RBI says these are beyond its jurisdiction, SEBI has made some efforts to control them, but these finance companies use local courts to ignore orders. But now big companies, like Saradha group have started defaulting. Is it the beginning of the end of dubious finance companies in West Bengal which have been close to both the Left Front and Trinamool Congress?
Saradha group, one of the biggest finance companies in West Bengal is on the verge of collapse and according to news reports, the state government has issued an order for arresting Sudipta Sen, chairman and managing director (CMD) of the company for default on repayments. The Saradha group is just one of the many deposit-taking companies that sprouted and flourished in West Bengal under the garb of legitimate businesses such as real estate, agro products and tourism.
Over the past few years, West Bengal has seen the emergence of quite a few chain-marketing companies. Among them Rose Valley, Icore Group, MPS Group and Saradha group are the most visible ones. They are all about a decade old and claim to be highly diversified conglomerates today. Amazingly, these groups are all Bengali-owned when there is hardly any example of Bengali entrepreneurship of any kind.
While the Reserve Bank of India (RBI) has maintained that the deposit-taking companies does not fall under its jurisdiction, market regulator Securities and Exchange Board of India (SEBI) tried to rein in such companies in the past under its collective investment schemes (CIS) regulations. However, these companies managed to subvert the SEBI orders and continued to flourish with political patronage. But more about it later.
According to a newspaper report, SEBI's action against deposit-taking companies from West Bengal has so far failed due to intervention by district courts. As many as six district courts passed injunctions last year on SEBI’s cease-and-desist order against MPS Greenery Developers, the newspaper report said, quoting an official from SEBI. The market regulator even approached the Supreme Court against these deposit-taking companies, but this effort too could not produce any result.
Last month, SEBI requested the finance ministry to appoint a separate regulatory body for regulating deposit-taking companies and CIS operators.
Collectively, CISs operators are whispered to have raised over Rs20,000 crore, mostly from lower-middle class people in West Bengal, once ruled by the communists and Tripura, which is still under the red flag. With that money, they have bought media space and acquired legitimacy. Rose Valley has been a big advertiser with the Ananda Bazar Patrika (ABP) group. ABP has gone out of its way to promote them and celebrate their ‘entrepreneurship’.
Saradha group was one step ahead of other similar businesses. Since 2010, it acquired or launched several newspapers and TV channels. Unfortunately, over the past few weeks at least 10 media organisations of Saradha group shut shop due to financial issues.
According to media reports, about 200 commission agents of Saradha group met Trinamool Congress leaders demanding immediate intervention from the state government for recovering money from the group. The agents claimed that Saradha group has started defaulting on repayments since January and it is they who have to face the brunt of depositors.
“The state government assured them (agents) that it will take necessary steps to seize all assets of the Saradha Group by the weekend, the agents said after their meeting with Roy (Mukul Roy—general secretary of Trinamool Congress). Even so, they fear the state may not be able to recover anything from the 100-odd companies that the group ran. The group’s management had already started liquidating assets and there may not be much left on the books of its firms, they said,” the newspaper report said.
A common (surprising) factor among all deposit-taking companies is their phenomenal growth. For example, Rose Valley started as some kind of insurance and small-savings scheme, but it has now expanded into a long list of sectors such as hotels (Hotel Rose Valley), foods (Taste Me), amusement parks (at Agartala and Kolkata), resorts, media (Ruposhi Bangla, a Bengali entertainment channel, and News Time, a news channel) and garments (RV Fashions). Rose Valley's representatives claimed that the company had 10,000 acres of land all over India, 14 regional offices, 500 branch offices, 5,000 employees, and so on. Rose Valley claimed it was setting up many housing projects, hotels and hospitals. As of March 2012, Rose Valley Hotels and Entertainment had public deposits worth Rs2,900 crore, while MPS owes Rs1,320 crore to its around 16 lakh depositors.
Almost all of these finance companies have collected money by assuring huge returns from businesses like real estate, agriculture to some unheard of. For example, Sumangal Industries offers an annualised return of 15.6% on seven-day deposit by claiming to invest the money in potato bonds or warehouse receipts issued by cold storages!
Another interesting aspect of all deposit-taking companies is the source of money. Nobody knew exactly where the money was coming from for these companies, but everybody suspected that it was some kind of a pyramid marketing scheme, made infamous 30 years ago by the failed Sanchaita Investments. Sanchaita Investments went bust in 1980s leaving behind a long trail of ruin and suicides by number of agents and depositors in West Bengal.
So far, all deposit-taking companies, chit funds and CIS operators have received patronage from politicians across the party lines. Especially in West Bengal, the ruler got changed but patronage has remained the same. The CID and state finance department officials had once raided Rose Valley's office in Tripura, but to everyone's surprise, no arrests were made. Many people had attributed the outcome to Rose Valley's cosy relations with the Left Front.
The Saradha group is reportedly known to be close to Trinamool Congress leaders and the government.
Is it is the beginning of the end for deposit-taking companies in West Bengal? Or will they again find political patronage? We will know the answers in coming months.