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

Stock Market Resistance Likely at 5990-6000 Levels!

We had talked of a downward momentum due to the double-top and hanging man pattern in the Indian stock markets. As a result the Nifty broke our mentioned support at 5950 levels. The first day opened on a positive note but was sooner dragged downwards due to the worst performances of PSU Banks specifically Bank of Baroda. The second day opened with a gap-down but opened lower and hence depicted a little positivity in the markets. Amongst all NSE India, BSE India stocks Sunpharma and Ambuja Cements led the move. However, FMCG sector did not allow the markets to rise further. Third day was bearish for the intraday but closed higher than the previous day and hence, all NSE & BSE sectors closed flat. The fourth day opened on a negative note, traded with a positive bias for the initial half but was dragged downwards by the Media sector to close where it opened. The last day too closed on a bearish note but experienced volatility due to a positive momentum in the IT sector stocks viz; TCS and Wipro.

We had talked of the Government to increase import duty on gold to curb the rising current account deficit. Now the Government is likely to find an alternative to introduce gold backed financial instruments. This should also help to relax the risks arising out of the instability in gold prices. The current quarter is critical as the Government is taking high efforts for better budgetary results this year. However, we are unlikely to achieve the mentioned GDP growth rate as a result of which we would fall short of the tax collection this year. Hence, the fiscal deficit target of 5.3% too seems difficult. To add to it the Income Tax department went on strike to get their promotional work done by the Government, which might delay the tax collection.

What Next….
The double top and hanging ma pattern have shown their results. We had mentioned our next support at 5820-5850 levels. We expect a small fall up to these levels and then a reversal. Moreover, the oscillators are lying in the oversold zone. We can expect a bounce back up to 5990-6000 levels for another fall and if the Nifty is successful in breaking this resistance, we can expect further upward momentum. The market has fallen and so we expect a breather at first and then arrive at either of the directions.

Convertibles and Adjustable Rate Debt and Income Stocks

Convertibles and Adjustable Rate Debt have long been popular with investors and corporations alike.Convertible bonds have long been popular with investors and corporations alike. Investors like the likelihood that they may participate in the growth of the company and are prepared to fore go some current yield and some credit score high quality for the privilege. Corporations like this cheaper approach of issuing more inventory, and they just like the looser debt restrictions. Even an organization’s bankers love convertibles, since they provide an additional cushion for his or her loans. Some individuals will argue that original-issue junk bonds, particularly of the single-B and CCC selection, are literally disguised convertible bonds since so many end up being redeemed with stock after a default.A lot of CCC and even single-B bonds never get a single share of stock; in truth, they by no means get any payoff.

Most conversion clauses specify a fixed number of shares into which the bond will convert. On the time the bonds were issued, that is normally set at a price level about 20 percent above the place the inventory is then trading.This value stays fixed except for any adjustments for inventory dividends or stock splits. From time to time, the conversion privilege might be primarily based in the marketplace value of the common inventory at some future date or at some future event. Such conversion privileges are extraordinarily attractive for the bondholder, however could be catastrophic for the company. Most convertible bonds will be transformed to inventory at any time by the holder. The bond issuer may even have this privilege, however solely after a couple of years and usually will not train it till the value of the stock exceeds the par value of the bond-and maybe not even then if the coupon charge makes it a cheap borrowing. At that time, all holders will take the inventory fairly than settle for the lower money amount. As the value of an organization’s inventory rises, the convertible bond will even rise, but all the time sustaining a premium to its conversion value. Once the inventory conversion equivalent equals or exceeds the par value of the bond, the bond price will transfer dollar for dollar with the stock at or near its conversion equivalent. The conversion premium disappears because the stock worth reaches its conversion equal if the issuer can call the bond anytime after that.

Continuously, an organization falls on hard instances, and the chance of the inventory ever recovering to a degree the place the conversion privilege is at full worth is remote. In such an occasion, the bond will commerce at a value primarily based on its yield and credit score rating. Conversion at full worth may be out of the query, but conversion will still play a role.
Convertible Preferred
Convertible preferred have characteristics much like their bond cousins. They differ primarily in that a convertible most popular will pay both curiosity or a dividend that will or is in all probability not certified dividend revenue (QDI).In addition they differ in that the conversion privilege may be non-compulsory or mandatory.
Income Stocks

Common stocks have traditionally had a limited role in income portfolios.This has meant buying primarily utility shares and REITS.The discount of the tax on dividends to 15 percent appears to have inspired important dividend will increase since 2004, broadening the vary of corporations that enchantment to revenue investors. Though many of these stocks pay only 2 or three % in dividend yield, they offer progress in dividend payouts in addition to worth appreciation over time. Others offer quick high payouts in the 10 to 12 p.c vary, but are more risky in worth and need to be purchased very selectively.

Common stocks have traditionally had a limited role in income portfolios.This has meant buying primarily utility shares and REITS.The discount of the tax on dividends to 15 percent appears to have inspired important dividend will increase since 2004, broadening the vary of corporations that enchantment to revenue investors. Though many of these stocks pay only 2 or three % in dividend yield, they offer progress in dividend payouts in addition to worth appreciation over time. Others offer quick high payouts in the 10 to 12 p.c vary, but are more risky in worth and need to be purchased very selectively.
RealProperty Investment Trusts (REITs)
REITs are trusts authorized by Congress as tax-exempt vehicles for investing in actual estate. As much as ninety p.c of their revenue must be distributed to shareholders each year in an effort to maintain their tax-free status. Those dividends are totally taxable to the shareholder at strange income rates except to the extent that the distributions are thought-about both capital features or a return of capital. The intent of Congress was to give small traders the opportunity to take part within the industrial actual estate market, which previously had been only for rich traders who might make massive commitments for lengthy periods of time. At this time more than one hundred REITs commerce on the most important exchanges, and hundreds extra exist as personal investment vehicles. These entities could be fairly sizable, as evidenced by the truth that eleven of the S&P 500 Index corporations are REITs.

A REIT may invest in property mortgages or it could be an working firm that buys, sells, and operates properties in a spread of industries. Generally, a REIT will specialise in one sort of property in which it is knowledgeable. Properties embrace accommodations, house homes, workplace buildings, industrial buildings, retail malls, storage buildings, and well being care facilities. Dividend yields run from three to 12 percent, however are susceptible to rates of interest and normal financial conditions. With the diversity of properties, however, you probably can think about that performances range in accordance with the cycles in several industries. For instance, when the financial system is good, industrial properties do well; when the economic system is dangerous, residences do well.

One approach to participate in REITs and still get a gentle revenue is to buy the convertible preferred of a REIT. These pay a better rate of interest than the widespread shares and yet provde the opportunity to transform to widespread when the widespread dividend begins to exceed the popular payout. However even the straight most well-liked shares of a REIT are engaging because of the robust collateral value their property or mortgage holdings provide.
Different Widespread Stocks
Usually speaking, any common inventory is a candidate for consideration by an earnings investor if it pays a excessive dividend now or is on a monitor to pay ever-growing dividends within the future. As we speak, corporations in the natural resource extraction industries are prime candidates. The evolution of China and India as world-class economic powers with big populations is placing everlasting stress on natural uncooked materials of all sorts. I’m not just talking about oil and pure gas, but also copper, coal, bauxite, gold, silver, and so forth-a spread of a dozen or extra in all. What makes pure sources totally different is that, not like agricultural or manufactured merchandise, you possibly can’t simply construct a brand new manufacturing unit or plant a model new field to increase production. For natural assets, you have to find a new source that's, more typically than not, positioned in a remote or politically unstable region. Hence it's important to build infrastructure and relocate staff to carry the materials to market. Keep in thoughts that over the centuries, all of the low-hanging fruit in natural resources exploitation has taken place or is spoke for, so additional assets are sure to be far more costly to produce. This means that the value will increase we now have been seeing in most of these supplies are, right here to stay. While few pure resource firms have histories of high dividend payouts, this is prone to change in the future. Corporations with present properties are at present having enjoyable with large income with low development expenditures. Solely these with soon-to-be-depleted properties can be in a rush to spend vital quantities of this wealth on new exploration and development. Extra probably, they may have interaction in a round of takeovers first, thereby postponing inner growth.

One other area of common inventory interest is in monetary institutions such as banks. Current Fed policy has restricted their means to make cash by means of loans and thru taking half in the unfold between the quick and long rates. Because of this, their prices are depressed, but they have maintained their dividend payouts, which run three to 4 percent. Because the Fed has ended its coverage of short-term price increases, these establishments are anticipated to benefit, provided the Fed has not already killed off financial growth, because the inverted yield curve would suggest. Here again, as with REITs, Canadian trusts, and natural sources corporations, selections about what to buy can be different right now than in the future.

Unfair Advantage Book Review

Unfair Advantage; The Power of Financial Education

by Robert Kiyosaki

Synopsis:

Kiyosaki challenges you to stop struggling financially by becoming financially literate.

The author addresses several unfair advantages that the general public has when it comes to money and finances, namely:

• Knowledge
• Taxes
• Debt
• Risk, and
• Compensation.

This book will help you take the steps necessary to change your life for the better empowering you to know what you should be investing your money and education in.

Author’s Credentials:

• Bestselling author of The Rich Dad Series of financial education books.
• Creator of The Cashflow board game.
• Founder of the financial education-based Rich Dad Company.

Top Chapter Take-Aways:

1. Explains why the next 10 years will prove to be the most exciting in world history.
2. Gives you insight into the five components of financial education.
3. Provides a number of financial education tips to get you pointed in the right direction.
4. Outlines how to pay less in taxes by positioning yourself to become a “true” capitalist.
5. Discusses the difference between portfolio income and passive income.
6. Suggests purchasing gold and silver, an asset, rather than saving money.
7. Tells you why you should invest in debt by using other people’s money through real estate.
8. Explains why a lack of financial education is risky and not necessarily the type of investment.
9. Describes the importance of buying assets as opposed to working for money and saving your money for retirement.
10. Makes a case for “true” capitalism and what it can offer you should you become financially educated.
11. Provides a special section that describes the five levels of investors and how you could fit in.
12. Includes a section of 8 frequently asked questions about Rich Dad’s financial education and programs.

Possible Shortcomings:

• Strong bias towards investing in real estate and precious metals.
• Strong promotion of his Rich Dad financial education products.

Reviewer’s Opinion:

I have been a big fan of Robert Kiyosaki’s approach to investing for years. No matter what type of investment vehicle you use, your focus should be on generating cash flow.

This book makes a strong case for cash flow investing and acquiring assets as opposed to saving money.

The author helps you get a start with your financial education by pointing out the flaws in the current model of working for a paycheck and saving for retirement.

This book is targeted towards the investor who is searching for an alternative path to financial freedom rather than the current one advocated by the financial services industry.

You will find that the layout and organization lend to making this guide easy-to-follow.

My favorite section is the first one that explains how a lack of financial education is an unfair advantage for the vast majority of people.

I would highly recommend this book as a stepping stone for moving from the realm of a life of poverty or limitations to one of abundance and hope.

To learn how to create a better financial future for you and your family, check out unfair advantage.

Time to open up the wallet?