The Chennai Fund Fraud

THE curtain came down with a simple police complaint in September this year. Sneham, a Chennai-based finance company which promised 33 per cent interest plus 3 per cent incentive on deposits, had issued post-dated cheques to investors. And the cheques had bounced, a cognis-able offence.

The cops quickly nabbed Sneham’s boss K. Arvind, 40. Further inquiries revealed that several other firms too were running the same racket. Before long, promoters of seven companies were behind bars and property worth Rs 63.42 crore had been seized to prevent Rs 2,000 crore from going down the drain.

As cons go, this one was among the oldest in the book. The companies had lured investors by promising them interest between 24 and 40 per cent, twice what banks and non-banking finance companies (NBFCs) give. Plus, an incentive of 3 per cent. Plus a Cielo or Maruti Esteem for the winner of the lucky draw.

The temptation of making a quick buck or three was impossible to resist, what with the secondary capital market dull. Result: as much as Rs 3,400 crore found their way into 30 companies. But as the prospect of losing all stares the investors in the face now, what is stunning them are the political faces behind the companies.

l Almost all the branches of Eswari —where Sneham’s K. Arvind cut his teeth before deciding to open his own outfit in end-1993—were inaugurated by either the former AIADMK speaker of the Tamil Nadu legislative assembly, Sedapatti Muthaiah, or by the former deputy speaker Ganthirajan.

l And Ramesh Cars, which advertised heavily on satellite TV channels like Sun TV (owned by the ruling family of Tamil Nadu) and J Jay TV (owned by the kin of the former chief minister J. Jayalalitha) in its heydays was declared open by K.A. Sengottiyan, transport minister in the Jayalalitha government, and who has already been taken into custody for other irregularities.

Says Chief Minister M. Karunanidhi: "The fraud had gone on for nearly six years but the previous AIADMK government ignored it. We’ve definite information that most of the fraudulent elements were puppets in the hands of some prominent persons in the AIADMK regime.... It’s unfortunate that our people can be so easily ensnared by promises of high interests rates." The eight companies whose promoters are behind bars are Sneham, Eswari Finance and Investments, Ramesh Cars, GNS Nidhi, Maxima, Devi Gold House, Thirumangal Finance Corporation and Omega. The promoters of two other firms, Laxmi Gold House, and New India Investments, are absconding fearing arrest.

Till just six months ago, though, Ramesh Cars, Maxima and the lot were all respectable names. Giant hoardings of the companies stood cheek-by-jowl with cutouts of the ‘Puratchi Thalaivi’. Countdown shows on the local satellite channels were sponsored by them. Newspapers ran full-page colour advertisements. Door-to-door canvassing was normal publicity activity.

The first alarm bell went off two years ago when some of the companies physically threatened depositors who wanted their money back. The Jayalalitha government did little to assist them. Says Karunanidhi: "Those who sought the money back were even beaten up by hired goondas."

In November last year, the Reserve Bank of India (RBI) put out a watchlist of 30 finance companies, including the eight on the mat at present. The RBI said the aggression with which the companies mobilised deposits and the sky-high promises they were making indicated that not all was hunky-dory with them.

But the RBI did not—or probably could not—proceed further beyond issuing the customary caution. Reason: the companies did not come under the RBI’s purview. Most of these were partnership firms which do not fall under the Company Law.

Moreover, the promoters were adept at circumventing RBI rules. There are only two restrictions on such companies: there cannot be more than 10 partners in a single partnership firm, and a partner cannot solicit deposit from more than 25 persons.

In effect, a partnership firm can take deposits from only 250 persons, the restriction on the number of investors intended at keeping the general public away from the lure. It meant that the deposits had to be garnered through friends and relatives, and through word of mouth.

BUT, in contravention of the guidelines, the errant firms indulged in an advertising blitz that would put the Cola wars to shame. With the stockmarket losing its glitter after the 1992 scam, and the near static interest rates offered by the banks and NBFCs, the companies struck pay dirt. The burgeoning middle class trooped in in hordes as the RBI could do nothing but watch helplessly.

Till September 5 dawned and the complaint was filed against Sneham and K. Arvind was arrested. The other promoters who are under arrest are Devi Gold House managing director N.M. Karunakaran, his chief executive Rajendran; GNS Nidhi’s Sundarajan; Madan of Maxima; Jyotivelu of Eswari; P. Rajagopalan of Thiru-mangal and Ramesh of Ramesh Cars.

Chief Minister Karunanidhi has now proposed the setting up of a special court to go into the duping of the depositors by these companies to enable confiscation of assets and return the money to the affected people. Says he: "I will also urge the Centre to enact a legislation that would put a full stop to this wretched practice." But irate investors are, it seems, not prepared to wait. Last fortnight, a mob stormed the Thirunelveli branch of Ramesh Cars and stripped it bare, walking away with whatever it could lay its hands on—tables, fans, air conditioners, computers, even dustbins.

The Tamil Nadu government has decided to ask the RBI to impose a ban on partnership finance companies placing advertisements. There is already an ad ban on GNS Nidhi companies on the ground that since the transactions in a Nidhi company are between members there is no need for them to crow about it in public.

So far, the police has received about 1.5 lakh complaints against various finance companies. But few depositors are aware that chit fund members are liable to be arrested for violation of the Prize Chits and Money Circulation Schemes Banning Act, 1978. According to the Act, both organisers as well as participants are held guilty.

The government’s desire to auction the attached properties of the companies and return the money to the subscribers has to overcome this legal hurdle. And given the track record of our institutions in tracking and cracking public grievances, few believe that the victims would be adequately compensated. According to a senior banker, the victims have paid a very high price to realise where they should invest and where not. A very high price indeed.