Cheat funds, again

April 26, 2013 01:21 am | Updated December 04, 2021 11:18 pm IST

The spectacular failure of the Saradha Group domiciled in West Bengal but also operating in a few adjoining States reinforces certain important messages from past scams. The first lesson to investors and regulators alike is that it is still possible for unscrupulous promoters to design and operate Ponzi schemes built around promises of extraordinary returns that are clearly unsustainable. Such schemes depend upon a steady stream of fresh deposits — at least — replacing the maturing ones, and when the chain snaps lots of people besides the investors stand to lose. The second message is that the State governments concerned cannot escape responsibility. In this case, the West Bengal government is clearly at fault for failing to take timely action against the high profile, illegal fund collection. The Saradha Group’s promoter has now accused a few ruling party politicians of complicity. Though the persons he named have protested their innocence, these allegations need to be carefully probed. However, past experience with other financial frauds suggests that politicians and other influential individuals always manage to keep themselves one step ahead of the investigating agencies.

Unfortunately, therefore, it is ordinary investors who will bear the brunt of the Saradha Group’s losses, which are estimated to be above Rs. 30,000 crore. The West Bengal Chief Minister’s proposal to set aside Rs. 500 crore to partly compensate investors is not workable as it assumes a fair method for distributing the money to several competing claimants can be worked out. It also runs the risk of moral hazard, of taxpayers’ money being used to underwrite scam losses. Regulators like the Reserve Bank of India and the Securities Exchange Board of India have much to answer for. Despite impressive strides in extending regulation to wide swathes of the financial sector, the system has not managed to check the dubious activities of the Saradha Group or for that matter those who have attracted deposits for raising emu birds in Tamil Nadu. Most of these ‘collective investment schemes’ operate in a grey zone where the role of specific financial regulators has not been clearly spelt out. It is only recently that SEBI has promised strong action against fraudulent operators. For Saradha’s investors, that will be cold comfort really. While greed and gullibility might have induced them to part with their savings, it is also possible that many of them chose risky avenues simply because it is more convenient to invest in them than with say, banks. The mainline financial system too has much to ponder over. When policymakers say they are committed to financial inclusion and financial literacy, scams like these should not happen.

Top News Today

Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in


Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.