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PONZI A Ponzi scheme is a fraudulent investment scheme where money brought in by the newer investors is used to pay off the claims of older investors. This creates SCHEMES an impression of a successful investment scheme. Of course, as long as money entering the scheme is greater than the money leaving it, all is well. The moment the situation is reversed, the scheme collapses.
The scheme takes after the name of Carlo Ponzi (1920s), an Italian fraudster who promised to double the investment of clients in 3 months’ time, basing the model on cash flows from new investors and the arbitraging gains from discounted postal reply coupons between Europe and US. The scheme collapsed in a year’s time and caused loss of US$20 Mn to investors.
Characteristics of a Ponzi scheme: 1. The scheme appears to be a genuine investment opportunity, but at the same time it is obscure enough to prevent any scrutiny by the investors. 2. The operators in the scheme persuade investors to roll over the profits into the next investment cycle. So the returns for investors remain on paper. Since the money remains with the operator the Ponzi scheme keeps running. 3. Most Ponzi schemes start with an apparently legitimate or legal purpose. 4. Brand building is an inherent part of a Ponzi scheme. Ponzi schemes eventually become too big and collapse under their own weight. The original investors gained only because the latter investors subscribed. No new wealth gets created. Typically, the investors are persuaded to reinvest their money back into the scheme and wait for a bonanza at a later day.
The attraction of easy wealth is something that investors cannot resist. Ponzi schemes offer huge returns in a short period of time vis-a-vis other investments available in the market at any point in time. In a country like India, where the poor populace constantly looks for new revenues to meet needs, the chances of people falling for Ponzi schemes continue to remain high. Many of the rich in their greed for quick money fall for such schemes. The only way out of this menace is by quickly and in an exemplary way punishing people who run Ponzi schemes.
Driven by the lack of safe and legitimate savings schemes for the rural poor, inadequate regulations and political patronage, hundreds of illegal Ponzi schemes masquerading as collective investment schemes or Chit Funds have played havoc across India.
National THE CURRENT STATUS Conference on “Capital Market On March 14, 2013 Corporate Affairs Minister Sachin Pilot presented a list of 87 Frauds and such companies in Parliament, against whom complaints had been received for Malpractices - indulging in Ponzi schemes. Seventy-three of these were from West Bengal. Eight Genesis, Resolution companies of the Saradha Group figure in the list, as do 16 companies owned by and Prevention” Rose Valley, a sponsor of the IPL team Kolkata Knight Riders. The ministry has 10 October 2013 ordered the Serious Fraud Investigation Office (SFIO) to fast-track investigations into the working of these organisations.
In April 2013, Securities and Exchange Board of India (SEBI) Chairman U.K. Sinha said at a seminar in Mumbai more than Rs 10,000 crore had been raised by so-called money circulation schemes, or by people who run Collective Investment Schemes but refuse to come under any sort of regulations.
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THE LAW
A major reason for the proliferation of Chit Funds and fraudulent Collective Investment Schemes is the absence of adequate regulations and, in some cases, the lack of clarity in laws. Chit Funds are monitored by state governments, Collective Investment Schemes by SEBI, and nonbanking finance companies (NBFCs) by the Reserve Bank of India (RBI).
With an aim to provide effective power to SEBI for taking on perpetrators of Ponzi Schemes and other fraudulent activities, the government has proposed to arm SEBI with direct powers to carry out search and seizure operations and for attachment of assets. Besides, it has also been proposed to provide SEBI with powers to seek information, such as telephone call data records, from any persons or entities in respect of any securities transactions being probed by it. After getting the Cabinet's approval, the government plans to introduce the Securities Laws (Amendment) Bill, 2013 in Parliament to carry out the proposed changes for grant of stronger powers to SEBI.
It is proposed to revamp the existing Market Research & Analysis Unit (MRAU) in the Serious Fraud Investigation Office (SFIO) to enable it to function as an Intelligence Unit. In its new avatar, the SFIO will be a statutory body with the ability to initiate prosecution when directed by the Central Government. The investigation report filed by the SFIO with the criminal court, for framing of charges, will be deemed to be a report filed by the police under the Code of Criminal Procedure.
CASE STUDIES C R BHANSALI (CRB) (1996)
The Scheme and people behind it: CRB’s meteoric rise in the early 90s coincided with the boom in the Non-Banking Finance Company (NBFC) sector. His fall in 1996 was equally fast. The credit-rating agencies didn’t see it coming. Rating Agency CARE gave the CRB group a ‘AAA’ rating at a time when the company was sinking.
First came the finance company (CRB Capital Markets), after which the mutual fund (CRB Mutual Fund) and CRB Share Custodial Services followed. CRB had a dream run from 1992 to 1996 collecting money from the public through fixed deposits, bonds and debentures. Bhansali floated around 133 subsidiaries and unlisted companies. Most of the money was transferred to these dummy companies.
The flagship company, CRB Capital Markets, went public in 1992 and raised Rs 176 crore in three years. In 1994 CRB Mutual Funds, through its Arihant Mangal Growth Scheme, raised Rs 230 crore. Another Rs 180 crore came through fixed deposits. CRB Corporation Ltd. raised Rs 84 core through three public issues between May 1993 and December 1995. CRB Share Custodial Services raised a further Rs 100 crore in January 1995 to set up operations. Between 1992 and 1995 Bhansali had managed to raise a mind boggling figure, in that era, of Rs 900 crore.
SEBI Action: Post-1995, CRB lost large amounts on the stock markets. His investments in the property market did not pay off because of the slump. Caught in a financial trap, CRB tried borrowing more money from the market.
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To repay the interest on amounts he borrowed, CR Bhansali was forced to borrow once again. CR Bhansali made a determined effort to get out of the trap by investing in some high-risk ventures. This went on, and CRB got stuck in a financial quicksand and was finally charged criminally. Bhansali spent three months in jail in 1997. He is out on bail now but nobody knows where he is.
ANUBHAV PLANTATIONS SCAM (1998)
Scheme and people behind it: The Chennai-based Anubhav Plantations owned 2,600 acres of land, on which teak plantation was to be cultivated. The saplings were already planted and insured. The deal was to invest money and own a part of the land. The money the investors put in would be used to tend to the plantations. Since the interest earned on plantation schemes was treated as agricultural income, it was exempt from tax. The unit value of the teak schemes was very small, investors could easily afford them. As a result, Anubhav's schemes became very popular. The Anubhav Group was also associated with the World Wide Fund for Nature, adding to its credibility. The Anubhav group of companies never delivered on the Teak scheme. They were found to have duped investors of over Rs. 400 crore.
Current Status: C. Natesan, the promoter, was arrested in October 1998 and spent 8 years in jail. In March 2013 the Madras high court dismissed the anticipatory bail petitions of C Natesan and his wife, who again apprehended arrest in connection with an NRI cheating case registered against them in 2008.
HOMETRADE.COM (2002)
Scheme and people behind it: By claiming a foreign source of money supply, the company - which was nothing more than a financial dot-com web portal - launched an incredible celebrity endorsement based campaign featuring three of the most expensive celebrities in the country, to brand a financial product that nobody could figure out. Nobody knew what Home Trade did or what it sold, or even whether a financial portal could afford to throw around the sort of advertising money that it was.
It was masterminded by Sanjay Agarwal, broker Ketan Sheth, Nandkishore Trivedi and Baluchan Rai (- a Hong Kong-based NRI). With funding from Euro Discover Technology Ventures, Mauritius, this group bought off Lloyds Brokerage Ltd, for a paltry Rs 1.5 per share. Lloyds Brokerage changed to Euro Asia Securities, which was listed at the Pune and Bangalore stock exchanges. Euro Asia Securities soon morphed into another avatar and Home Trade was born. Its high profile ensured that nobody delved into its background for over two years, right until the bubble burst. Home Trade was not focused on earning revenues through product sales but seemed focused entirely on raising capital. Its ultimate aim was to tap retail investors through all that hype. Having ensured that its share price was kept at a high at the Bangalore Stock Exchange, it was lobbying to have its shares listed on the BSE and NSE.
Hometrade was using its ‘hyped up’ image to cover up its continued borrowings and the illegal government securities trading through an equity broking membership. It was running a Ponzi scheme with several co-operative banks. Home Trade, obtained over Rs 120 crore from Nagpur District Central Cooperative Bank (NDCCB) for investment in government securities,
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but did not deliver the certificates. A NABARD (National Bank for Agriculture and Rural Development) team pointed this out and leading NDCCB to file a complaint. Very soon many other cooperative banks in Maharashtra and Gujarat as well as provident funds, started filing complaints. All reported having invested in government securities through Home Trade and Gilt Edge, another brokerage, but did not receive the relevant certificates. The scam threw light on the opacity of investments by cooperative banks and provident fund organisations. The sums involved could be in excess of Rs 400 crore.
Current status: Sanjay Aggarwal, chief executive of HomeTrade, was arrested in May 2002 along with his associates Ketan Seth and Subodh Bhandari for duping investors of billions of rupees. However they are currently out on bail.
The lure of lucre on the part of celebrities that endorsed HomeTrade, without the necessary checks, led to several thousand uninformed investors losing out.
CITY LIMOUZINE (INDIA) (2002 -2008)
Scheme and people behind it: This Mumbai-based Company promised investors, the scheme launched in 2002, Rs 4,000 every month for five years if they made an initial investment of Rs 97,000., The scheme planned to invest the money collected in buying cars that were to be run as taxis. The post-dated cheques for monthly payouts that the company had issued started getting dishonoured in 2007. After collecting around Rs 1,000 crore from investors by promising them unrealistic returns, through various schemes, the companies City Limouzines and City Realcom shut operations in 2008.
Current status: The enforcement directorate (ED) arrested Sayed Mohammed Masood, chairman of City Group, in December 2012.
TOTAL4U (2009)
Scheme and people behind it: In 2009, the Kerala police busted a money chain run by R Sabarinath, who, along with his associates in a company Total 4 U, lured as many as a few thousand people to invest Rs 200 crore by promising high returns.
Current status: In 2012, authorities auctioned nine luxury cars belonging to Sabarinath, including a BMW and a Toyota Lexus, to pay back some of the investors. Sabarinath was arrested but was subsequently released on bail.
SPEAK ASIA (2010)
Scheme and people behind it: The Singapore-based Company promised Rs 4,000 monthly payout on an investment of Rs 11,000. The company claimed it did online surveys for big companies such as ICICI Bank and State Bank of India. It managed to collect Rs 2,500 crore in less than two years before the authorities nabbed the company brass in India. Hundreds of investors could not even recover their initial investment.
Current status: Tarak Bajpayee the man behind this scam was arrested in July 2011.
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GOLDSUKH (2011)
Scheme and people behind it: Promoters of a little-known company in Jaipur promised 27 times return to investors in 18 months, mopped up over Rs 200 crore and then made off with the money, leaving close to 200,000 people in the lurch, and not at all with any ‘sukh’. . The company, Goldsukh, was a multi-level marketing (MLM) company which promised investors that their money would be invested in gold. More than by the business model, investors were lured by the promise of stellar returns.
Current status: The Rajasthan police caught one of the fleeing directors of Goldsukh, Narendra Singh, at the Indira Gandhi International Airport in New Delhi on January 30, 2012.
ABHINAV GOLD (2011)
Scheme and people behind it: The Bhilwara-based Company promised to pay investors Rs 1.72 lakh after two years on an investment of Rs 6,000. It duped 20,000 investors in Surat, Gujarat.
Current status: Anil Birla and Murlidhar Birla the main accused are absconding and only a few agents have been arrested and the offices sealed by the Economic Offenses Wing.
SHIVRAJ PURI FROM CITIBANK INDIA (2011)
Scheme and people behind it: In 2011 Shivraj Puri, a relationship manager at the DLF Phase II branch, Gurgaon, of Citibank siphoned money amounting to Rs. 400 crore, of various customers, to fictitious accounts over a period of 12- 14 months. He enticed customers with a fake circular purported to have been sent by the capital market regulator (SEBI) offering an attractively high fixed interest scheme promising 2-3% returns per month. He forged documents and letterheads of Citibank and SEBI to promote these products.
The forged circular also mentioned a custodian account run by one Premnath that was passed off as an approved channel to route investor funds. Premnath is Puri’s grandfather. Once the money was deposited in Premnath’s account, it flowed immediately out of it into three other accounts kept with Citibank—in the names of Sheila Premnath (grandmother), Deeksha Puri (mother) and Shivraj Puri himself.
In the third leg of the transaction, the funds moved out of these accounts to brokerage accounts Shivraj Puri kept with firms such as Religare Securities Ltd, Bonanza Portfolio Ltd, India Infoline Ltd and Normans Martin Brokers Pvt. Ltd. (owned by Raghuraj Puri, father). All three legs of a transaction would be completed within one working day. Shivraj Puri also made about half-a-dozen customers of Citibank sign blank cheques and drafts and other financial instruments, and used these to transfer money out of their accounts directly to the brokerages to be invested in the market. There was also collusion with the investment managers of Hero Motor Corp, setting the company back by Rs 200 crore.
Current status: Shivraj Puri and his father were granted bail in May 2012 after 17 months in jail
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EMU FARMING (2012)
Scheme and people behind it: M.S. Guru of Perundurai in Tamil Nadu duped 20,000 investors of about Rs 500 crore, by luring them to invest Rs 1.5 lakh in emu farms, promising a return of Rs 3.34 lakh in two years by rearing the Australian-origin birds.
Not only the investors lost, the innocent emus were abandoned and left to fend for themselves, to forage for food. The State Government has stepped in and proposed an emu protection scheme.
Current status: M.S. Guru was arrested in August 2012.
THE SAHARA CASE (2010 – ongoing)
Scheme and people behind it: In January 2010 it was discovered that the housing bonds issued by two companies of the Sahara group - Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) - were not conforming to prudent disclosure and other investor protection norms. SIREC planned to raise funds through unsecured OFCDs by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with the Sahara group, without any advertisement to the public. The funds raised were to be used in real estate development and infrastructure projects. The memorandum of information clarified that the company had no intention of listing the OFCDs in any exchange in India or abroad. The company collected over Rs 19,400 crore from 22.1 million investors between April 25, 2008 and April 13, 2011. Similarly, SHIC raised Rs 6,373 crore from 7.5 million investors.
When SEBI started its investigation on the OFCDs, Sahara argued that SEBI can take action only against listed public companies and those companies which intend to get their securities listed in India. Since the two Sahara companies had clearly stated that they did not intend to list the OFCDs and it was a preferential issue, the matter was outside the market regulator’s purview, the Group maintained. SEBI countered with the regulation that if OFCDs are issued to 50 people or more, it becomes a public issue and therefore falls within its jurisdiction.
On January 4, 2011, the Supreme Court upheld SEBI’s rights to seek further details on the issues. In the end of 2011 / early 2012, the Supreme Court opined that records of the investors that Sahara placed before it were totally unrealistic and may well be fictitious, concocted and made up.
Finally, On August 31, 2012 the Supreme Court passed an order asking Sahara to refund over Rs 24,000 crores to more than three crore bond holders of SIRECL and SHICL, after SEBI verification of the genuineness of these investors,
within three months. The apex court rejected the idea that just because there were no investor complaints, it does not mean there was no problem with the schemes.
On 5 December 2012, the court gave additional time to Sahara group and it
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was asked to make an immediate payment of Rs 5,120 crores, followed by Rs 10,000 crore by the first week of January 2013 and the remainder by the first week of February 2013. Supreme Court allowed the market regulator to freeze accounts and attach properties of Sahara if it did not deposit the money for refund to investors. SEBI also restrained all Sahara entities from accessing the securities market for raising funds, till the time payments are made to its satisfaction.
Nevertheless several interesting points stand out in this case: 1. The OFCDs that the two Sahara group companies issued to raise money do fall into the category of investment but at the same time details obscure enough to pre-empt and prevent any scrutiny by investors. Further, Sahara raises its money from the lowest economic strata of the society; a lot of them do not even have bank accounts. So the chances of questions being asked are very low. 2. Sahara admitted that they often ask their investors to reinvest their money in new schemes of the Group by rolling over their schemes into new ones. 3. Sahara is into a variety of businesses from running hotels, making films and television serials, acquiring IPL team, building resorts, buying up property abroad, and construction of houses, which are all legitimate. The money raised by Sahara supposedly finances these businesses. What is not disclosed is which of these businesses is making money. Also, has all the money that has been raised put to stated use? The film business of the company has been scaled down majorly over the years. The listed businesses of the group can’t be said to be doing terribly well either. Very little financial information regarding the group is available in the public domain to perform any reasonable financial analysis on it.
Current status: The court dismissed the Sahara companies' plea on February 25, 2013 for more time to deposit the money. They have till date deposited only Rs 5120 crores with SEBI. On 13 August 2013 the court heard three contempt petitions by the market regulator SEBI against the two Sahara real estate companies, their directors, including promoter Subroto Roy, for not complying with the apex court orders.
Sahara has accused SEBI of preventing the company from abiding by the court order by refusing to accept documents relating to investors. Sahara also claimed that they have already refunded Rs 22,000 crores before the Supreme Court order in August 2012, which has been rubbished by the apex court. The Supreme Court has in its hearing the first week of October 2013, has asked the Sahara Group to explore providing a bank guarantee for Rs 22,000 crores,
THE SARADHA CASE (2013)
Scheme and people behind it: The Saradha Group financial scandal masterminded by Sudiptio Sen and Debjani Mukhopadhdhay is a financial scam Caused by the collapse of a Ponzi scheme run by Saradha Group, a consortium
of Indian companies which was believed to be running a wide variety of collective investment schemes in Eastern India. The group collapsed in April 2013, causing an estimated loss of INR 4000 crore to over 1.4 million depositors.
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Initially, the front-line companies collected money from the public by issuing secured debentures and redeemable preferential bonds. However, under Indian Securities regulations and section 67 of the Indian Companies Act 1956, a company cannot raise capital from more than 50 people without issuing a proper prospectus and balance sheet. Its accounts must be audited. It must also have explicit permission from the market regulator SEBI for such a deemed ‘Public’ issue.
SEBI first challenged Saradha Group in 2009. The Saradha Group responded by opening as many as 300 new companies to create a complex web of cross- holdings. This created an extremely tangled corporate structure which rendered it difficult to trace and apportion accountability and pin blame on any one company.
In 2010, Saradha Group changed its methods of raising capital. In West Bengal, Jharkhand, Assam and Chhattisgarh, it now ran variations of collective investment schemes (CIS), such as tourism packages, forward travel and hotel booking timeshare credit transfer, real estate, infrastructure finance, and motorcycle manufacturing. The investors were not informed about the true nature of the investments. Instead, many investors were told only that they would get high returns after a fixed period, 30 months to other investors; the investment scheme was fraudulently sold as a form of 'Chit Fund'.
After SEBI warned the State Government of West Bengal about Saradha Group's apparent Chit Fund activities in 2011, the Group changed its methods again. This time, it acquired and sold large numbers of shares of various listed companies, siphoning off the proceeds of the sale to unidentified accounts.
In 2012, SEBI demanded that the group immediately stop operating its investment schemes until it received proper permission from SEBI. However, Saradha Group ignored SEBI, and continued to operate in the same manner until it collapsed in April 2013.
On 7 December 2012, RBI governor Duvvuri Subbarao stated that the West Bengal government should initiate suo motu action against companies which were indulging in financial malpractices. By that time, the Saradha Group Ponzi scheme was already beginning to unravel. In January 2013, the cash inflow of Saradha Group was less than its required cash payouts for the first time. This outcome of mismatch between inflow and outflow of cash is inevitable in a Ponzi scheme when allowed to run its full course.
Current status: In a letter dated 6 April 2013, Sudipto Sen wrote an 18-page confessional to Central Bureau of Investigation, in which he admitted that he had paid large sums of money to several politicians, from different political parties. After posting this letter on 10 April, 2013, Sen fled to Kashmir, where he was arrested on 23 April 2013 along with Debjani Mukhopadhdhay. Meanwhile, much of investor money has truly fled with only a slender chance of retrieval.
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National Conference on “Capital Market Frauds and Malpractices - Genesis, Resolution and Prevention” 10 October 2013
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