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Scam around the corner

The loans scam grabbed eyeballs in late Nov as the CBI arrested officers of banks and housing finance companies. But the more disturbing instances that have come to light are of companies raising deposits claiming approval from one regulator or the other.

Suman Layak | Print Edition: December 26, 2010

The loans scam grabbed eyeballs in late November as the Central Bureau of Investigation arrested officers of banks and housing finance companies. But, a deposits scam brewing alongside does not seem to have received as much attention even though the amount of money raised is on a much larger scale and from easily-lured sections of the investing public.

On November 24, the Securities and Exchange Board of India or SEBI, barred Sahara Pariwar chief Subroto Roy and two companies from the Sahara stable - Sahara India Real Estate Corp. and Sahara Housing Investment Corp. - from raising money from the public. The two companies had raised several thousand crores through optionally fully convertible debentures.

SEBI deemed the fund-raising illegal, to which Sahara responded with full-page advertisements in newspapers. On an appeal by Sahara on December 1, the Lucknow bench of the Allahabad High Court ordered the watchdog not to take any coercive action until an order is passed.

Rip-off

  • Print jazzy prospectus
  • Deploy army of agents to sell deposit schemes
  • Prospectus marked for private circulation and not a public issue
  • Flag RoC registration - as if it is an approval
  • Avoid label of a Collective Investment Scheme to duck SEBI
  • List a business like realty to avoid being called a fi nance company by RBI
But, now, it appears that Sahara might just be the tip of a problem that has an iceberg's proportions. Those that have escaped attention so far are companies like Mumbai's Pancard Club or the Pearl Group. In July, a Supreme Court bench ordered the Pearl Group to refund all deposits. On November 25, the SEBI said that it has not approved any issue by Pancard Club. Both Pancard and Pearl are raising money through the same means: fixed deposits of different types. Anil Upadhyay, General Secretary of the Mumbai-based Investors and Consumer Guidance Society, says that at least 25 companies have been actively raising deposits in the last two years through agents. "City Limousine, Metro Cruise, Naik Ventures, Shree Om Sai Nath are just a few of them that I can name right away," says Upadhyay, adding: "One of the two Sahara companies alone had raised Rs 4,843 crore, and that indicates what the total amount raised by all these companies could be."

In a throwback to the times when timeshare and plantation companies were selling trees to raise money from the public, some companies are bundling land along with deposits. In other words, the deposit holder will have the option to buy a plot of land when his deposit matures. Else, he can just take the money. "Collateral such as booking for a three-nightand-two-day stay in a hotel in the United States are being offered," says Upadhyay. Some companies even offer a fictitious career, calling the fixed deposit holder an associate.

Most firms raising such capital say the deposits are being offered through private circulation, which is restricted to 50 people. This norm is often the first to be flouted.

The two Sahara companies were raising the deposits sometimes as "Housing Bonds" or "Abode Bonds" or "Nirmaan Bonds". It took complaints by Professional Group for Investor Protection, an investor group, and two other individuals for the SEBI to look into it. In such fixed deposits, the regulatory mechanism falls between several stools. No one is sure who is to regulate these companies - the Reserve Bank of India or RBI, the Registrar of Companies or RoC, or SEBI.

In April, the RBI referred the Pancard Club case to the Economic Offences Wing stating that it was a "non-banking non-financial" company. Sahara's response to a SEBI showcause notice was that it was raising money through private placement with people well known to the group and was, therefore, outside the SEBI purview. Some companies even use their RoC registration as a badge of honour and claim in their prospectus that they are RoC-approved. Some even say they have clearance from the RBI or are SEBI-approved.

With no regulator coming forward to monitor the scenario, it seems one more scandal is getting ready to blow up in the face of the government.

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