Collapse of Ponzi Scheme Spreads Panic in West Bengal

Piyal Adhikary/European Pressphoto Agency A woman with her investment certificate for Saradha Group in Baruipur, West Bengal, on May 9.

KOLKATA, West Bengal - Every morning in West Bengal, boats carrying state police officials stop at various points along the Matla River, which flows close to the state's Sunderbans Tiger Reserve. The police disembark to tell villagers some very bad news: they have been duped of their life savings in a huge Ponzi scheme.

Within seconds, the news spreads like wildfire across the village. Weeping inconsolably, people rush to the police officers to ask how they can recover their lost cash. But no one can offer any words of hope.

In West Bengal, 14 people have committed suicide over the scam, including agents of the operators of the Ponzi scheme. Panic has been spreading among villages as investigators have said it is possible that more investment firms will collapse, and the West Bengal Association of Small Savings Development Officers has even warned of riots in the days to come.

“It is hara-kiri, a worst kind of investment by villagers,” said Mukul Somany, a director of the Calcutta Stock Exchange. “You will see more suicides.”

The markets regulator, the Securities and Exchange Board of India, or S.E.B.I., says the scam has resulted in at least 3.2 trillion rupees ($5.5 billion) in losses and has affected 3.3 million people in West Bengal, making it one of the biggest financial fraud cases in India.

The national Serious Fraud Investigation Office is investigating as many as 53 companies, the largest of which is the Saradha Group, which collapsed in April. The Reserve Bank of India and the markets regulator have said these companies promised returns as high as 100 percent in three years in order to lure deposits from rural residents of West Bengal, who don't have easy access to banks.

Officials of the Enforcement Directorate in Delhi investigating the case say that almost half of the cash collected by these companies has already been illegally channeled to tax havens abroad. The markets regulator has said several operators of the schemes have confessed to using the cash to acquire villas in Jordan and Dubai, oil businesses in Qatar and diamond businesses in South Africa.

“The companies operated by flouting all rules,” Sachin Pilot, the Indian corporate affairs minister, said in an interview. “The cleanup will take months, years. And the overall loss could be higher.”

Over the past five years, investigators say, the agents of these companies went where banks didn't, receiving instant commissions of 16 to 33 percent to get rural depositors to invest in fixed-deposit funds. Investigations by the West Bengal police showed that in many places the agents had employed wives of local police officers as representatives to prevent investors from raising an alarm against such dubious investment programs.

Often, the companies continued to collect money from depositors even after financial regulators had banned them from doing so. For example, the markets regulator had ordered the flagship company of the Rose Valley Group, which is one of the companies currently under investigation, in 2011 to stop taking cash deposits, saying that Rose Valley was operating an investment fund without permission. But the company continued to raise money from depositors.

Even when regulators are alerted to possible irregularities, inquiries can take years to conclude. In 2010, S.E.B.I. began looking into the fixed-deposit funds at Saradha Realty, the flagship company of the Saradha Group, which claimed that the money was being collected for real estate investments. The markets regulator issued a “show-cause” notice to Saradha Realty in 2011, asking the company to explain its operations.

Dissatisfied with the company's response, S.E.B.I. proceeded to investigate the fund and eventually determined Saradha Realty was operating a “collective investment scheme,” which requires regulatory approval. On April 23, the regulator ordered the company to stop operations and return depositors' money, but by that time, the Saradha Group had collapsed and Sudipta Sen, the group's chairman, had fled West Bengal.

Piyal Adhikary/European Pressphoto Agency Sudipta Sen, chairman of Saradha Group, being escorted by police officers to court after his arrest in Kolkata, West Bengal, on April 25.

According to local media reports, before Mr. Sen ran off, he posted a letter to the Central Bureau of Investigation, India's top investigative agency, that said two lawmakers from the governing Trinamool Congress Party pressured him to pay them large sums in return for protection from government regulators. The Central Bureau of Investigation has confirmed it had received the letter.

Mr. Sen was arrested late last month in Kashmir and is now being questioned by the authorities. However, he recanted his allegations against the state's governing party last week, saying that he has had no involvement with Trinamool politicians. Mamata Banerjee, West Bengal's chief minister, has denied that anyone from her party pressured Mr. Sen for money.

The Trinamool Congress Party, in an April 23 affidavit to the Calcutta High Court, has acknowledged that it was aware of Ponzi schemes since 2011 but did not say why no action was taken.

India's financial regulator admitted it lacked the manpower to monitor such illegal collections across rural India. “We are heavily dependent on the state governments,” U.K. Sinha, S.E.B.I. chairman, told reporters in New Delhi recently. “If they do not take any action, there is little we can do.”

Deepak Ghosh, a former principal secretary of the state who personally forced two companies running a similar Ponzi scheme to close a decade ago, said the firms targeted people living in the rural areas for a reason. “There is a devious combination of financial illiteracy and political protection in West Bengal,” he said.

The Rose Valley Group used star power to attract unsophisticated small investors, having hired the Bollywood star Shah Rukh Khan as its brand ambassador. A spokesman from the actor's office said that Mr. Khan's contract with the firm expired earlier this year and that he does not endorse the brand anymore.

“I saw Shah Rukh Khan and invested 75,000 rupees,” said Ashok Mitra, a retired clerk with the state government. “I did not worry because he was vouching for the company.”

Since the news of the Ponzi scheme broke last month, thousands of duped investors have been lining up each day outside the offices of a one-member commission, run by a retired judge, Shyamal Sen, which was set up to process victims' claims. On average, the commission is receiving 25,000 applications every day just from Kolkata. The state government has also opened branch offices of the commission across West Bengal.

Victims come from all walks of society. In Kolkata's northern areas, sex workers submitted a petition to the state government that said 20,000 of them lost a little over 100 million rupees to the Saradha Group. “I invested 500,000 rupees and was promised double the amount in three years,” said Aparna Dey, 26, a sex worker.

In Sunderbans, home to the royal Bengal tigers, depositors said their financial loss was worse than the routine deaths by man-eating tigers in the area.

“Often, there is respite from tiger attacks,” said Madhab Mondal, a 55-year-old honey collector who lost 100,000 rupees in a Saradha deposit. “But this one has crippled us. We will have to start saving all over again.”