labels: rbi, economy - general, mutual funds
The lure of the gamenews
They also had implied fa
20 August 2002

Chennai: D Ramamoorthy, 76. S Seetharaman, 72. T Krishnakumar, 60. These are some of the frequent visitors to the Chennai police commissioner's office.

No, they are not culprits booked by the police, but office-bearers of the Federation of Investors' Association. The frail Ramamoorthy is the secretary while Seetharaman is the vice-president, who along with other office-bearers make these torturous visits to this place. They carry this slim hope of nailing the crooks who have swindled the lifetime savings of lakhs of people.

It's really a pity that these senior citizens, expected to lead a peaceful retirement life by visiting temples or parks, are forced to go around in the hot sun to places like the police department and the courts. ''We have little option,'' sighs Ramamoorthy.

Since 1996 several finance companies of varied hues in Tamil Nadu - incorporated, unincorporated, nidhi, chit and others like plantation companies and jewellery shops - have downed their shutters, in the process embezzling many a depositor's hard-earned money.

Own your teak or tamarind tree. Get some kilos of sugar or rice for every milk packet you buy every day. Buy jewellery at today's price 12 months from now. These are some of the deposit schemes that people got attracted to.

The lure of the game
The modus operandi of these fraudsters is simple. First they would set up a flashy office and start advertising heavily in English and Tamil dailies, offering fancy interest rates for deposits. Newspapers and magazines will be more then willing to feature them in their news columns due to the advertising revenue. Once a positive image is built and deposits are mobilised, the promoters flee with the kitty.

The economic offences wing (EOW) of the Tamil Nadu police says a total of Rs 1, 945 crore - deposits by 12-lakh middle- and lower middle-class wage-earners - have been swindled by various dubious entities. And no one knows what happened to those jewels offered as security to finance companies while borrowing.

Hidden behind that cold number is the untold human tragedies that the organised swindlers have caused to lakhs of families. There were around 30 suicides, and several marriages were upset. About 75 oldies were chased out to old-age homes or streets by their offspring for depositing their retirement proceeds in defunct companies. Many have got into depression, and suffer silently. ''Pox on the cheats,'' curses a depositor who lost more than Rs 7 lakh.

It's easy to dismiss the losers as people who are greedy for unrealistic high returns as some finance companies offered whopping interest rates of 36 per cent plus 3 per cent as incentive. The gullible didn't calculate the economics and the risk profile of such businesses and were impressed by the advertisements and snazzy offices.

They also had implied faith on the Reserve Bank of India (RBI) that govern non-banking finance companies and nidhis, the Registrar of Chit Funds, Tamil Nadu, which supervises the chit fund players and the auditors of companies like RBF Nidhi, MCC Finance, Alwarpet Benefit Fund and Fidelity Finance.

Apathetic policing
None of the auditors of incorporated finance companies blew the whistle about the actual status while signing statements saying the books give ''a true and fair'' picture of the state of affairs in these fraudulent companies.

''The Registrar of Chits, too, failed in his duties,'' says Eswari Depositors and Chit Holders' Association president N Babu Peter. ''If only periodic checks were carried out on chit fund companies, episodes like Sudarshan Chit Fund could have been averted.''

Many chit fund companies register only one scheme and offer security deposit for that scheme while operating several unregistered schemes, says Peter. ''It's a different matter that chit fund companies are now lobbying to dilute the provisions of the Chit Fund Act 1982.'' But what should not be lost sight of is that, making a deposit in return for interest, and later the principle, is a contract.

 And it is this contract that has been violated by all high and mighty groups like Spic (MCC Finance to the tune of Rs 183.7 crore) Balaji (RBF Nidhi: Rs 490 crore), Anubhav Plantations (Rs 266 crore), Madras Motor Finance, the Sanmac Finance and Synergy Financials combine belonging to P Rajarathinam's Agni group (Rs 172 crore), Alwarpet Benefit Fund (Rs 120 crore), Devi Gold House, GNS Nidhi (Rs 42 crore), IGGI Resorts (Rs 65 crore), Park Town Benefit Fund (Rs 120 crore) and Fidelity Finance. A devastating list.

Glamour wooing
The latest to join this dubious club is Sudarshan Chit Funds, promoted and run by R Velayuthan, film actress K R Vijaya's husband. In support of her husband, Vijaya, famous for her divine smile and donning goddess roles, assured that the depositors will get their dues back.

The company went on the offensive, blaming the depositors for spreading canards about it. The truth is that the depositors complained when the company failed to make the payments even after eight months when the chit matured, while the law prescribes 30 days as the maximum outer limit.

Emboldened by the manner in which a majority of the defaulting companies and their promoters escaping the law, many individuals, operating unregistered neighbourhood chit and deposit schemes for several decades, are now absconding with lakhs of rupees.

One such family got transfer certificates from the educational institutions of their children before going underground. In a curious case, the chit fund organiser ''died'' and big photographs of his with garlands adorn the walls of his house.

With law taking its own sweet time, many depositors have written off their money. They have lost faith in the administrators appointed to auction the properties of defaulting companies. The state law, the Tamil Nadu Protection of Interests of Depositors (TNPID) Act, 1997, is applicable only for unincorporated bodies, hence not effective.

''In many cases we donned the police's and administrators' robe, tracing the properties owned by the defaulting companies in remote places,'' says Ramamoorthy. He was instrumental in finding a buyer willing to pay the market price for a dairy farm that defaulted; the property was about to be palmed off for a paltry sum.

''Administrators are drawing fat salaries, but nothing concrete happens when it comes to the sale of properties,'' says an irate office-bearer of the depositors' association.

Smart operators
Given the high stakes involved, defaulting promoters exploit the loopholes in the legal system. They would pay fancy sums to Supreme Court lawyers, but are reluctant to pay back a single rupee to the depositors, says the office-bearer. In some cases they even floated and registered depositors' associations with their stooges. And in one significant incident the promoter of a defunct company is alleged to have murdered a complainant.

According to EOW, Rs 401 crore has been recovered from defaulting companies and refunded to the depositors, and seven cheats have been sentenced for several years. The police have ensured repayment of Rs 14.95 crore to 14,122 depositors. Sixty cases involving a sum of Rs 5.32 crore have been settled at the petition stage benefiting around 2,050 depositors.

Credit should be given to EOW for acting smartly in some cases. For instance, when a depositor of Sudarshan Chit Fund complained to EOW about non-payment of his money three months before the issue blew up, the police silently attached two real estate properties of the company.

Similarly, the police arrested ''the takeover tycoon'' Rajarathinam by tracking the IP address in his email. Jumping bail soon after, Rajarathinam slipped out of India and he is now a proclaimed offender.

Some hope
EOW, in the meantime, has mooted the idea of amending the TNPID Act to provide for sale of attached properties fast by empowering a competent authority. It has also announced that the defaulters will be pardoned if they settle their dues promptly. But the latest thinking that is doing the rounds among the depositors is to go in for negotiated settlements with the promoters instead of waiting for the legal process to end.

''Even if the companies are liquidated after several years of fighting, we will get just a micro fraction of our dues. Instead of getting that after several years, especially with inflation going up, is it not prudent to get the same now?'' asks one.

The success in realising some money by selling the assets of the now-defunct Eswari Finance with the assistance of the promoters is what is leading to the change of heart. Says Peter: ''Out of seven properties owned by the company, we were able to sell four and realise Rs 3 crore. The real estate market fall is one of the reasons for low realisation. We are on the lookout for buyers for two properties.''

But it is not going to be an easy task for the depositors because a spanner could be thrown in by anybody, as it happened in the case of Park Town Benefit Fund. Nevertheless, Ramamoorthy is keeping his fingers crossed. ''What else can we do when no chief minister is willing to give us a hearing?''

Dubious state of affairs
He has reason to be afraid. The defaulters may take a leaf out of leading chambers of commerce and ask the law enforcers to distinguish between wilful defaulters and non-wilful defaulters. Several chambers of commerce are in favour of differentiating wilful and non-wilful defaulters when it comes to the recovery of the money lent to industries by the banking sector.

According to RBI's state-wise list of defaulters, who borrowed Rs 1 crore and above from the banking sector and released by All India Bank Employees' Association, Tamil Nadu ranks third with Rs 8,569.98 crore classified as non-performing assets by various banks.

The state may not have thrown up great entrepreneurs or industrialists, but certainly it is the breeding ground for cheats and crooks who can put a Bhansali, Harshad Mehta or a Ketan Parekh to shame.


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The lure of the game