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The recent crackdown by the police on Kerala-based Non-Banking Financial Company (NBFC) Popular Finance, revealed that it was a Ponzi scheme— where money brought in by new investors was used to pay off the old investors. The firm also used the parent company as a cover to dupe investors’ deposits through an elaborate scheme involving shell companies, according to the police.
The company, headquartered in remittance-fuelled Pathanamthitta district, collected around ₹2,000 crore from thousands of investors, many of them NRIs, in 274 branches in Kerala, as per the police. Using the brand name of the parent company, Popular Finance, the promoters used several firms under them to run financial operations ranging from giving gold loans to seeking deposits to moneylending, the police say. They also had branches in Karnataka, Haryana, Tamil Nadu and Maharashtra— from where complaints have started pouring in.
Microfinance Institutions Network (MFIN), the national apex body for Microfinance Institutions or MFIs, said in a statement that Popular Finance does not appear in the 96 NBFC entities allowed to carry out microfinance lending operations by the RBI. No NBFC-MFIs are allowed to take deposits too, it said. The Kerala Association of Financial Inclusion Institutions (KASAFI), an apex body of MFIs in the state, said in a statement that Popular Finance, to the best of its knowledge, “is not an MFI and was not conducting any microfinance business.”
The alleged fraud was exposed when a large number of savers decided to withdraw their money amid covid-19 induced financial crisis.
While the company failed to deliver promised returns, it also shuttered its branches last week, leaving thousands of depositors in the lurch.
The promoters including managing partner Thomas Daniel Roy, his wife Prabha, who were on the run, surrendered to the police this week. Following a lookout notice issued by the police, their elder daughter and Chief Executive of the firm Rinu Mariam Thomas was arrested on Sunday while she allegedly attempted to flee the country to Dubai.
In an interview with Mint, PS Rajesh, an Inspector of Police who is in charge of the probe, said the fraud raises the risk of exposure to even nationalised banks, and that the promoters have diverted massive funds to foreign countries.
The fraud raises the risk of exposure to even nationalised banks, and that the promoters have diverted massive funds to foreign countries, Inspector PS Rajesh, in-charge of the probe, told Mint.
“They have re-pledged investor’s gold— an initial estimate says more than about ₹80 crore worth— with mainstream banks. They have also pledged properties and taken loans from nationalised banks. They have huge sums deposited in the UAE, and in countries like Australia where some of Roy’s family members are settled,” said Rajesh.
Popular Finance has been offering gold loans as a Non-Banking Finance Company (NBFC) since 1965. The lender’s business came to a halt in 2014 when the Reserve Bank of India flagged it for collecting fixed deposits while they were only a licensed moneylender under Kerala Moneylender’s Act (1958). Kerala’s Crime Branch had filed the charge sheet against the family in this case in 2019. Both Roy and Rinu were out on bail in that case.
But it did not stop the firm from collecting deposits. After RBI’s intervention, the firm renewed its playbook and allegedly sold shares of its shell companies as fixed deposits, the police said.
“They got investors to deposit money under the brand of Popular Finance, while actually the company did not take deposits. The money was deposited in the 15 partnership firms and LLPs that acted as shell companies. The investors were asked to send money through RTGS to the account number of the shell companies. In the receipts to the investors, it was marked that their money was received in return for buying shares of these firms,” said Rajesh.
“The unsuspecting investors, who were aiming for high returns for their deposits— the firm offered interests in the range of 12-15%, more than what is offered by the banks— never realised they purchased the shares. They thought they were making fixed deposits,” he added.
“They simply got huge deposits from a lot of people and used it to pay interests to the same investors. When the deposits matured, they started giving excuses to delay repayment. Once several investors were delayed repayments, people created an uproar and it resulted in the police cases,” Rajesh explained.
In interviews with local news channels, some investors said they were offered a return as high as double their investment, for a minimum ₹5 lakh deposit, within six years.
Eventually, the police says, it was the coronavirus crisis that pulled the plug.
“They seem to have had a perfect plan. Collect deposits through registered companies, exploit loopholes in the system to dupe the investors, and finally escape the country. The only thing they did not anticipate was the coronavirus,” said Rajesh.
“The virus created several impacts: One, they had given a large number of microfinance loans. When the moratorium over covid-19 kicked in, its repayments stopped resulting in a liquidity crunch. Second, they had a prawns-export business which came to a halt over the lockdown. Third, due to the covid-19 distress, more customers were taking gold loans whereas many were not repaying their existing ones. Fourth, as the pandemic hit on people’s incomes, investors rushed to withdraw from money whereas new fixed deposits dropped significantly,” he said.
However, before surrendering to the police, Daniel, in a press release said that this is a temporary phase of business getting affected due to covid and that the firm will honour all its commitments. He had sought nine months from the depositors to sort the issue.
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