Garnering money has never been easy as regulators are still in slumber!

Do not ask the investors’ for PAN number, address proof or for any KYC. Just promise huge returns in few months and give 35-40% commission to agents and voila! You can garner any amount of money from people, both educated or uneducated living in urban and rural areas. And don’t worry about the regulators. They would be the last one to know about your fortune

These days raising crores from the public is easier than it was in the past. Anybody with a gift of the gab can pull it off to collect crores just by styling as first time budding entrepreneur and flourishing a colourful brochure containing a glamorous business plan-cum-prospectus promising great returns on investment. 
The road-smart IPO (initial public offer) promoters wanting to make big impact IPOs just flaunt some Masters qualification with an equally phoney Doctorate in either management or industry from an unknown phoren university. No questions asked for post-qualification hands on experience!  Armed with this they then get on board the right connections at different levels in the financial world, media, some political big-wigs, celebrities including P3 glitterati to sign in as “joint-promoters”. Then tie up with big name merchant bankers with right contacts with auditors, preferably from amongst the Big Four, to attest the due diligence report justifying the inflated offer price/premium, even before their entity even came into existence or turned out a single finished product or earned any revenues! Armed with this, the next port of call was a governmental or private development finance institution or bank for term borrowing for land, building and later equipment because all this forms a part of the offer document. The IPO when out then is said to be “oversubscribed” many times over! 
Earlier the Reliance group were pioneers in raising monies with all kinds of unusual names like Fully or Partly Convertible Debentures with coupons and illu-pillu twin issues. This took place in the Controller of Capital Issues era in the pre-SEBI (Securities and Exchange Board of India) days. Taking a cue or a precedent, now Sahara, without having to submit voluminous disclosure documents to SEBI or any other authority goes further than Reliance to collect Rs19,000 core Optionally Fully Convertible Debentures to be converted into shares of other unlisted group firms
Saradha went on to collect what they denominated Advances from the gullible public against promises to allot land/apartments from one to ten years, others were promised fantastic returns from potato fields, mango and strawberry orchards, potato, teak plantations and emu farms. Both conveniently avoided. Both of them conveniently avoided the elaborate public issue procedural compliances like Red Herring Prospectus and other filings with numerous disclaimers, road shows, TV promos, media ads promoting the proposed CSR activities. 
Aarti Krishnan,  recently writing in the Hindu Business Line on Raising capital made easy has a quite an interesting take—“If you are not overly scrupulous and willing to exploit loopholes in the law, here is a ‘business model’ to raise thousands of crores of rupees from retail investors (through chit funds).. The first step to raising public money, without attracting unwanted attention from the numerous regulators, is to keep your identity delightfully vague. Make sure you are not a listed company, a mutual fund, an insurance company, a finance company or even a chit fund.  Holding yourself out as any of these would require you to register under a relevant authority, bringing with it many rules and regulations governing capital raising. Instead... calling yourself XYZ ‘group’ the onus will immediately shift to the regulators to prove that you do fall under their jurisdiction that is likely to take a long time in the Indian courts… Taking on the Sahara group SEBI had to fight a legal battle all the way to the Supreme Court just to establish that it did have powers to regulate unlisted entities raising public money. The same is now playing out with the Saradha group, which appears to be neither a chit fund nor a finance company... Ensure that the instrument through which you raise money is neither a share, nor a bond, nor a deposit but a hybrid that defies any of these descriptions. The trick is to assert that it is not a ‘security’ at all, so that the onerous security market laws about public offers or public offers or disclosures simply cannot apply to it.” 
The Saradha group is alleged to have mobilized over Rs20,000 crore before it went bust. Now the other hitherto low-profile companies in this game are out in the public by  taking heavily to the print and electronic media to stave off negative perceptions and to  salvage their image and allay investors’ fears by even airing TV commercials and large scale advertisements in local dailies asserting that they continue to remain “asset-based economically proficient companies” by showcasing projects in which the investors’ funds are parked and also participating in live TV chat talk shows opening up to media queries. One of the outfits—the Rose Valley group—has to its credit national award winning films. The movie Kagajer Nouka –Paper Boat featuring the story of two freedom fighters—one true to his ideals and another setting up a deposit taking company duping public—was prevented from being released. 
Sahara and Saradha will hereafter be referred to as S&S have chosen the softer options of signing up big names from cricket, football, hockey and tennis as brand ambassadors to create confidence in the public. While Sahara showcased reality in Ambey Valley near Mumbai, owned in-house TV channels and an airline, Saradha went overboard by setting up myriads of corporate entities to undertake unrelated activities ranging from print media and multiple TV channels and even a two-wheeler manufacturing unit that never saw the light of the day. Both of them took care to keep on the right side of all the political parties of UP and West Bengal that were expected to enforce the state Chit Funds Act, which were conveniently winked at for their companies’ transgressions.  
The most informal business plan for windfall fund raising by S&S was to involve minimal or least paper work; no procedural hassles of requiring from their investors any proof of identity or residence any PAN or KYC, cash collection with no limit. Their target markets were not educated urban but rural hinterland in remote smaller unsuspecting towns and villages with minimal literacy and hardly any banking penetration, most transactions in untraceable hard cash. 
The promotion was made by a large field force from local agents verbally marketing on promises of high commissions going as high as 35%-40% by way of cuts from collections. The agents in turn also recycled their commissions into investments, not aware that the monies that they were collecting was not to be returned and in the bargain they not only stood to loose their commission but also all that they had invested as principal!  Sahara now tells the apex court that they have truck loads of evidence of repayments, evidence that would require the hundreds of auditors thousands of manhours just to shift through the refund payment vouchers with the application forms.
Collecting monies is at best a con job of ensnaring gullible greedy people with offers of windfall stupendous returns that they are told no one else on earth can match. This justifies the good old Hindi adage “Duniya jukti hai, jhukhanewalla chahiye”. A smart con man can bring this it best.
 On 17 May 2013, top officials from RBI, CBDT and SEBI, Secretaries from MCA and MOF officials who appeared before the Parliamentary Standing Committee on Finance frankly admitted to poor coordination and lack of regulation to control the flourishing chit fund business. They told the Committee the major onus to regulate chit funds lay on the states. A member pointed out the government data itself was faulty—in response to a question in the parliament, it was stated that the regulations are functional in 15 states when it was flourishing in 17 states and six Union Territories. Gurudas Dasgupta of the CPI terms it a complete failure of system lamenting that different arms of the MOF like Revenue Intelligence, Enforcement Directorate, and Income Tax failed to zero on that advertised in news paper offering as much as 30% returns that were quite abnormal. The Committee has suggested that MOF by an executive order bring all deposit schemes under RBI as recommended by the FSLRC. 
Raising monies from banks or financial institutions is not difficult either. Not long ago the multi-national HSBC Bank at Mumbai was conned into lending Rs330crore, ostensibly “for upgrading a media library for BBC”. HSBC apparently took the promoter- conman at face value till their enquiries with BBC exposed the con.
 The 17 public sector banks lent crores to  the KFA on various  illusory securities that included the brand name, as a part of the corporate restructuring of  debt got its borrowings converted into equity on an inflated valuation of shares at a premium when the company was always in the red from day one; unenforceable personal and corporate guarantees. Now it transpires that the lenders can possibly recover at the utmost 25% of the securities and this will result in the banks having to write off 75%!
The CMD of Canara Bank, which has a Rs360 crore exposure out of the Rs4,000 crore to Deccan Chronicle Holdings now states—“The balance sheet does not reveal the exact situation and the company had filed wrong registration certificates, the true financial picture was not revealed and all loans taken were not disclosed, the end use of funds not established… On the recovery of loans of the total about 50% was securitised.”   
Most of our developmental financial institutions are saddled with crores advanced to various industrialists who were advanced funds based on pressures and without adequate due diligence. In the railway minister Pawan Bansal corruption enquiry it has come to light that his personal tax advisor was nominated for two terms on the board of directors of Canara Bank which advanced Rs9 crore to a company in the Bansal family group where the CA was a director.  Conflict of interest is not for high flyers!
Acceptance of deposits by limited companies both private and public is another mode of raising funds. To overcome the caps imposed by the Acceptance of Deposit Rules just one equity share is allotted and later money accepted under “Unsecured Loans from Shareholders”. This is also included as equity for Debt: Equity computations. 
There is an urgent need to tighten measures to protect the interest of investors by bringing about stricter monitoring by the regulators.
(Nagesh Kini  is a Mumbai-based chartered accountant turned activist.)
Naresh Nayak
9 years ago
Nothing works in India. The regulators if they act, do it belatedly. The police is darn corrupt. The Judiciary has 500 years of cases to close. So what is the solution? Invest in Fixed deposits. Deal only with people you trust in person after knowing them well. Dealing with insurance, corporate fixed deposits are a hit and miss operation. Good investors (retail) who have made money in India have only parked money in fixed deposits and purchased gold! If as a retail investor you did only these two things it would be a positive return on capital echoing Warren Buffets singular philosophy - Don't lose money.
R Balakrishnan
9 years ago
Nothing comes in the way of an investor and his money getting parted. And the frauds also afford the best of the lawyers leaving the regulators with their backs to the wall even if they can prosecute. The practice of 'negative retainers' by the legal profession is another big contributor
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