The Political Economy of Shadow Finance in West Bengal
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ISSN (Online) - 2349-8846 The Political Economy of Shadow Finance in West Bengal SUBHANIL CHOWDHURY Vol. 48, Issue No. 18, 04 May, 2013 Subhanil Chowdhury ([email protected]) teaches at the Institute of Development Studies, Kolkata The Saradha group's collapse has possibly bankrupted lakhs of small investors robbing them of their life savings and has rendered thousands of its agents jobless. The scam highlights the failure of the government and its regulatory agencies to reign in the mushrooming chit fund companies in West Bengal. It also brings under the scanner the Trinamool Congress' proximity with the tainted group. In the wake of the scandal, the article attempts to understand why the dubious Ponzi schemes have thrived and flourished in the state. Sudipto Sen, the chairman of the Saradha group of companies, was arrested in Kashmir on April 23, 2013, for allegedly defrauding lakhs of depositors who had invested in various schemes floated by his companies. After the Saradha group went bust, Mamta Banerjee, the chief minister of West Bengal callously told the duped investors, “let go whatever has gone”. However after two days, she announced a Rs 500 crore relief package for the hapless investors. In light of the unfolding events, this article attempts to analyse the political economy of the dubious shadow finance organisations in West Bengal. The Modus Operandi Let us take a look at the modus operandi of the Saradha Group of companies. The group collected money from the investors, through agents, promising them either land or a flat, or an option for a refund with a rate of return ranging between 12-24 per cent approximately, as per the Securities Exchange Board of India (SEBI) notice.1 The agents in turn were assured of a commission ranging from 15 to 20 per cent on the funds mobilised by them, according to local media reports. In some schemes, the group promised that on a deposit of Rs 1 lakh an investor will get Rs 10 lakhs after 14 years. If the same amount of money was kept in a fixed deposit in a bank for the same period, the amount accrued would be Rs 4 lakh. In other words, the rate of return promised by the group was more than double of that promised by commercial banks. According to some media estimates, the number of agents employed by Saradha group may run into thousands or even in lakhs, while the total amount of money mobilised by the group can run into thousands of crores. The huge collection of money from the agents was deposited with the main company which loated 160 companies ISSN (Online) - 2349-8846 (according to the letter submitted by Sudipto Sen to the CBI), including a large number of newspapers in various languages and TV channels in Bengali. The entire money mobilisation exercise of the group was, however, deeply problematic for a number of reasons. Firstly, in none of the documents given to the Registrar of Companies did the group mention anything about mobilising such huge amount of money from the public, and hence kept itself out of the purview of either the Reserve bank of India (RBI) or SEBI.2 The SEBI report also categorically mentions that the group never sought any permission from it to run such a scheme. The promise of providing a plot of land, or a flat after the maturity of the scheme was also a hoax. The SEBI found that the land/flat allotted to the investors was not pre-determined, and the investors had no control over the scheme, or the property. Moreover even after repeated prodding by the SEBI, the group did not furnish the required information, and tried to mislead it by providing voluminous data, which was basically irrelevant. When at last they furnished the information, it was found that it contained details of only 5 projects while the group stated to have acquired land in 31 locations. The details of allocation, booking, cancellation etc, were not provided, thereby prompting the SEBI to conclude that “it is highly unlikely that the projects are actually in progress”.3 There are also reports in the media that a motorcycle factory run by the group did not carry out any manufacturing. The workers were told to act as if they were producing the bikes when the group brought in investors to showcase the factory as an important asset of the group.4 In short, the group’s functioning was blatantly illegal and fraudulent.The working of the group in such blatant violation of all regulations and laws shows a mammoth failure of the regulatory authority of the government, both at the centre as well as the state level. In April 2010, the Left Front government sent a letter to the SEBI to investigate the group's activities. Prior to this, the Left Front government had passed a bill first in 2003, and then in 2009, to protect the interest of depositors and reign in such fraudulent companies. The bill has sections under which the property of such companies could be confiscated and auctioned to repay investors and charge them with criminal culpability. But even after four years, the bill still awaits Presidential assent. It can be argued that the Left Front government should have done more in terms of devising some mechanism to either control the functioning of the group, or at least alert the public. However, the matters came to a head under the Trinamool Congress (TMC) government. The Unholy Nexus : TMC and Saradha Group There are deep links between the Trinamool Congress party and the Saradha group. The CEO of the group's media wing Mr. Kunal Ghosh, and Mr. Srinjoy Bose, owner of the Pratidin newspaper, which has extensive business deals with Saradha, are both TMC MPs. Newspapers such as Pratidin, Sakalbela (owned by the Saradha group), etc, and TV channels such as Channel 10 are practically mouthpieces of the TMC. The brazen manner in ISSN (Online) - 2349-8846 which they support the chief minister Mamata Banerjee and the TMC makes a mockery of journalism. The TMC has been equally complicit in patronising Saradha's media network. The TMC government had ordered all public libraries to subscribe to newspapers owned by the Saradha group, including a Bengali daily Kolom, which Mamta Bannerjee had inaugurated recently. Video footage of her distributing ambulances, motorcycles and bicycles donated by the Saradha Group in Jangalmahal in 2011, has also been circulating. It is also reported that Sudipto Sen bought a painting of Banerjee for Rs 1.86 crore. The TMC transport minister, Mr. Madan Mitra, was appointed the president of the employees' union of the group, and at a programme organised by Saradha he proclaimed that its owner Sudipto Sen was the pride of Bengal. Moreover till April 15, the Chief minister feigned ignorance about Saradha being a chit fund company. Infact in March 2013, Sachin Pilot the Union Minister of Company Affairs placed in Loksabha, a list naming 73 companies from West Bengal who were running Ponzi schemes. The list included the Saradha group. No action was ever initiated by the TMC government against Saradha in the last two years. Rather the growing proximity between the ruling party and the group only helped in increasing the latter's credibility. After his arrest, the group's chairman in a letter to the CBI claimed that TMC MPs like Kunal Ghosh and Srinjoy Bose promised to protect him from the law if he acceded to their demands. Reasons for Small Investors Flocking to Saradha As has been already noted, the Saradha group promised a very high rate of return to the investors. It is true that the investors did not know that the scheme was a big fraud. However, it was evident that the abnormally high returns promised by the group was either not feasible, or involved too much risk, which could lead to investors loosing all their money. Currently, the rate of growth in India has slowed to 5.5 per cent, and the rate of interest prevailing in the market is between 8 and 9 per cent. In such a scenario to promise a rate of return above 20 per cent was blatantly absurd. So why did the people give their hard earned money to such complete fraudsters? There are number of reasons for this phenomenon. Slide in small saving deposits- If we look at the savings portfolio of the household sector in India, we find that between 2000-2005 the financial assets consisted of 12.8 per cent of GDP, while the physical assets accounted for 12.9 per cent. However between 2005-2010, the financial assets increased to 15.6 per cent of GDP, while physical assets declined to 11.8 per cent. In other words there was a greater degree of financialisation of savings in the second half of the last decade. If we further analyse the financial savings data we find that bank deposits account for the largest share-- increasing from 37.8 per cent in 2000-2005 to 51.6 per cent in 2005-10. The share of life insurance fund and that of stocks and debentures also witnessed a significant increase. However, there was a drastic fall in the share of claims on government -- mainly the small savings schemes -- which declined from 19.5 per cent in 2000-05 to 2.6 per cent in 2005-10.5 This drop in small savings holding is because of ISSN (Online) - 2349-8846 two reasons: (a) a decline in the interest rates of the schemes on offer (b) the availability of other financial instruments in the market made possible by economic liberalisation.