What households can learn from Saradha Scam?

The Saradha Scam is one of the largest ponzi scheme scams in India. It played out primarily in east India, originating from kolkatta.

With the latest CBI raids in this case on former SEBI officials, we are witness to every arm of governance being involved in the scam. There is no true or accurate estimate of the scale of the scam and it keeps changing. When the scam first broke out it was estimated at Rs. 2000 crores in 2013. Some recent reports peg it at Rs. 10000 crores.

The affected customers of the chit fund were approximately 17.5 million.

  • What should investors, especially from small and marginal household learn from this scam to protect themselves in the future?
  • Why do households with low income choose risky avenues to invest over deposits with local banks?

We can't dismiss it as an any other ponzi scheme, because certain characteristics that we want to shortlist are tailored to Indian conditions. Across India chit funds are a significant basis of finance for the low –income households and small businesses.

We shall focus on the messaging that the fraudster does that pushes an investor who does not place a fixed deposit directly aim for a risky investment option.

1. The name of the firm was supposed to be derived from Maa Sarada Devi, spouse and spiritual counterpart of one of the most revered saints of 19th century Bengal, Ramakrishna Paramhansa. This instantly broke barriers to adoption in rural bengal. The scam was primarily rural based across several eastern Indian states.

2. Most educated folks would find it difficult to understand that the less educated and sometimes individuals without a numbers based education find it difficult to evaluate a financial proposition. They would evaluate it with other attributes.

1. For example: Suppose you are offered a scheme stating "Your money would double in 3 years". Investors would either compare with their existing investments or with any standard investment to understand the numbers. More educated individuals would use the rule of 72, and say that the implied interest rate is 72/3=24%. More sophisitcated investors would compare 24% with the bank deposit or another government scheme. And suspect that there may be risk involved.

2. The concept that investors can earn additional returns by taking additonal returns, that there is no free lunch or the law of one price are not widely dispersed gospel among household lower than the middle class. Right messaging can break through any preliminary reservation an investor may have.

3. The scheme of schemes like Saradha or even some non-scam schemes like kerala state lotteries, necessarily will have good distribution margins. In the Saradha case a field force of agents was set up who earned 25-40% commission on every investment they brought. A little maths will tell you that if the commission is such high then it is difficult to generate required returns from the remaining funds and one has to look at providing the returns to old investors from investments of new investors. A ponzi scheme.

4. Note that some traditional participation policies of LIC and other insurance companies had a commission structure of similar kind. First year 40-60% and subsequently 5% per annum. It is possible that when Saradha moved from a chit fund to a collective investment scheme to debentures and other securities, it may have resorted to tapping such insurance agents. Unlike westbengal where the communists and later TMC set up a cut culture no such set up exists in other states, Assam, Jharkhand, Odisha, Chattisgarh, Bihar, Tripura. The westbengal 'cut culture' is notorious. Usually people point to the cut which real estate industry or other businesses need to give to get all kinds of government approvals and patronage. There is something more sinister.The ruling party workers are urged to go into the society and pick funds. They can keep 25% and have to deposit the remaining to party funds.

5. Investments into brand building primarily through celebrity endorsements. Most celebrities in India create a persona through active PR management. They want to leverage this and are available to any activity for a price. "Saradha promoters made investments in high-visibility sectors like the Bengal Film Industry through celebrity endorsements from prominent faces like Trinamool Congress (TMC) leader and Member of Parliament (MP) Satabdi Roy and TMC-MP Mithun Chakraborty as brand ambassadors." In poorer parts of India, politicians are more recognised figures and hence are brought into campaign advertisements, awards functions etc. Sudipta sen has alleged that he bought paintings of westbengal chief minister Ms. Mamata Bannerjee and payed a total sum of 26 crores to her. Paintings sold at 1-2 crores each and no flutter in the art world.

6. Fraudsters to create massive frauds that breaks the collective governance structures of civil society need to invest and cultivate other channels of civil society.

7. Saradha heavily invested in local television channels, FM radio channels, and newspapers (eight), investing around Rs. 988 crores under the CEO of the media group, another TMC-MP, Kunal Ghosh. SInce there exist no culture of paying for news in India, media houses routinely extort from whosoever has the money to pay. So either they have to be involved or co-opted. If media is not reporting on any great scheme, there should be more than that meets the eye.

8. A backend apparatus that does 'hawala' the Indian pseudonym for money laundering. All routes in India usually lead to kolkatta and then move to Dubai, katmandu etc. To do this Saradha created a web of companies. So in the Indian context a scheme brought by a 'Group' should not be viewed as Financial strength, rather a potential scam. The Saradha Group - Global Automobiles, West Bengal Awadhoot Agro Private Ltd., and Landmark Cement. Usually it would be linked to all the cash heavy businesses and agriculture.

9. Cultivate police. Saradha group donated motorcycles to Kolkata police and offered ambulances for the Naxalite areas.

10. Cultivate the local goondas, unemployed youth who are party workers of political parties. Saradha invested in various football clubs and also sponsored Durga Puja pandals.

11. Finally, bribe the officials who should have put a stop to the entire thing. CBI finally raiding the SEBI officials who were posted in that location suspecting their complexity in the entire episode. Saradha issuing securities of different kind without SEBI approval was plainly illegal.