not Addressing the loss of 2 lakh crores in Ponzi Schemes incurred by ten crores depositors living at the Margin?

II. Why is Sahara the only Ponzi scheme that is still in business?

III. Why has SEBI refunded only Rs. 54.43 crores in four years to 11,956 depositors (Annual Report 15-16) when the amount deposited with SEBI is Rs. 14,000 crores and around 2.2 crores depositors were duped by Sahara?

IV. Are the Alleged Sahara payoffs entries true or are they being used to blackmail those at the helm?

V. Either way the allegation of corruption in the case of Sahara needs to be Investigated, more so when it is not true!

The author of the article, having failed in his attempt to intervene in the  Sahara case (Civil Appeal NO. 9813 and 9833 OF 2011) due to lack of locus, and having drafted the pending PIL (Writ Petition <Civil> 928 of 2013) filed by Humanity Salt Lake on Ponzi schemes with particular reference to Saradha and Rose Valley, has sufficiently researched the subject-matter to explain as to why the Ponzi schemes successfully flourished for so long, what was the nature of  violation of law, why paying protection money as bribes was a part of the business expenses, and most importantly why the ten crores marginal depositors who have lost two lakh crores will not recover their money in spite these companies having assets.

Amid the controversy of the Sahara payoffs and the arrest of TMC MPs, the question to be asked is not how much pay offs were made to whom for the “smooth functioning of the Ponzi scheme” (as stated by Enforcement Directorate) but is it because of these pay offs that the poor and hapless savers will never recover their life time savings aggregating 2 lakh crores? Do we, the relatively well off, not owe a duty to these ten crore poor to recover their 2 lakh crore money that has been illegally scammed? In most cases, it represents their entire life time savings. Forget the optics and the drama of demonetization and the enriching of each Indian through the black money stashed abroad, this was their own money dammit! (Pardon the language). Has there been a bigger scam in the land of scams? Does the nation have a conscience? But first the basics of the Ponzi scheme.

What is the Ponzi scheme?

A Ponzi scheme is one in which the deposits are actively solicited from the public through commission agents and as the current deposits received from the gullible public are far more than the payments to be made on past deposits, this excess deposit is treated by the promoters of the Ponzi scheme as their own money.

For example, in the case of PACL the deposits grew from Rs. 800 crores to more than Rs. 49,000 crores over a period of 12 years due to lack of oversight of the authorities and delays involving the Courts, and this Rs. 49,000 crores amount became the scam amount when the authorities were belatedly forced to put an end to the Ponzi scam. All the money was diverted by the promoters for personal use. The way the legal proceedings were delayed at various levels which in turn gave breathing space to PACL to grow their deposits phenomenally by thousands of crores is another scam, but then that is beside the point.

Why were these Ponzi scams successful in India?

The main reason for the Ponzi scheme being successful was the absence of the banking industry in rural areas and lack of financial inclusion for the low-income daily wage earners in urban areas along with the lack of oversight by the regulatory authorities. The Ponzi companies provided to the wage earner and the unbanked gullible poor depositor easy accessibility to para banking service with doorstep service provided by deposit agents of Ponzi companies.

This absence of easy accessibility to the banking industry led to the unscrupulous elements exploiting the opportunity by spreading their tentacles in every nook and corner of the country – villages and semi urban areas – by appointing deposit agents from the local community and paying them handsome commissions. It is significant to note the Ponzi companies did not flourish in the three Southern states where there was better administration and larger penetration of banks in the rural areas.

Number of people whose savings has been wiped out:

Most of the approximately 10 crores of low income people have lost their entire savings to these Ponzi companies. In the case of Sahara, the number involved is 2.2 crores and in the case of Pearl group the number of depositors is around 4.63 crores. There were other 300 large and small Ponzi companies like Rose Valley and Saradha, operating in the country in West Bengal, Orissa, Assam and Bihar which account for the remaining three crores of depositors.

Amount of money involved:

The largest Ponzi scam is not Sahara but the lesser known Pearl group of companies known as PACL. The amount involved for the Pearl group is Rs. 49,000 crores while the amount involved in Sahara group is over Rs. 30,000 crores. The Rose Valley scam is said to be a worth another Rs. 20,000 crores. If all the other Ponzi schemes and collective investment schemes numbering more than 300 are considered, the principal and the interest due, which has been misappropriated by these Ponzi companies, is around a staggering Rs. 2,00,000 crores.

Is it the largest and the worst money scam of the country?

Yes, it is. Around ten crore people have been cheated of their life-time savings aggregating 2 lakh crore. It is not the government but the poor who have been scammed. Does this country have a conscience and a Will to make amends? (Sorry, for sounding like a Gas-swami!)

Difference between Bank and Ponzi scheme:

The Ponzi schemes were operating like a bank without having any of the responsibilities and the safeguards that the banks have. They did not provide for SLR or CRR. They did not have to adhere to credit deposit ratio norms or to capital adequacy norms. Most important they were not subject to any lending norms let alone priority lending norms. There were neither subject to multiple rigorous audits. These companies were free to do whatever they liked with the deposit of the victims of the Ponzi scheme. Around 4% was paid to the deposit agents which was less than the salary bill of the Banks. The rest of the money was siphoned away as commissions, loans to sister companies and investment through benami companies. A small part was also spent on buying the silence of the powers that be.

What is the violation of law?

All these companies which are in the business of misappropriating the savings of the marginal saver are in breach of section 3 of the Company Deposit Rules 1975 made under section 58 A of the Companies Act which prohibits all companies from accepting deposits which are unsecured instruments (debentures or otherwise) for more than 10% of their net worth. The law has a rationale in that an entity should not borrow beyond its capacity to repay and innocent savers should not be exploited by unscrupulous elements. The Rules were framed in 1975.

Violation of 80 to 1600 times the permissible limit went unnoticed by ROC and Serious Fraud Department:

The omission on part of the law enforcers to enforce the law, lies at the root of the scam and companies have been allowed to collect deposits 80 to 1600 times the permissible limits. This omission was deliberate and the concerned officers are far more accountable than the politicians belonging to  Trinamool Congress.

In the case of one Sahara group company, Sahara India Real Estate Corporation Limited (SIRECL), the balance sheet of the Company for the year ended 30/6/11 shows the paid up capital and reserves of Rs. 2,325 crores. Hence the permissible limit for the company was Rs. 230 crores. However, deposits of Rs. 19,000 crores were raised as unsecured debenture. This deposit exceeds the limit by a whopping Rs. 18,770 crores which is more than 80 times the permissible limit.

In the case of PACL, the Company’s balance sheet for the year ending 31/03/2011 shows Rs. 235,508,150,280 as costumer advance. This money is nothing but unsecured deposit though called customer advance. According to the same balance sheet the paid up capital of the company on 31/3/11 was Rs. 40.1 crores and reserve & surplus was Rs 117.4 crores. Thus the total paid up capital plus reserve capital was Rs 157.6 crores only and the company was permitted to accept deposits of Rs. 16 crore only. The company PACL India Ltd. had collected/accepted the deposit to the tune of rupees Rs. 23,550 crores. This permissible limit of 10% under the Act has been exceeded by more than 1600 times.

This violation was going on for decades and yet the ROCs, Income Tax, RBI and SEBI did not act.

Had it not been for the WTM of SEBI and Hon’ble justice J S Khehar (as he was then) the scam would not have been brought out in the open. Both were criticized for their brave acts. The former by Sahara and the SEBI chief U K Sinha and the latter by Sahara lawyers which led to his recusing himself from hearing the matter further. (‘Should we be hearing this case,’ the opening famous lines of the 207-page judgment). In fact, he had reportedly directed the Registry not to put any matter related to Sahara before him! (Legal India 15/5/14)

Criminal Liability under Companies Act

Under 58-A (6) (b) of the Companies Act (old) if the overall collection of deposit beyond the permissible limit is punishable by five years’ imprisonment. Why has this clause not been enforced against any of the Ponzi companies? This shows that the government is complicit in allowing these Ponzi companies to cheat the 10 crore marginal depositors.

Why despite the bribes, commissions, diversion of funds abroad there are sufficient assets to pay back the depositors.

In most cases after diverting the cash for the purpose mentioned above, around 50% of the money was invested in land, real estate, hotels, and real estate development etc. These appreciated over a period of time and made up for the losses incurred in bribes, commissions, investments abroad and lavish lifestyle. Thus, there is sufficient asset to pay back the hapless depositor as the assets can be easily traced. However, it is more important to identify the depositors.

Protection money part of expenses is paid to continue the fraud

The entire Ponzi business is based on continuing the fraud of misappropriating the hard-earned deposits of the marginalised sections of society. If the violations of laws are grave, then so are the earnings. It is money for jam as crores of money are collected each day without any concern that the amount is to be returned.

Paying protection money to politicians, political parties and bureaucracy is a part of expense of the Ponzi business so that their activities are not inquired into. This protection money is a legitimate expense of an illegitimate business. It is for this reason that these Ponzi schemes have continued for decades and would have continued for a longer period had it not been for the honesty and the courage of Dr KM Abraham, erstwhile member of SEBI who wrote the Sahara order and Hon’ble Justice J S Khehar (as he was then) who upheld the order and how! However, neither of them went into the violation of the Companies Act as the same was not the issue before them.

Are the entries of bribes in Sahara computer/records true?

As stated above donations to political parties is protection money for all the Ponzi companies. It is routine. After all what is Rs. 100 crores when the deposit base is over Rs. 30,000 crores. Peanuts! But whether the amount alleged to have been paid to then Gujarat Chief Minister was a future investment or was a blackmailing entry is a different matter.

It is not a coincidence that most of the big Ponzi operators are also in the media business and involved in sponsoring sports? The former gives them blackmailing power and the latter is an advertising expense. They are also large advertisers in the media and buy their silence. At least Sahara was and continues to be.

Sahara, the only Ponzi still in business

Despite the Sahara Chief having spent substantial period in prison, it is the only Ponzi company that is carrying on business as usual by metaphorizing its business model, as rightly predicted by Dr K M Abraham of SEBI while alerting other regulators in his order. The following quote of a newspaper report from the order of SEBI has come true: ‘Sahara agents will now peddle several new investment schemes to raise money under the name Sahara Credit Co-Operative Society. The society has its headquarters and registered office in Sahara India Bhawan, Lucknow, where most Sahara group entities are based.’

Its insurance and its media businesses are intact, a large part of the deposits having been converted into co-operative deposit. It is business as usual.

Meagre amounts of Rs. 55 crores from Rs. 14,000 crores paid to depositors by SEBI in the Sahara Scam:

The Apex Court in 2012 had ordered the refund of the scammed money to the depositors and for SEBI to supervise it. It also appointed a former Justice of the Hon’ble Supreme Court to oversee the refund. What happened? In spite of SEBI receiving Rs. 14,000 crores (with interest on money deposited), only 11596 depositors out of 2.2 crore depositors have received Rs. 54.43 crores (refer SEBI annual report for 15-16) out of this Rs. 14,000 crores in last 4 years.

The low refund figure is because SEBI wants immaculate documentary proof from the illiterate gullible depositors. These were never given to the duped depositor! If the illiterate investor could prove his identity and the deposit would he be depositing his money with Sahara?

At another level one suspects that SEBI chief too is hand in glove with the promoters of Sahara (Refer to the letter written by the then WTM of SEBI, who wrote the Sahara order, to the then PM) and is out to reinforce Sahara’s contention that they have paid the depositors!

Allegations of bribes paid to the Prime Minister:

While there is much in what the Hon’ble CJI says that no document of Sahara can be trusted as there are very few who would know more about the character of Sahara than he does. After all, he had spent months hearing their lawyers before recusing himself!

But then that precisely is the point and why the allegation based on documents should be investigated. Not because they may or may not be true but because the good name of the Prime Minister needs to be cleared in a scam involving a company which is the mother of all scams. Why should the name of the PM be sullied by Sahara?

The fact that Sahara is the only functioning Ponzi scheme, the fact that its insurance and media businesses are flourishing, the fact that its assets are intact and no one is bidding for it, the fact that refunds of only Rs. 55 crores to 12,000 out of 2.3 crore depositors have been made in four years by SEBI, the fact that CBI has not arrested a single politician in this flourishing Ponzi scam, the fact that the neither the Serious Fraud Office not the Registrar of Companies have applied section 3 of the Deposit Rules and taken action under section 58 A (6) (b) of the old Companies Act providing for 5 years imprisonment and more recently the fact that the Settlement Commission has passed a very lenient order strikes at the very credibility of various institutions, shows that Sahara continues to be a favoured group.

Surely the impression that these failures of various government agencies are because of Sahara having falsified documents to falsely implicate the Prime Minister needs to be brought out in the open as the institution and the office of the Prime Minister is far more important than a powerful Ponzi company out to destroy the credibility of the Prime Minister.

Use 120B and 420 of the IPC against the deposit agents and the employees of the Ponzi scheme for refunding the depositor’s money:

The Prime Minister, however, having been accused by a Ponzi company needs to address the much larger tragedy relating to the ten crore marginal depositors losing Rs 2 lakh crores to the Ponzi companies.

Sections 120B and 420 of the IPC has been invoked by the CBI in all the cases of arrest of politicians of TMC, but not against the deposit agents.

It is a fact that accurate details of the depositor’s identity were not recorded and adequate proof of having received deposits were not given by the deposit agents. Most the depositors were gullible illiterate depositors. The agents forced the depositors to renew their deposits or made them do the rounds before refunding a discounted amount.

The Ponzi operators, in turn, never intended to return the bulk of the deposits and therefore found it convenient not to keep proper records so that they could deny the claims of the depositors. It is precisely this trap of the Ponzi operator and the colluding deposit agents that has led to the meagre refund of 55 crores out of Rs. 40,000 crores held by SEBI in the case of Sahara. In the case of PACL, SEBI in its order has abdicated the responsibility of making the refund and left it to the company!

The deposit agents fearing the wrath of the depositors, have united and formed an association to align themselves with the efforts of the depositors to get the refund. There are reports of their getting backdoor entry into the pending PIL referred to above and assuring the depositors that the PIL will get them their refund. Sadly, the present status of the PIL is on implementing future reforms, as suggested by SEBI, to prevent future scams. There is absolutely no concern in the PIL for evolving effective strategies for refunding the money to the depositors who have been duped.

The depositors can be identified by the deposit agents alone. And it is for this reason that section 120B and section 420 should be invoked against them at the district level and the name and the identity of the depositors should be obtained and tallied with the amounts remitted by the deposit agents. It is totally impractical to expect that the semi-literate depositors can approach SEBI and comply with their rigorous procedure to prove their deposit and claim refund.

In fact, the Odissa government has taken the lead in identifying the depositors duped by Ponzi firm Rose Valley Group of Companies to make way for refund of their money. They have passed the Odisha Protection of Interests of Depositors (in Financial Establishments) Act, 2011. In May 2016, the additional district magistrate (ADM), Cuttack, Bibhuti Bhusan Das, issued a notification in different newspapers for identification of duped depositors with a warning of prosecution against those who make false claims. This model along with invoking section 420 against the deposit agents is the only way in which the duped depositors can be identified and paid back their deposits from the seized benami assets of the Ponzi operators. Once behind bars under section 58A of the Companies Act these Ponzi operators will sing like a canary and identify all their assets.

We as a nation owe it as a duty to these hapless ten crore depositors who have lost their life time savings thanks to these Ponzi operators who have bribed their way to immunity.

Will the Prime Minister stand up for these ten crore marginalised Indians and clear his name in the only Ponzi scheme that continues to flourish and in which he is shown to have been paid Rs 55. crores?

The author wants to make it clear that he is not accusing the Prime Minister of having received the bribes but certainly supports investigations on Sahara having allegedly paid bribes in view of the overwhelming circumstantial evidence of the favourable treatment given by various government agencies.

In conclusion, the good name of the Prime Minister needs to be cleared from being associated with these scammers and justice done to the 10 crore marginal depositors who have lost two lakh crores.

(Arun Agrawal is the author of the book Reliance: The Real Natwar. The opinions expressed by the author and those providing comments are theirs alone, and do not reflect the opinions of Canary Trap or any employee thereof)