Lessons from Saradha scam

Seek proper documentation before investing

A 50-year-old domestic help on the outskirts of Kolkata set herself ablaze after she lost Rs 30,000 that she had invested in a deposit scheme run by the Saradha group. An agent of the company also attempted suicide out of the fear of facing depositors' wrath. The company's offices across West Bengal have shut down and many of its cheques have bounced. It is unlikely that the depositors, most of whom are poor, working-class people, would be able to recover the money. Though the Chairman and Managing Director, Sudipto Sen, has been arrested, this hardly provides any relief to the scores of depositors who have lost their hard-earned money.

The only route such depositors have is to approach the court, which could be a long-drawn and expensive route to recovering money.

Even if the court orders that depositors be paid, it would be applied on a pro rata basis. And, in case the promoters have transferred the assets to another company, recovering money will be longer, says Jehangir Gai, consumer activist and lawyer.

Para-banking companies, which include chit funds and nidhi companies, thrive due to the absence of strong regulation and monitoring. They also offer very high interest rates, easy liquidity and convenience such as door-to-door collection by agents and option to deposit small amounts of money.

If an agent of such a company approaches you, remember that anything that sounds too good to be true is probably not true. So, make sure to check what is the business the company is investing in and if it can be sustained over a long time.

For instance, depositors who invested money in schemes that promised high returns by investing in emu farms and teak plantations got money in the initial period. But after a while these went bust as the business was not sustainable.

For chit funds to function, they must be registered with the respective state's Registrar of Chit Fund Company. While there is a central government act regulating chit funds, not all states have implemented it and not all states have set up a Registrar for regulation of such companies, says Gai.

Some that do have a Registrar are Delhi, Karnataka, Kerala, Tamil Nadu and Andhra Pradesh.

To verify if the company, whose agent is canvassing deposits is genuine one or not, ask for the certificate of incorporation issued by the Registrar of companies and for the registration number of the company issued by the Registrar of Chit Funds. In fact, the chit manager has to deposit 100 per cent of chit value, or the money collected, with the Registrar before the scheme begins.

Ask for a list of directors of the company and verify for yourself the financial credentials of the diirectors. You must also ask for the chit agreement and go through the clauses. Ideally, the agent should provide a copy of the agreement to each subscriber of the deposit scheme before taking the money.

If depositors in the Saradha group's scheme had taken these precautions, perhaps they would not have lost money. But most of them were not even aware of these measures, since they were illiterate, like the domestic help who committed suicide.