New Delhi: Completing its probe into 'chit fund scam' of 14 Saradha group firms, SFIO on Monday said these companies have been found to be running 'ponzi schemes' and would face prosecution for violation of several laws.
The investigation concluded that the group was using collections from new investors to make payments to the previously-enrolled members, rather than from income generated through investments, in typical resemblance to a ponzi scheme.
Among others, the activities of these companies were found to be in serious violations of the Companies Act, the Sebi Act, and several provisions of the Indian Penal Code, the Corporate Affairs Ministry said in a statement on completion of the SFIO probe.
The Ministry said those companies which have been found to have violated the Sebi regulations for 'collective investment schemes' would be prosecuted for violation of Sebi Act, instead of the Companies Act, as the former carried longer terms of imprisonment.
Besides, prosecution would also be initiated by the state governments for violations of the Prize Chits and Money Circulation Scheme (Banning) Act, while the probe report and necessary evidence would be shared with CBI to avoid duplication in prosecutions.
The scam, wherein lakhs of investors in West Bengal and neighbouring states were defrauded of thousands of crores through illegal money pooling activities, came to light early last year and has also had its political ramifications.
The case has also become a political hot potato with Mamata Banerjee-led West Bengal government facing flak from various quarters.
"The companies, their promoters, directors and managerial personnel have been found guilty on many counts of various provisions of the Companies Act... Dealing with illegal collection of deposits and false statements, etc", it said.
"Several instances of violation of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 have also been found. As prosecution under this law are to be initiated by the State Governments concerned, the Report along with evidence is being shared with the CBI.
"The Report is also being shared with Sebi for proceeding against companies which were found to be running unauthorised/ illegal Collective Investment Schemes (CIS)," the government said.
It said that the Serious Fraud Investigation Office also found evidence of violation of several provisions of the Indian Penal Code (IPC). "Such Sections are 107 (Abetment of Crime), 120B (Criminal Conspiracy), 403 (Dishonest misappropriation of property), 406 (Criminal breach of trust), 409 (Criminal breach of trust by public servant), 415 (Cheating), 418 (Cheating with knowledge that wrongful loss will be caused), 419 (Punishment for cheating by personation) and 477A (Falsification of accounts).
"Since, CBI is now investigating cases under the IPC under orders of the Supreme Court, it has been decided to share evidence collected by the SFIO with CBI so as to avoid duplication in prosecutions," the government said.
In the wake of public protests, the Ministry also asked SFIO in April 2013 to probe the case. The agency, which looks into white collar crimes and violations of companies law, investigated more than 60 companies in this regard.
The probe agency had questioned many people including leaders from the Trinamool Congress party, while Saradha Group chief Sudipta Sen and some others were put behind the bars. An interim report was submitted by SFIO in September 2013.
Sebi had also passed an order against Saradha Realty in April last year, soon after massive protests by public investors began in West Bengal. The company was asked by Sebi to refund the investors' money, among other strictures.
Announcing the completion of its probe into the affairs of 14 companies of the Saradha Group of Companies, the SFIO said that this had come to be known as the 'Chit Fund Scam' and involved a number of schemes carrying unrealistic high rates of interest.
However, these entities were not actually registered as chit funds.
"The investigation has concluded that schemes run by such companies were 'Ponzi Schemes' -- that is arrangements where the primary source of payment to subscribers is the collections made from newly enrolled members rather than from income generated from investments," it added.
The SFIO has found serious financial mismanagement and siphoning off funds by promoters of various companies of Saradha group that were probed in this case.
In May this year, the Supreme Court had handed over the Saradha chit fund scam probe to the CBI and asked the state governments to provide all logistical help to the CBI team investigating the matter.
While there are allegations that some Trinamool Congress leaders are involved in the scam, the party recently said that the Chief Minister would support any unbiased investigation.
Apart from 14 Saradha group firms, the SFIO had also probed entities from various other groups including Rose Valley, Icore E-Services and Sunshine India Land Developers.
The Corporate Affairs Ministry, while ordering the SFIO probe last April, had said the decision was taken in view of the larger public interest involved in such cases, "and concerns regarding misuse/laundering by such companies of the ill-gotten wealth and the possibility that the promoters of these companies may strip these companies".
Even though state governments are appropriate authorities for regulations of "chit fund" companies under the Chit Funds Act 1982, the MCA had ordered a probe in April after a huge public outcry over Saradha scam in West Bengal.
Following the scam, efforts are being made to strengthen co-ordination between various agencies to curb ponzi schemes and safeguard the interests of investors.
Regulatory agencies such as Sebi and the Reserve Bank and those under the MCA also launched media campaigns aimed at cautioning investors not to fall prey to fraudulent companies.
With recent amendments to Sebi Act, the capital market watchdog has got more powers to crack down on fraudulent money pooling schemes. Among others, collective investment schemes worth Rs 100 crore or more are now under Sebi jurisdiction.
Besides, Sebi has taken action against many entities for running unauthorised money pooling activities, having raised funds totalling to the tune of over Rs 1 lakh crore.