Some three decades ago, Nirmal Singh Bhangoo was a milk seller near the India-Pakistan border in Punjab’s Attari. In 1996, he founded PACL Ltd—then known as Gurwant Agrotech—selling magnetic pillows, among other things.
Soon, PACL diversified into real estate and hospitality, according to the company’s website. Today it owns more than 183,000 acres of land across India—equivalent to around 1,700 Central Parks in New York. But Bhangoo’s business empire is in trouble.
On Jan. 08, India’s federal investigative agency, the Central Bureau of Investigation (CBI), arrested Bhangoo and three others in connection with an alleged Rs45,000 crore ($6.7 billion) Ponzi scam. Some 55 million investors who joined the massive scheme are said to have been duped–making it perhaps the biggest financial scam in Asia’s third largest economy.
Fraudulent investing schemes where investors are lured into parking their funds with promises of high returns are not uncommon in India. Some of the biggest include the Sahara scam and the Saradha chit fund fraud, which have between them duped investors of more than Rs66,895 crore ($10 billion).
In August 2014, the Securities and Exchange Board of India (SEBI), the country’s capital markets regulator, ordered PACL Ltd (pdf) to return the money it had pooled in from investors in the allegedly illegal scheme. This was primarily because PACL was not registered with the market regulator as a collective investment scheme, as mandated by the SEBI Act.
SEBI’s probe into PACL dates back to 1997 (pdf), when the company argued that it wasn’t operating any scheme but only selling land to investors. But, in February 2014, the CBI registered a case, following a supreme court direction.
“The enquiry revealed prima facie evidence of the said private company having raised investments by issuing bogus land allotment letters to induce investors,” the investigative agency said in a statement on Jan 08.
A Ponzi scheme is “an investment fraud that involves payment of purported returns to existing investors from funds contributed by new investors,” according to the US Securities and Exchange Commission.
And PACL allegedly did just that. Here is what the CBI said in the statement:
It was revealed that when the said company, on being directed by the Hon’ble High Court of Punjab & Haryana to wind up the scheme and refund the investors, a similar fraudulent scheme was operated under the name of other/second private company (sic). Funds collected from new investors of this second company were used to repay the earlier investors of the first private company to stave off criminal prosecution. Funds have been raised by the two companies through a vast network of lakhs of commission agents spread all over the country who were being paid hefty commissions for luring the investors.
For some time now, the SEBI has kept a close eye on these schemes. Between May 2013 and September 2014, it issued orders against 47 companies suspected to be operating dubious financial schemes.
“Do not fall for schemes that assure unbelievably high returns in a very short time. There are many companies in India that have siphoned off thousands of crores of rupees of investors through such Ponzi schemes,” SEBI chairman UK Sinha said in a July 2015 speech. “Many Ponzi operators are also behind bars for duping investors.”
That includes the likes of Subrata Roy.
Roy, founder of Sahara India, has been in jail for the past 21 months.
Once a powerful and influential businessman who owned an airline, sponsored India’s cricket team, and even had a stake in a cricket team in the Indian Premier League, Roy is now accused of duping investors of some $5.4 billion (Rs36,000 crore).
The case relates to an investment option that Sahara ran in 2008 where investors had deposited money in schemes launched by Sahara India Real Estate Corp Ltd and Sahara Housing Investment Corp Ltd.
The SEBI termed these schemes illegal, and asked the company to refund its investors. In 2012, after the supreme court asked Sahara to deposit the investor money with SEBI, the company claimed it had already returned $3.9 billion and only about $840 million was pending. SEBI disputed the claim as details of repayment to investors were not provided. After Roy’s group failed to deposit the remaining money, the supreme court issued an arrest warrant against him.
Even as Roy and Sahara were busy defending themselves in court, another fraud—with huge political ramifications—unravelled in the eastern Indian state of West Bengal.
The Saradha scam, where more than 1.74 million people lost their savings and investments worth $3.7 billion, was exposed when Kolkata-based Saradha group went bankrupt in January 2014. The crisis did not end just there. It led to some 35 people committing suicide. Politicians from the ruling Trinamool Congress Party in West Bengal were alleged to have been the beneficiaries of the scam.
Saradha group, promoted by Sudipto Sen, comprised over 200 small companies, and had been running collective investment schemes across eastern India since 2006.
Since access to banks is limited in rural parts of the country, many Indians depend on such schemes as an investment opportunity. ”We already have a total of about half-a-million individuals or entities that have either been indicted or been declared non-compliant by regulatory bodies,” Prithvi Haldea, founder of watchoutinvestors.com, a web-based database of defaulters, told the BBC in 2014.
Under the Saradha scheme, investors were issued redeemable bonds and secured debentures that promised extraordinary returns upon completion of tenure—the maturity period ranging between 12 months and 60 months. On completion of the tenure, many investors were also offered land or apartments. Much of the group’s success came from hiring local agents and roping in famous celebrities as brand ambassadors.
The government is yet to retrieve the losses made by the scheme. Last year, it allotted Rs500 crore ($74 million) from the state exchequer to repay investors.