Pyramid Schemes Fleece Thousands...And Make Life Hard For Honest Outfits
The glossy brochure published by India's Okara Agro Industries sold an unlikely dream. In three years, the brochure claimed, Okara could double investors' money by ploughing it into such agricultural endeavors as fish farming and teak plantations. The pitch proved irresistible to thousands of middle- and working-class Indians who forked over large portions of their savings. With the incentive of a 4% to 6% commission, many investors also acted as company agents, persuading relatives and acquaintances to sign up. A merchant collected the meager savings of domestic servants who shopped at his stores; a doctor passed on to Okara tiny sums from the ill-paid sweepers and nurses who worked at his hospital. All told, the company collected at least $17 million from more than 10,000 people.
Their dreams of wealth have ended. In March, Okara abruptly suspended payments to investors after the Securities & Exchange Board of India (SEBI) ordered all collective investment schemes to obtain a credit rating before raising more public money. SEBI officials now say Okara was a pyramid scheme. Barred from soliciting new funds, the company collapsed. Two Okara executives are now in jail, and courts have frozen company assets. SEBI officials believe the missing money may have been pumped into property held by Okara directors and their relatives. "I don't see too many people getting their money back--maybe a fraction of it, if they are lucky," a senior SEBI official says. Okara investors, who have kept a vigil outside the company's office in Delhi for months, are furious. "Such a big fraud has been committed, and no one is concerned," says Vinod Malik, a harried-looking pediatrician who lost nearly $60,000.
Companies making promises similar to Okara's have mushroomed in India in recent years, drawing in at least $650 million--possibly as much as $1 billion--from more than 5 million investors. Nearly 600 plantation companies--the moniker comes from promoting tax-free agribusiness schemes--were registered with the government, creating the impression that the businesses were under official scrutiny. But a long squabble between regulatory agencies, none of which wanted responsibility, meant the schemes went unmonitored for years. "It was almost a free-for-all," says SEBI Executive Director Vijay Ranjan. "Anybody could get in and raise money from people, and one did not know how the money was being used."
WHOSE FAULT? Initial audits completed on the largest 50 companies are "alarming," Ranjan says, showing shoddy accounting practices. At best, many seem to have speculated in inflated real estate. Or, as officials suspect happened with Okara, money has been siphoned into promoters' pockets. "They have some land, some buildings, but nothing that really matches the kind of the deposits they have taken," Ranjan said of the audited companies. Besides Okara, at least four are known to have closed, and all 21 of those examined thus far have received the lowest possible credit rating.
Company Director Gurpreet Singh denies any wrongdoing and vows "every penny will be repaid." But he admits some money went to a sister company that makes loans to people who want to buy motor scooters and home appliances. "We were utilizing [the money] for business," Singh says. "When I'm into the business of multiplying money overnight, I have to find the best way to get the best returns." Singh blames the SEBI for the industry's woes, saying it created a panic with its sudden order to stop soliciting funds.
Financial analysts are worrying about the ripple effect on legitimate companies. Securities dealers targeting India's retail investors gripe that they have had a tough time raising funds, since they couldn't hope to match the astronomical rates promised by the plantation schemes.
Now, with many investors getting burned, dealers worry that people will simply hold on to their money or buy gold, the traditional Indian savings method. "These schemes create a bloody bad name for people like us," says Vipul Dalal, a director at Alpic Securities, a Bombay-based equities house. "All this money will go to safe havens, or they'll just sit on cash. Nobody will put it in financial assets." That would be too bad. Indian authorities talk a lot about channeling India's high domestic savings into productive uses. Debacles like this won't help.