Why in news:

• Former Kolkata Police Commissioner Rajeev Kumar has claimed that the allegations raised against him in connection with the multi-core Saradha chit fund scam is part of a “larger conspiracy” by two prominent Bharatiya Janata Party (BJP) leaders Mukul Roy and Kailash Vijayvargiya.

Background: / Saradha -chit fund

• Saradha Group was a consortium of over 200 private companies with Sudipto Sen as a Chairman. It was believed to be running collective investment schemes popularly but incorrectly referred to as chit funds. As we know, chit fund cannot declare in advance the return an individual is likely to make. But returns were promised in Saradha chit fund.
• They offered fixed deposits, recurring deposits and monthly income schemes. The returns promised were handsome. High-value depositors were also promised foreign trips.
• The fact that a rate of return was promised in advance and the amount of 4 times return to the principal, clearly means that it was not a chit fund.
• It can be categorised under what SEBI calls a collective investment scheme.
• A collective investment scheme (CIS) is defined as any scheme or arrangement made or offered by any company under which the contributions made by the investors are pooled and utilised with a view to receive profits, income or property, and is managed on behalf of the investors. Investors do not have day to day control over the management and operation of such scheme or arrangement.
• Against the money collected Saradha promised allotment of land or a flat.
• The investors also had the option of getting their principal and the promised interest back at maturity.
• The investors did not have day to day control either over the scheme or over the flat or land for that matter. The money/land/flat came to them only at maturity. Given these reasons Saradha was actually a CIS.

What was the Scam?

• If the Saradha group was collecting money and promising land or flats against that investment, it should still have those assets. Saradha was trying to create an illusion it was doing all of it. But there was nothing really that it was doing.
• They were using money brought in by the newer investors to pay off the older investors whose investments had to be redeemed. At the same time they were creating an illusion of a business as well, which really did not exist.
• They were prompt with payments in the first year. Later agents were told to make payments for maturities with fresh collections or make adjustment against renewals.
• They also pay high commission to agents to keep bringing new investors. And as long as money brought in by later investors is greater than the money that has to be paid to earlier investors, these schemes keep running.
• The day this equation changes, these so called chit funds go bust. The same happened in case of Saradha chit fund as well. The group collected around 200 to 300 billion from over
• 1.7 million depositors before it collapsed in April 2013.