May 6 (Bloomberg) -- As the head of the conglomerate the Saradha Group, Sudipta Sen persuaded small investors in West Bengal to entrust more than $500 million to his business between 2008 and 2013. What wasn't to trust? After all, Sen ran a network of around 300,000 agents, owned a set of TV channels and newspapers and had influential patrons in politics, including a member of Parliament who agreed to run his media operations for him.
Last month, Sen (who so disliked being photographed that his "message" on his company's website has a picture of an empty chair accompanying it) went AWOL after the Ponzi scheme sustained by him for five years finally went bust. He was eventually tracked down in the north Indian state of Kashmir, but not before he had embarrassed the chief minister of West Bengal, the mercurial and autocratic politician Mamata Banerjee. Sen accused two members of Parliament belonging to her party, the Trinamool Congress, of having accepted millions of dollars to buy him protection from the law.
Meanwhile, as thousands of defrauded investors thronged the offices of the Saradha Group, Banerjee's advice to them was the austere "Ja gechchey, ta gechchey" ("What's gone is gone"). The same might soon be said of her own political credibility. This was only the most inflammatory of a number of paranoid and perverse steps she has taken since coming to power in West Bengal two years ago, ending more than three decades of Communist rule in the state.
Shortly after her blooper, Banerjee rethought her strategy and promised a relief fund worth about $9.2 million to compensate investors. The smokers of West Bengal -- and there are many in this state famous for its culture of "adda," or intellectual debate over cigarettes and tea -- will have to cover Sen's false promises. Banerjee announced that she planned to raise 30 percent of the fund through a higher tax on cigarettes. "Smoke a little more to help the investors," Banerjee was quoted as saying.
There were two remarkable aspects to Sen's grand fictions: the extent to which he went to construct an elaborate facade of productive business activity, and that to which these charades were supported by an elaborate machine of extremely persuasive publicity and political patronage. Sen's main source of investor funds, a real-estate company called Saradha Realty, bought land for various projects but never embarked on construction work. He also had a motorcycle factory where 150 workers faked work in front of busloads of potential investors. The Hindustan Times reported:
"For two years since January 2011, employees at the Saradha group-owned Global Automobiles were forced to pose in front of the conveyor belt to give the impression that the plant was operating in full swing....
"Just before the depositors reached the factory, the workers would get dressed in their blue uniforms, rush to the shed where the assembling of motorbikes used to be done and pose in front of the conveyor belt as if they were really assembling the twowheelers."
And in a piece on the website Smart Investor, Namrata Acharya detailed some of the other enticing schemes offered by Sen:
"Sen offered fixed deposits, recurring deposits and monthly income schemes. The returns promised were handsome. In fixed deposits, for instance, Sen promised to multiply the principal 1.5 times in two-and-a-half years, 2.5 times in 5 years and 4 times in 7 years. High-value depositors were told they would get a free trip to 'Singapur.'
"Saradha Realty was the company most active in collecting money from depositors. Agents as well as depositors found Saradha's growth blinding. The company's website claims it has nine ongoing projects and says, somewhat ironically, 'Base of business - land which doesn't cheat anyone (sic).' Sen had even told agents that he was building a township in Sri Lanka, and its advertisement would frequently pop up on his television channels."
Why did so many depositors fall for Sen's schemes? West Bengal has one of the highest rates of small savings in India, and one of the lowest rates of financial inclusion. Because conventional savings instruments require elaborate paperwork and offer returns that barely keep up with inflation, many small investors in Bengal (and other parts of India) put their money into an indigenous financial instrument -- one that combines savings and credit -- called a "chit fund." Many news reports initially called the Saradha crisis a "chit fund scam," but in truth the affair involves a classic Ponzi scheme.
These cons work when a base pool of investors receives handsome returns on its investments -- usually nothing more than a recycling of deposits from a fresh batch of entrants. In this way, Saradha managed to persuade small investors in Bengal, including many sex workers of Kolkata, to part with their savings.
But Sen's main asset was his ability to work the political system. In 2010, he began to invest in a network of newspapers and television channels, hiring Kunal Ghosh, a member of Parliament from the Trinamool Congress, to run his media operations. The Bengali actor Mithun Chakraborty was hired as a brand ambassador for a Saradha-owned television channel. These well-known names gave Saradha a halo of legitimacy. Sen's newspapers and television channels were unabashedly pro-government in their news coverage -- an important weapon for the Trinamool Congress in the state's political battles. In turn, his main businesses were insulated from the scrutiny of the state, and his agents could chant the names of those in power when they solicited deposits.
Although the Trinamool Congress MP Kunal Ghosh has denied that the party had anything to do with Sen's business, an investigative piece in the Indian Express uncovered a long trail of links. In fact, Sen went so far as to pay astounding sums for some paintings made by Chief Minister Banerjee, money that was then used to fund the party's political campaigns. The Express reported:
"Trinamool sources confirmed that Saradha CMD Sudipta Sen, as a gesture of goodwill, regularly bought Mamata's paintings. According to one estimate, the group spent over Rs 1.86 crore [$370,000] on the paintings. The group was also a major donor to the Chief Minister's Relief Fund."
It isn't very surprising, then, that the government of West Bengal should decide to bail out the hundreds of thousands of investors -- and voters -- whose money was swallowed by Saradha. If anything, this is a further advance in a long chain of financial malfeasance, in which taxpayers compensate other citizens for an audacious Ponzi scheme that was heavily dependent upon a quid pro quo with a political party in power.
A recent piece in India's Economic and Political Weekly explaining Saradha's methods was titled "The Political Economy of Shadow Finance in West Bengal." What Indian citizens have also managed to glimpse in recent weeks, from newspaper reports and documents such as Sen's long letter to India's Central Bureau of Investigation, is the shadowy economy of political finance in West Bengal.
(Chandrahas Choudhury, a novelist, is the New Delhi correspondent for World View. Follow him on Twitter @Hashestweets. The opinions expressed are his own.)
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