Saradha Group Scam – just the tip of the iceberg

As they say, “Days begin with hopes and end with dreams. A chit-fund group by the name of ‘Saradha’ had sold the ticket to the moon to people but their journeys ended on the doorstep to hell. A dream that was incredible while it lasted. The Saradha Group had sold big dreams, and many had invested every bit of their life’s savings; some had even left their jobs. At risk is at least Rs.20,000 crore, mostly in small savings from the poor, who can ill-afford the loss.

The Saradha Group had got advances from investors as contribution for allotment of plots or flats besides a ‘money back’ option. However, there was an option for the investors to cancel the booking and get back their money with compound interest from 12% to 14%. 

Saradha Reality catered to all kinds of investors. It had  installment plans with tenure varying from 12 to 60 months where minimum investment was Rs 100 per month. It raised money from investors with contributions ranging from Rs 10,000 to Rs 1 lakh for a tenure of 15 months to 120 months. It also had a lump sum investment scheme (with minimum amount of Rs 1,000 and multiple thereof) with tenure varying from 12 months to 168 months. At the end of the tenure the investor had the option to get either allotment of land or a flat or to simply get a refund of the money he or she had put in, along with the promised interest.

Brand building was an inherent part of Sudipta’s Ponzi Scheme. He cleverly ensured that the Saradha Group had huge presence in the media. His first entry into the space was through Channel 10 and thereafter he expanded into dailies like the Bengal Post & Sakalbela—in 2010. Sen bought out Tara channels, as well. At the time of closing down, the group had 10 media outfits — news TV channels, newspapers and magazine,” the Business Standard points out. This gave the group a lot of credibility and helped build its brand. The cine actor Mithun Chakraborty was the brand ambassador for Channel 10.

To understand the entire chit-fund scam, one must understand their modus operandi. Say, with the start-up cash of Rs 50,000 from two depositors, a company floats a ‘Rupees One Lakh’ scheme, with an assurance of 20% return. Eventually, the fund manager or agent needs to cough up Rs 1.20 lakh at the end of the first year. To raise this sum, he brings in three more investors who contribute Rs 40,000 each.

At end of the second year, the manager has to repay those who contributed the previous year at Rs 48,000 each. To make this payment, the agents raise another Rs 48,000 from three new investors at the end of the second year to make the previous payments. Now, these new investors need to be repaid Rs 57,600 each for a total of Rs 1,72,800 at the end of the third year. The manager now needs more investors and collects Rs 43,200 from four investors this time to make those payments. 

The first rule, therefore, is that the company has to constantly keep on adding fresh investors. So even if the old depositors do not ask for refunds, the chain instantly treads into troubled waters if the company fails to get new depositors. 

Cut to the chit-fund scam, Shankaraditya Sen, an ambitious Naxalite, who had once fought for the poor, later turned into a land shark. Going by the name of Shankar in his neighbourhood at the height of the Naxal movement in the 1970s, he had disappeared over a decade ago, only to resurface with a new identity — Sudipto Sen. 

It might be just an eyewash to throw investigators off their investigation track or a frantic attempt of a drowning man clutching at the straws, but Sudipto Sen put down everything in a tell-all letter to the CBI revealing all the details of the scam. He, in due process, also opened a can of worms – following which, he had to make a dash to save his life. 

Announcing a Rs 500 crore relief package for scam-hit small and medium depositors, the TMC has proposed a 10% hike on tobacco products in the state to raise money for the relief fund. Meanwhile, the state government has frozen Sudipta’s Sen’s bank accounts, seized his cars and four office buildings in and around Kolkata. But will all this help the small retail investors?

Sparing a thought for the above-mentioned scam, one might think, why do such fraudulent schemes keep cropping up in India? What is the actual issue which comes out of it?

In this jungle of scamsters and cons, what are the opportune avenues for the middle class to invest in, other than the fixed deposits in bank, gold, or the more obvious - real estate?

It seems that a lack of knowledge of decent investment opportunities is one solid reason why people tend to get pushed towards these schemes.

It is actually very difficult for the government to stop such high-risk Ponzi schemes, since it is the people’s own discretion to invest in such systems. But the middle class in India is increasingly finding it difficult to make sensible investments and in the dearth of choices which can provide them huge returns with small investments, fall prey to such schemes. 

In conclusion the ‘chit fund scam of the Saradha Group in West Bengal is not new and it is not for the first time that something of this sort has happened. The ‘Stockguru’ scam or the ‘Speak Asia’ frauds have been some glaring examples. But in spite of these, newer scams keep occurring every other day. So it becomes peoples’ responsibility to understand that nobody can turn rich overnight. People should think before investing and lets hope that the law is also enforced strongly to stop such crooks fool the small retail investor.

Pre-Event Volatility Expected in the Stock Markets

We had talked of 5970-5950 as our resistance level for the nifty to break the downward trend. Nifty has currently made a high at 5925 levels. Last week nifty opened lower and traded with a positive bias for the entire daily session to close higher by 0.89%. Amongst all NSE India & BSE India sector only IT sector specifically Infosys and HCLTech could not withstand the positive move. Second day opened on a positive note and was dragged downwards in the initial half but was again pulled upwards to close near to where it opened. After a festive gap of one day the fourth day again experienced fresh buying in the stock markets. That day being the expiry day in derivatives market was also putting thrust on the buoyant prices in the F&O stocks.  Last day ended on a negative note with Realty sector at the forefront of the move. It sector performed the worst in the last week. As recently declared by NASSCOM about the US Immigration Bill announcement is likely to hit Indian IT sector as the IT companies have been restricted to obtain visas for their H1B and L1 employees if more than 75% already have it. The restriction is likely to be increased to 65% and 50% up to 2015 and 2016 respectively. And most of the IT large-caps are highly dependent on US outsourcing and off shoring business.

Last week ended on a negative note. We can expect a further fall of up to 5750-5720 levels which is a 50% retracement level of the upward rally and 5660 levels which is a 200day EMA support. The oscillators too are lying in the overbought zone. The last negative tick might also act as a breather for a further upward move up to 5750-5790. If nifty manages to break these levels 6100 would be the next resistance level.

We are heading towards the RBI policy announcement. RBI is expected to cut benchmark short term lending rate by 0.25% and repo rate to maintain falling inflation and boost growth. Goldman expects a cut of 0.50%.

Chidambaram strived hard to convince foreign investors about the determination of Indian Government to bring in growth through constant reforms. Moreover, Rangarajan forecasted the growth rate to reach 6.4% in the current financial year. Trade deficit has also come down to record to a two year low. The reason being fall in oil imports. Exports to Pakistan have risen to 1.64 Billion $.

Commodity prices have fallen. And we can sense WPI also cooling off a bit. Results season adding up spices to the market with volatility and we may conclude that we can witness some consolidation before rate cut. Banking stocks to be monitored with caution and expectation.

We are recommending BHEL buy@190 -185 with a target of 202 and stop loss at  179 for 2-3 months time span.

We also recommend SAIL for long term. Buy@ 62-59.5, stop loss @56 with target of 73-76