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West Bengal will see county's biggest financial frauds

Last updated on: January 30, 2013 16:44 IST

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Subir Roy


Eastern India is suffering from a serious affliction, which in West Bengal is heading for a crisis.

Ponzi schemes that come under the rubric of "collective investment schemes" and are variously known - chit funds, multi-level marketing companies, commodity schemes - are mushrooming and garnering large parts of the savings of ordinary people, especially in rural areas.

As these schemes eventually fail - some have already collapsed - and set off, perhaps, a domino effect, the social tension that can follow is too scary to imagine.

Chit funds are essentially associations of savers who contribute regularly and hold draws to decide who gets the prize. The foreman maintains accounts, holds draws and earns a commission.

The problem is that many so-called chit funds are not registered and eventually do not deliver. Multi-level marketing schemes run on a sales agent earning a hefty commission by recruiting other agents.

A commodity scheme issues bonds to be serviced by returns on trading in commodities like seeds, teak plantations, and potatoes.

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Image: Spate of Ponzi schemes are mushrooming in West Bengal.
Photographs: Laszlo Balogh/Reuters

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Whatever be the scheme, it runs on the promise of excessive returns, which gullible investors fall for.

The returns are financed by the contributions of new members; when this inflow of fresh capital stops, the scheme collapses. The bottom line is that a legitimate commercial activity cannot sustainably earn the level of return promised.

An FIR was filed by duped investors against the then Congress chief in Meghalaya in 2007; a film actor and producer was arrested in Odisha on similar complaints in 2009; and late last year, during a visit to rural Jharkhand, I came across poor people who had lost their savings.

But most of the action is currently in West Bengal. And it is not an absolutely new phenomenon.

A news report in April 2011, when the Assembly elections that brought the Trinamool Congress to power were being held, spoke of the chit fund menace sneaking back and mentioned cases initiated in two West Bengal districts against the perpetrators of failed schemes. (The state was earlier scarred by the collapse of Sanchayita).

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Image: Whatever be the scheme, it runs on the promise of excessive returns.
Photographs: Reuters

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Perhaps anticipating this, the Left Front government passed legislation in 2009 to take suo motu action against these schemes, but the Bill is awaiting presidential assent.

Right now the Left and the Congress, which are in opposition in West Bengal, are publicly raising the issue of these schemes and highlighting the inaction of the Trinamool Congress government.

The latter is silent and individual leaders are defensive, giving credence to the feeling that its hands are tied.

Disappointment with this government has set in early among the established media, even as a string of TV channels and newspapers owned by the operators of these schemes have solidly backed Mamata Banerjee's rule. This has lent credence to the feeling that she is dependent on their support.

The operators of these schemes raise their profile in the districts by organising dos with film stars and celebrities.

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Image: Mamata Banerjee, chief minister of West Bengal.
Photographs: Rupak De Chowdhuri/Reuters

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They have invested heavily in real estate, media and tourism infrastructure such as resort hotels. Also, they advertise extensively in the established media, focusing on their investments and not on deposit taking.

To counter the onslaught of the Opposition, the above board and properly registered chit fund operators - some with Trinamool links - are calling for action against fly-by-night operators and are asking why the established media takes the advertisements of concerns who they say are up to no good.

It seems the Opposition leaders are not raising a bogey, because lately concern has begun to be voiced by diverse sections.

The state's Association of Small Savings Development Officers has publicly asked for action, pointing to the fall in small savings collections in the state, from Rs 32,000 crore (Rs 320 billion) in gross collection in 2010-11 to Rs 23,000 crore (Rs 230 billion) in 2011-12, claiming this is because of the diversion of savings to chit funds.

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Image: Government's small savings schemes have taken a hit, as investors are rushing to put their money in ponzi schemes promising high returns.
Photographs: Reuters

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The CPI (M)'s leader of the Opposition, Surya Kanta Mishra, has alleged that a few schemes have garnered Rs 15,000-16,000 crore (Rs 150-160 billion) in the last few years.

Most recently, the managing director of the Calcutta Stock Exchange warned that the situation was going to "explode". And, in what must be the clincher, financial regulatory officials in charge locally have both voiced concerns and pointed to the regulatory gaps allowing the funds to mushroom.

The Securities and Exchange Board of India has even initiated investigations in West Bengal.

The state government is not pushing the Centre for quick assent to the Bill, although it is complaining day and night about a resource crunch and the Centre's unwillingness to help.

But if money did not go into these savings schemes, it would have landed up in official small savings schemes, against which the state government could have automatically taken loans. This is how the chickens are coming home to roost.

The writer can be reached at subirkroy@gmail.com


Image: Upendra Kumar Sinha, chairman of the Securities and Exchange Board of India.
Photographs: Bobby Yip/Reuters

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