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Ponzi Swindles and the Common Man



Ponzi schemes must be stopped

By Roopen Roy Dec 22 2015

Tags: Op-ed

Subrata Roy of Sahara Group was sent to Tihar Jail on March 4, 2014, for failing to refund over Rs 20,­000 crore with interest to depositors. He was asked by the Supreme Court to pay Rs 10,000 crore for bail, including Rs 5,000 crore in cash and the rest as bank guarantee. Unable to come up with the money, the bail was denied. According to the latest status update,   the Securities and Exchange Boa­rd of India rec­eived 10,456 applications and made refunds with respect to 7,296 applications for an aggregate amount of Rs 42.42 crore as on June 3. Therefore, according to the Sahara records, a very large number of small, rural depositors remain unpaid.


In the Saradha Group sca­m, between Rs 30,000 crore and Rs 36,000 crore were collected from small, poor inve­stors. No regulatory body or investigative agency unearthed the scam. As happens in every ponzi scam, trouble begins when cash outflows exceeds cash inflows. The gro­up’s cash inflow was, for the first time, less than its cash payouts in January 2013. Su­dipto Sen, the owner of Saradha, tried but failed to calm wo­rried depositors and agents. The crash, which was waiting to happen, happened. On Ap­ril 6, 2013, Sen wrote an 18-page confessional letter to the CBI. He posted the letter on April 10 that year, and then fled. While he was absconding, the chickens came home to roost. Eight days later, he was arrested and has since be­en in prison.

Then, on May 9, 2014, the Supreme Court ordered CBI to investigate all ponzi 
sch­emes, including Saradha, in eastern India. The West Bengal government appointed a commission under retired Ju­stice Shyamal Sen. In mid-August 2013, the commission finished its initial compilation of the list of claimants. Aro­und 1.74 million depositors filed claims with the commission, of which, 83 per cent invested less than Rs 10,000. The commission recommended that the West Bengal government sell the assets of Sa­radha Group and proportionally distribute the proceeds among defrauded investors. By April 2014, the commission had refunded only 40­0,000 depositors who had invested less than Rs 10,000. Thus, the vast majority of depositors still remain unpaid.

In two more high profile ponzi schemes, the amounts of money swindled from the poor and the middle-class are staggering. The first of these was the Rose Valley ponzi sc­am, which could be as big as Rs 60,000 crore. Gautam Ku­ndu, the company’s chairman, was arrested. Rose Valley resorted to many innovative types of ponzi sch­emes to dupe investors and depositors. For instance, it collected money under a so-called timeshare scheme. The group cla­imed it owned and operated properties across India and wa­s committed to redeeming deposits in the form of accommodation at its hotels.

The latest scam has triggered an unprecedented cra­ckdown on December 14. Se­bi has attached all assets of Pearl Agrotech Corporation (PACL) and its promoters for their failure to refund more than Rs 60,000 crore due to investors. With their corporate office in Delhi, Nirmal Singh Bhangoo and his team engine­ered this ponzi scheme under the garb of sale and development of agricultural land. The deposits were collected from ne­arly 5.85 crore investors.

Experts estimate that if all ponzi schemes were put together the size of the scams would exceed Rs 300,000 cr­ore. Therefore, the size of the problem is huge and it impa­cts small and middle class investors who have been swindled of their life savings. What is to be done?

First, we must understand what a ponzi scheme is. Na­med after Charles Ponzi, such a scheme is ab initio a scam. It promises to pay higher returns to investors out of their own capital or from the capital of subsequent investors and not from the operating profits of the enterprise. The longer the charade goes on, the more ca­pital is eroded and lost. The continuity of a ponzi scheme is dependent on the continuously rising mobilisation of deposits from a growing circle of investors. Therefore, we must understand, almost by definition, that all depositors will not be repaid the entire amo­unt they have invested, but will have to take a haircut.

Secondly, the regulators, pa­rticularly Sebi and RBI, should be armed to the teeth to stop illegal raising of funds before and not after the event. It cannot be the case that funds exceeding Rs 3 lakh crore have been raised from the market by flying un­der the radar. The ponzi scam operators used loopholes in la­ws and delays in the judicial process to raise money illegally.

Thirdly, imprisoning the ponzi scheme operators after they have frittered away a part of the capital is like shutting the stable door after the horses have bolted. At the whiff of a ponzi scheme, the regulators should remove the management and put in professional administrators or cou­rt-appointed trustees, as happens in the west.

Fourth, the focus should be on returning the money of depositors, not headline grabbing raids, imprisonments an­d trials. In the widely public­ised Madoff scam, approxima­tely $5.868 billion has been distributed to victims of the scam through the agency of trustee Irving Picard who acted as the professional administrator. Most victims will only receive roughly 34 per cent of what Madoff stole, with only a handful being made whole. But that is much better than what is happening in our country.

Last, but not the least, severe punishment should be meted out to the officers of the company and its auditors. Ponzi schemes are so blatant in their operations and so flagrant in their violation of laws that it is nearly impossible for an insider not to understand that fraud and scams are afoot unless you are an innocent Alice in Blunderland.



(The author is the Founder and CEO of Sumantrana, a strategy advisory firm)

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