 "Rs 18,000 cr and counting")
There have been 11 arrests in the Rs 5,600-crore National Spot Exchange (NSEL) fraud, including of promoter Jignesh Shah and some defaulters. Yet, the money repaid to investors, 13,000 of them, has been only about 10 per cent of this.
Last week, investors of the multi-crore Saradha chit fund scam (pegged at Rs 2,500 crore in West Bengal and another Rs 10,000 crore in Odisha) blocked rail traffic at several places in West Bengal because they haven't still got their money. Though the state government set up a fund to repay the investors (estimated at 1.7 million), things are yet to move. On Friday, the Supreme Court ordered an enquiry by the Central Bureau of Investigation into this scam.
While both these are large, there is one big difference. In the first one, even the so-called smart investors are caught because they were sold the contract by brokers as a 'safe' investment, with 13-14 per cent returns annually. Says a high net worth investor who has lost money in the scheme: "The investors in the NSEL scam were sophisticated liquid and short-term debt fund investors, who put money in these contract for about two-three per cent more." Not a great incremental rate of return.
In the Saradha case, small investors such as shopkeepers and householders were lured into investing in this chit fund with the promise of excellent returns. "Chit fund investors are typically those who are not even aware of the internal rate of return. They are simply told their money will be doubled or trebled in a few years," says an investment expert.
Whether it is a Saradha investor or the wealthy investor in NSEL, the redressal mechanism is long and winding. But the alarm bells should start ringing the minute someone offers returns higher than normal.
For instance, that investment will double in two to three years, a typical trap laid by a Collective Investment Scheme (CIS). How can you be promised returns irrespective of the economic or market condition? Other tell-tale signs could be no information about where the returns will come from, no regulatory stamp of approval, minimal documentation and outlandish investment avenues - all hints that a scheme is a potential black hole.
Equally difficult is to get your money back from the scamsters. Says a lawyer, even with the arrest of a number of borrowers and promoters in the NSEL case, the leftover money might not come as easily because they will need a proper plan to recover dues and proper execution of this. The battle to get back your money also depends on how you invested in an instrument - directly through the company or through a broker.
In most cases, filing a First Information Report (FIR) with the police is an effective way of getting the institution/company on the negotiation table. Next, investors can send a legal notice and take the matter to court through a civil case. "If the company does not react to an FIR, they will definitely do so on getting a legal notice," said R N Gupta, managing partner of SN Gupta & Company.
Investing in CIS
A Reserve Bank of India survey said most duped investors in the multi-crore emu contract farming scam in Tamil Nadu were literate, adding they had been lured by "greed". Here, a criminal case is the only option, as such companies indicate wrong returns to draw investors and don't come out clean on their backgrounds - this is criminal breach of trust. You should invest money only in registered companies, as there is no law to control unregistered ones. While the Securities and Exchange Board of India is the regulator its limited reach makes it difficult to regulate such scams.
Investing through an institution
In case of a problem, first take up the matter with the financial institution, if you had invested directly through it - insurance companies, mutual fund houses, banks or exchanges. The problem can be anything - the company not paying up, improper service or deduction of money in the garb of random charges and so on. At least, you will get an initial justification from the company or a possible way to resolve the problem.
If the problem remains unresolved, dispute resolution would depend on the contractual agreement between the institution and the investor. The redressal mechanism for disputes between two parties is stated in every company-client agreement, said Sajid Mohamed, partner at PDS & Associates.
Many times, investment agreements have an arbitration clause for dispute resolution. In a way, this is an out-of-court settlement route under the Arbitration and Conciliation Act, 1996. Arbitration is of two types, ad hoc or institutional. In ad hoc arbitration, the arbitrators are free to decide the procedure and administer the proceedings on their own. In institutional arbitration, an institution such as the Indian Council of Arbitration or LCIA (India) administers the proceedings for a small fee and most procedural issues are provided for in their published rules. Institutional arbitrations have proven to be more efficient. If a contractual agreement does not offer the option of arbitration then the parties can decide even post-dispute, adds Mohamed. But, that rarely happens.
When an investor has to recover money from an institution, he can file a civil suit. Once the trial is over, the court orders need to be executed, even by liquidating the company's assets. A criminal case is filed when there is breach of trust between the parties, which starts with filing an FIR. For instance, NSEL investors would have been secured about their transaction if they had receipts from the exchange's godowns.
Investing through a broker
The contractual agreement is of importance for resolution. Such disputes are settled mostly through a criminal suit filed for inducing investment. But there should be evidence that the brokers furnished false information, either about investment returns or the company. For instance, if NSEL brokers had not informed investors of the non-availability of stock in warehouses.
No proof of misrepresentation can also land a broker in court for mediating a wrong investment. But he might be asked only to pay a penalty, as he will not be responsible for your loss if he didn't underwrite the transaction.
Lawyers warn that one can book companies or brokers for wrongdoing but the money might not be recovered completely or even partially.
How an NSEL investor got duped
"When I was asked to invest in the National Spot Exchange's contract, the lure wasn't too dramatic. Typically, businessmen like me keep the debt portion of our investment book in liquid funds or bank fixed deposits or highly rated corporate deposits or debentures.
This proposition, in comparison, was marginally higher at 13-14 per cent. And, even after analysing the deal, I could find little error in it. The effective charge for the borrowers, including value added tax, brokerage, etc, was 16-17 per cent for 30-60 days - actually, a lower rate than banks were lending to these borrowers, as they were in the seasonal business of commodities trading. I construed that the instrument was an innovative way to intermediate between the genuine needs of the borrowers (planters) and lenders, thereby giving finance at a lower rate than the market. The investors benefited marginally - two to three per cent more - than what good corporate deposits, banks and other debt instruments were offering.
Since the exchange and warehouse was regulated and additionally, there was a large investor protection fund - almost Rs 800 crore - for settling defaults, this seemed a low-risk instrument. This is where even the most-savvy investor stumbled.
Being made to look foolish for barely two-three per cent additional returns and being labelled 'greedy'... well... seems uncharitable...
How a Saradha investor got duped
I started working as a Saradha agent in Burdwan in 2008. I was an eight-rank officer. Saradha not only started the business of money pooling but also started advertising Saradha bikes. By 2009, two branch offices were open in Burdwan, including one in Durgapur.
Soon, I was promoted to a rank-14 agent, when I could earn as much as Rs 32,000 a month as commission. I earned a total of Rs 6 lakh as commission, which I entirely invested at Saradha. I was doing a job at a private sector company and this was good part-time income.
It was sometime in January 2013 that we first got the hint something was wrong. We realised the company was redeeming maturity from fresh collections. Two days before the crisis broke out on April 12, Sudipto Sen and other top officers of the company had stopped taking phone calls. We met TMC (the ruling party) leaders but it was no help. At the end, I lost whatever money I made as commission.
(As told to Namrata Acharya)
Last week, investors of the multi-crore Saradha chit fund scam (pegged at Rs 2,500 crore in West Bengal and another Rs 10,000 crore in Odisha) blocked rail traffic at several places in West Bengal because they haven't still got their money. Though the state government set up a fund to repay the investors (estimated at 1.7 million), things are yet to move. On Friday, the Supreme Court ordered an enquiry by the Central Bureau of Investigation into this scam.
While both these are large, there is one big difference. In the first one, even the so-called smart investors are caught because they were sold the contract by brokers as a 'safe' investment, with 13-14 per cent returns annually. Says a high net worth investor who has lost money in the scheme: "The investors in the NSEL scam were sophisticated liquid and short-term debt fund investors, who put money in these contract for about two-three per cent more." Not a great incremental rate of return.
In the Saradha case, small investors such as shopkeepers and householders were lured into investing in this chit fund with the promise of excellent returns. "Chit fund investors are typically those who are not even aware of the internal rate of return. They are simply told their money will be doubled or trebled in a few years," says an investment expert.
Whether it is a Saradha investor or the wealthy investor in NSEL, the redressal mechanism is long and winding. But the alarm bells should start ringing the minute someone offers returns higher than normal.
For instance, that investment will double in two to three years, a typical trap laid by a Collective Investment Scheme (CIS). How can you be promised returns irrespective of the economic or market condition? Other tell-tale signs could be no information about where the returns will come from, no regulatory stamp of approval, minimal documentation and outlandish investment avenues - all hints that a scheme is a potential black hole.
Equally difficult is to get your money back from the scamsters. Says a lawyer, even with the arrest of a number of borrowers and promoters in the NSEL case, the leftover money might not come as easily because they will need a proper plan to recover dues and proper execution of this. The battle to get back your money also depends on how you invested in an instrument - directly through the company or through a broker.
In most cases, filing a First Information Report (FIR) with the police is an effective way of getting the institution/company on the negotiation table. Next, investors can send a legal notice and take the matter to court through a civil case. "If the company does not react to an FIR, they will definitely do so on getting a legal notice," said R N Gupta, managing partner of SN Gupta & Company.
Investing in CIS
A Reserve Bank of India survey said most duped investors in the multi-crore emu contract farming scam in Tamil Nadu were literate, adding they had been lured by "greed". Here, a criminal case is the only option, as such companies indicate wrong returns to draw investors and don't come out clean on their backgrounds - this is criminal breach of trust. You should invest money only in registered companies, as there is no law to control unregistered ones. While the Securities and Exchange Board of India is the regulator its limited reach makes it difficult to regulate such scams.
Investing through an institution
In case of a problem, first take up the matter with the financial institution, if you had invested directly through it - insurance companies, mutual fund houses, banks or exchanges. The problem can be anything - the company not paying up, improper service or deduction of money in the garb of random charges and so on. At least, you will get an initial justification from the company or a possible way to resolve the problem.
If the problem remains unresolved, dispute resolution would depend on the contractual agreement between the institution and the investor. The redressal mechanism for disputes between two parties is stated in every company-client agreement, said Sajid Mohamed, partner at PDS & Associates.
Many times, investment agreements have an arbitration clause for dispute resolution. In a way, this is an out-of-court settlement route under the Arbitration and Conciliation Act, 1996. Arbitration is of two types, ad hoc or institutional. In ad hoc arbitration, the arbitrators are free to decide the procedure and administer the proceedings on their own. In institutional arbitration, an institution such as the Indian Council of Arbitration or LCIA (India) administers the proceedings for a small fee and most procedural issues are provided for in their published rules. Institutional arbitrations have proven to be more efficient. If a contractual agreement does not offer the option of arbitration then the parties can decide even post-dispute, adds Mohamed. But, that rarely happens.
When an investor has to recover money from an institution, he can file a civil suit. Once the trial is over, the court orders need to be executed, even by liquidating the company's assets. A criminal case is filed when there is breach of trust between the parties, which starts with filing an FIR. For instance, NSEL investors would have been secured about their transaction if they had receipts from the exchange's godowns.
Investing through a broker
The contractual agreement is of importance for resolution. Such disputes are settled mostly through a criminal suit filed for inducing investment. But there should be evidence that the brokers furnished false information, either about investment returns or the company. For instance, if NSEL brokers had not informed investors of the non-availability of stock in warehouses.
No proof of misrepresentation can also land a broker in court for mediating a wrong investment. But he might be asked only to pay a penalty, as he will not be responsible for your loss if he didn't underwrite the transaction.
Lawyers warn that one can book companies or brokers for wrongdoing but the money might not be recovered completely or even partially.
How an NSEL investor got duped
"When I was asked to invest in the National Spot Exchange's contract, the lure wasn't too dramatic. Typically, businessmen like me keep the debt portion of our investment book in liquid funds or bank fixed deposits or highly rated corporate deposits or debentures.
This proposition, in comparison, was marginally higher at 13-14 per cent. And, even after analysing the deal, I could find little error in it. The effective charge for the borrowers, including value added tax, brokerage, etc, was 16-17 per cent for 30-60 days - actually, a lower rate than banks were lending to these borrowers, as they were in the seasonal business of commodities trading. I construed that the instrument was an innovative way to intermediate between the genuine needs of the borrowers (planters) and lenders, thereby giving finance at a lower rate than the market. The investors benefited marginally - two to three per cent more - than what good corporate deposits, banks and other debt instruments were offering.
Since the exchange and warehouse was regulated and additionally, there was a large investor protection fund - almost Rs 800 crore - for settling defaults, this seemed a low-risk instrument. This is where even the most-savvy investor stumbled.
Being made to look foolish for barely two-three per cent additional returns and being labelled 'greedy'... well... seems uncharitable...
(As told to Joydeep Ghosh)
How a Saradha investor got duped
I started working as a Saradha agent in Burdwan in 2008. I was an eight-rank officer. Saradha not only started the business of money pooling but also started advertising Saradha bikes. By 2009, two branch offices were open in Burdwan, including one in Durgapur.
Soon, I was promoted to a rank-14 agent, when I could earn as much as Rs 32,000 a month as commission. I earned a total of Rs 6 lakh as commission, which I entirely invested at Saradha. I was doing a job at a private sector company and this was good part-time income.
It was sometime in January 2013 that we first got the hint something was wrong. We realised the company was redeeming maturity from fresh collections. Two days before the crisis broke out on April 12, Sudipto Sen and other top officers of the company had stopped taking phone calls. We met TMC (the ruling party) leaders but it was no help. At the end, I lost whatever money I made as commission.
(As told to Namrata Acharya)