Ponzi Schemes and Corruption in West Bengal: A Reading List

The Trinamool Congress in West Bengal is unable to shake off allegations of protecting corporate allies. 

On 5 October 2019, Mathew Samuel, the whistleblower in the Narada News sting operation—where members of the Trinamool Congress (TMC) were recorded accepting bribes in exchange for favours to a fictitious company—was summoned for questioning by the Central Bureau of Investigation. Despite this revelation, the TMC still won the 2016 assembly elections by a comfortable margin, winning in 211 constituencies.

In West Bengal, corruption is deep-seated, and scams that involve the TMC are not uncommon. In the Saradha Group and Rose Valley Group Ponzi schemes, nearly Rs 20,000 crore is estimated to have been duped from investors. Further, the TMC has been accused of inaction in both these cases; the directors of both these groups have ties to the party. However, these two groups are only the tip of the iceberg. Data collected by the All-India Small Depositors' Association says that nearly Rs 40,000 has been taken from small-time depositors—usually people from rural and semi-urban backgrounds.

This reading list looks at the links between the government and private capital in West Bengal, and also examines institutional safeguards that can be implemented to check the rise of scams in India.

1) Why Are Corruption-accused Voted to Power?

Suman Nath writes that the corruption charges on numerous TMC candidates after the Narada News sting operation did not seem to make a dent in voter choice. Nath argues that corruption in West Bengal has “disciplined” those in power. As compared to the previous left government, the TMC asked for bribes, but provided services in return—an acceptable compromise to the populace.

In contrast to CPI(M)-led Left Front organisation-based operations, TMC could deliver things to the people relatively quickly, often through a corrupt form of exchange. Yet, because of the speedy and assured delivery of services, a large section of people approve of this mechanism … there is a deliberate attempt to free people from the strict party grid and to make them depend on one or two relatively powerful local leaders. Although, in one sense it is an accumulation of power by a handful of people, it has accelerated the process of service delivery. It is seen that the party supremo Mamata Banerjee did not make much changes in her list of candidates for the assembly election of 2016. She even made former transport minister, Madan Mitra contest the elections from jail. She continued to defend Anubrata Mondal, district secretary of Birbhum, who is allegedly involved in fuelling political clashes in the district after the panchayat election.

2) What Are the Links between Saradha and the TMC?

Subhanil Chowdhury argues that in the Saradha Group scam, where investors were led to believe that they would either receive property or a return on investment ranging from 12% to 24% on the initial sum, deep connections exist between the TMC government and the group.

The CEO of the group's media wing Mr. Kunal Ghosh, and Mr. Srinjoy Bose, owner of the Pratidin newspaper, which has extensive business deals with Saradha, are both TMC MPs. Newspapers such as Pratidin, Sakalbela (owned by the Saradha group), etc, and TV channels such as Channel 10 are practically mouthpieces of the TMC. The brazen manner in which they support the chief minister Mamata Banerjee and the TMC makes a mockery of journalism. The TMC has been equally complicit in patronising Saradha's media network. The TMC government had ordered all public libraries to subscribe to newspapers owned by the Saradha group, including a Bengali daily Kolom, which Mamta Bannerjee had inaugurated recently. Video footage of her distributing ambulances, motorcycles and bicycles donated by the Saradha Group in Jangalmahal in 2011, has also been circulating. It is also reported that Sudipto Sen bought a painting of Banerjee for Rs 1.86 crore. The TMC transport minister, Mr. Madan Mitra, was appointed the president of the employees' union of the group, and at a programme organised by Saradha he proclaimed that its owner Sudipto Sen was the pride of Bengal. 

Moreover, Chowdhury writes that Mamata Banerjee denied knowledge that Saradha was operating as a chit fund company, despite the centre listing it as one of 73 companies in West Bengal that were running Ponzi schemes. Chowdhury argues that people continued to put their faith in Saradha as they assumed that the TMC and the state government were backing its success.

People put their bet on Saradha looking at TMC as the guarantor. This kind of political underwriting of a dubious financial organisation by the ruling party is unique in the history of West Bengal. However at the same time it must be highlighted that the people did not use their judgment to invest prudently. Though most people were misled by Saradha and its association with the TMC, given their weak educational and class background, it cannot be denied that they got lured by high profits offered by the Ponzi schemes.

3) How Do Ponzi Schemes in West Bengal Spread?

Souvik Dutta and Abhirup Sarkar write that social networks such as self-help groups (SHGs) in West Bengal, which are formed to secure microcredit from rural banks are being used to spread Ponzi schemes among the group members. On surveying two districts in West Bengal, the authors write that financial illiteracy and ignorance about the risks involved in such schemes are largely responsible for their prevalence.

Our survey was conducted in 2016. We asked the respondents about their investments in Ponzi schemes over a period of five years prior to that date … a higher percentage of SHG members were aware of Ponzi schemes compared with non-members and the difference is statistically significant. Again, of those who had heard of Ponzi schemes, a much higher percentage of SHG members actually invested in such schemes compared with their non-member counterpart. As percentage of total SHG members, 28.7% had invested in Ponzi schemes. The corresponding figure for non-members is 13.8% and the difference is statistically significant. Again, the average amount of investment in Ponzi schemes for SHG members is 56% higher than the average investment of non-members and this difference is also statistically significant.  

Further, Dutta and Sarkar state that misinformation spread through these networks by friends, family members, or relatives plays a large part in people investing their money in questionable enterprises. 

Though 94% of SHG members and 100% of non-members did not get any return from their investments in Ponzi schemes, very few of them (1% of SHG members and 10% of non-members) were actually aware of the risk involved. Since a large fraction of members (80%) heard of someone who had actually benefited from some Ponzi scheme, and the fraction is only 37.5% for non-members, it seems that the spread of misinformation was higher among members … It seems likely that the SHG members were “instructed” not to say anything that will implicate the group in Ponzi scheme-related activities. As a result, there was systematic misreporting by SHG members regarding the source from which they learnt about Ponzi schemes. But whether a group member learned about Ponzi schemes from other group members or not, the statistical association between investing in a Ponzi scheme and being in a group is strong. 

4) Why Are There No Checks and Balances?

In the case of the Saradha scam, D N Ghosh questions the authorities’ inaction. Ghosh asserts that regulatory bodies must have been aware that large sums of money were being raised as deposits from poor people in rural and semi-rural West Bengal. 

Even if they knew little, they must have known—if we are to go by several notorious precedents—that these money-raising schemes could blow up any time. Was it not then their duty to use as many forums as they could to give out warnings? They could have taken advantage of our extensive television network to reach the remotest corners of the country. Of course, being regulators, they should have avoided making direct references to any particular company, but a message in general terms sent out continually would have served the purpose.  

Further, Ghosh contends that the only reason regulatory bodies fail to raise issue with ongoing scams is because they often target the poor, who have no voice, while the perpetrators have deep political connections. 

Our style of regulatory tactics suited to the old style gentlemanly capitalism will not do. Our market intelligence system has to be extensive, but more important, it has to be unorthodox. Listen to the whisperings in the market place, create listening points all over—as many as possible; be attentive to signals that emit from there, have the courage to put uncomfortable questions to those who pose as financial celebrities, demonstrate independence and prove the credibility of the regulator. The rest will automatically follow.

5) Can Audits Help Prevent Scams?

To check the formulation of bad policy and to stem the influence of political actors on bureaucratic processes, Dharam Vir argues in favour of a few institutionalised procedures to restore accountability and transparency, which can stem the prevalence of scams in the government. Vir writes that safeguards need to be put in place to protect the interests of those who work under erring ministers. 

It is generally accepted that the secretary provides the inputs for policy formulation but it is the minister who is ultimately responsible for policy. The secretary then oversees its delivery and implementation. But the lines between policy and its implementation can often be blurred, particularly with several big ticket transactions requiring the approval of the minister or a cabinet committee or even the entire cabinet … the minister is not called to appear before Parliament’s Public Accounts Committee (PAC), and it is the secretary who has to “hold the baby.” This places the secretary in the unenviable position of having to explain or defend a course of action to which he may have been personally opposed.

Vir argues that audits, along the lines of those conducted in the United Kingdom, can be an effective tool in investigating a difference of opinion between secretary and minister, and could also check the growth of scams.

In the United Kingdom, if the minister is contemplating a course of action that the permanent secretary feels he may not be able to justify when called upon to defend because it involves irregularity or impropriety or poor value for money, the latter is required to set out his views in writing and obtain the specific direction of the minister to proceed. On receipt of such a specific direction from the minister, the permanent secretary will formally inform the CAG with copies of all documents keeping the minister too in the picture.

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