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Chit funds — hook and sinker
People continue to invest in Non-Banking Financial Companies for higher returns, but many of these companies end up cheating the depositors. The latest is Mylapore Benefit Fund Nidhi. At present, 314 cases are under investigation and 345 cases are pending trial. So far, over 1,160 financial institutions have been booked for defaulting on payments to 9.20 lakh depositors who lost roughly ₹14,000 crore. Fraudsters are encouraged by a middle class lacking awareness
An edifice of hope dashed: The 150-year-old Mylapore Benefit Fund Nidhi Ltd., regarded as a neighbourhood bank, suddenly put up the shutters. It denied the payment of interest and the principal for the last one year. Depositors have invested roughly ₹650 crore.
| Photo Credit: M. SRINATH
For many like L. Francis, the majestic building of the Mylapore Benefit Fund Nidhi Ltd. was an edifice of hope, trust, and confidence. Promised better returns, they had invested all their savings in the Non-Banking Financial Company (NBFC) hoping that their hard-earned money would mature with more interest and bring their goals closer. But with the 150-year-old company suddenly putting up the shutters, their dreams have come crashing down.
“This building was fondly called the fund office. We used to pledge our jewellery for raising money for weddings and educational expenses and repay the loans when we got a bonus or other income. Now, the company has swallowed our financial deposits and let us down,” says Mr. Francis. A large number of depositors are often seen on South Mada Street making frantic inquiries about rumours that the company would soon revive operations and return their funds with a higher rate of interest. However, for now, there seems to be no sign of the company keeping its promise.
No proper response
S. Mohan, who retired from a Central government establishment, had invested his savings in the firm. He also heads the Mylapore Fund Depositors’ Association. Mr. Mohan says, “The firm has denied the payment of interest and the principal for the last one year. Some of us had made small recurring deposits and then converted the matured sum into fixed deposits. Going by our calculation, depositors have invested roughly ₹650 crore. There is no proper response from the firm when we question the non-payment of interest. The company has formed a small WhatsApp group and circulated messages that it would send its ‘men’ if we demanded our money back. Most of the depositors are senior citizens. They are scared of questioning the management or approaching the police,” he said.
K. Baskar, another depositor, says people invested in the company since it promised 10% interest on deposits, while the rates were less in banks. “They used to promptly give us 10% interest. We are all traditional investors here and Mylapore residents. The management took advantage of the people’s trust. We are all elderly people and even invested our pension here. We are now left in the lurch.”
Some investors say the company’s performance over the decades had been so strong that it has had many second- or third-generation investors. J. Bharat Ram, a resident of Abiramapuram, says, “We are the third-generation investors in this company. My parents, grandparents, relatives, and I have altogether invested ₹1 crore in various schemes. They gave post-dated cheques which bounced. For the last seven months, I kept on visiting [the company]. People [the staff] were rude in their response.”
Chairman arrested
Following many complaints, the Economic Offences Wing of the Tamil Nadu Police arrested the chairman and managing director of the company, T. Devanathan Yadav, who was fielded by the BJP-led NDA from the Sivaganga Lok Sabha constituency in the recent general election. Two other directors were also arrested last week.
In Tamil Nadu, it is not uncommon for the NBFCs and unincorporated financial institutions to collect deposits from people and default on repayment. People have been witnessing the collapse of such financial institutions since the late 1990s. The closure of such institutions and the police warning against offers of unrealistic interest rates or schemes have had no effect on people.
In July 1996, the Central Crime Branch (CCB) of the Chennai City Police had to handle a series of complaints against Sneham Finance and its 20 subsidiaries defaulting on repayment of fixed deposits. They allegedly collected about ₹10 crore from about 6,000 depositors and defaulted. The CCB also handled a case against Eswari Group of Finance Firms, which cheated about 12,000 investors of ₹27.50 crore. The list of unscrupulous financial institutions and corporate bodies is quite long — Anubhav, GNS Nidhi, Devi Gold House, Royapettah Benefit Fund, Alwarpet Benefit Fund, MCC Finance limited, and Ramesh Cars, to name a few.
A majority of these companies started out in the 1990s with good intentions. However, they tried to attract depositors by offering attractive freebies, hosting dinner/lunch at hotels, gifting gold coins, and tours. Prominent persons or celebrities were on their boards as directors. They offered 10%-30% interest on deposits. They also offered a variety of schemes, including ownership of farmhouses and teak estates. A lot of people, including senior citizens, invested in their deposit schemes, and most of the depositors were from the middle or lower middle class.
Unrealistic schemes
So much money poured into these companies that they could not handle it. The schemes were unrealistic and failed owing to mismanagement, diversion, and investment in the share market, real estate, and the film industry. These companies soon started collapsing, leaving the depositors high and dry. Under the circumstances, the State government enacted the Tamil Nadu Protection of Interests of Depositors (Financial Establishments) Act, or TNPID Act, in 1997 to protect the interest of investors and punish the defaulters with a maximum of 10 years in jail. A special court was also created for speedy trial in these cases. As the CCB and the local police did not have the expertise to probe such frauds, a dedicated unit, the Economic Offences Wing (EOW), was formed. It started functioning from January 2000.
Since 2000, several financial institutions have folded up, mostly because of mismanagement or fly-by-night operators vanishing after collecting money from the depositors. The “emu scam” and the cases of cheating by Hijavu and Aarudhra Gold have rocked the State in recent times. Purasawalkam Santhatha Sanga Nidhi Limited and Mylapore Benefit Fund Nidhi Ltd. have made it to the list now.
In Salem, Tiruppur, and Erode, a farm company promised to construct a shed and provide six emu chicks, fodder and medicines for an investment of ₹1.5 lakh in 2010. The investors were promised a monthly incentive of ₹6,000 and a yearly bonus of ₹20,000. The company ended up cheating the investors. From September 2020 to May 2022, Aarudhra Gold Trading, functioning from Aminjikarai, collected ₹2,400 crore in deposits from more than one lakh investors by offering an interest of 25%-30% a month. The company neither paid the interest nor returned the deposits.
People crowding at the City Police Commissioner’s office or the EOW office at Ashok Nagar has become a usual sight. Moving scenes of depositors pleading with the police to help them recover their lifetime savings are not uncommon either. However, the closure of several finance companies in the last few years has not deterred people from investing in such firms.
Former Director-General of Police R. Natraj says, “The middle class is the most susceptible to these traps, and scammers target them. There is little entrepreneurial attitude among the people; the greed for quick money is more prevalent.”
“The frauds kept happening despite extensive campaigns by law-enforcement agencies to create awareness. This is because people lack financial acumen and do not know how to manage their funds. The second factor is greed. Everyone wants to multiply money, not in due proportion, but in geometric progression. Scamsters take advantage of this psychology,” says Prateep V. Philip, who also retired as the DGP.
As on date, there are 314 cases under investigation and 345 cases pending trial. Over 1,160 financial institutions were booked for defaulting on payment to 9.20 lakh depositors who had lost roughly ₹14,000 crore. Of the 3,800 persons who were cited as accused, 1,900 were arrested.
Police officers say anything beyond 10% in interest is not feasible. However, the institutions lure depositors with much higher rates of interest. They pay these rates for one year or so and then default. People do not check if the company where they plan to invest is following the norms of the Reserve Bank of India (RBI). Nobody checks the background of the directors of these companies, says a police officer.
Compoundable offence
The offence is compoundable, and Section 5A of the TNPID Act allows the company and the partner to settle the amount due to the depositors speedily. Hence, the victims and the accused can reach a settlement during trial.
“Once a case of default is booked against a firm, we initiate criminal prosecution and attach the properties of the company for settlement of the dues. We are not involved in refund of money. It is done by either the District Revenue Officers (DROs) or the special administrator/liquidator appointed by court. The money will be settled on a pro rata basis after liquidation of properties,” a police officer says. The companies accused in the cases file frivolous petitions to drag the proceedings and dilute them. Sometimes, the value of properties attached would be less than the liability.
So far, 3,98,850 depositors have got back ₹667.68 crore. Of them, 4,660 received refund from the DROs and that too, only ₹20.77 crore. But the court-appointed administrators have settled ₹646.91 crore to nearly 4 lakh depositors.
M. Sathiya Priya, Inspector-General of Police, EOW, says, “We have registered 28 cases against the financial institutions this year following receipt of complaints from 5,561 depositors. The total defaulted amount is ₹301 crore in those cases and 159 accused persons have been arrested. Efforts are being made to apprehend the suspects who remain abroad. So far, we have issued 14 Red Corner Notices and 45 Look Out Notices. Efforts are on to attach any investment made in foreign soil through proper channels. Forensic investigations are also done to trace the proceeds of crime.”
She says awareness campaigns are being conducted across Tamil Nadu. In the past two years, more than 2,300 campaigns have been conducted. The IGP says people are being advised to invest only in regulated entities. Thomas Franco, a former general secretary of the All India Bank Officers’ Federation, says, “There should be a strict monitoring system. The RBI alone cannot do the monitoring. A separate system has to be created to monitor the functioning of the NBFCs as their number is increasing by the day.”
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