Case: Subrata Chattoraj &amp; Another Vs. Union of India &amp; Others

10. We are in the case at hand dealing with a major financial scam nicknamed ‘Chit Fundaffecting lakhs of depositors across several States in the Eastern parts of this country. Affidavits and status reports filed in these proceedings reveal that several companies were engaged in the business of receiving deposits from the public at large. The modus operandi of the companies involved in such Ponzi Schemes was in no way different from the ordinary except that they appear to have evolved newer and more ingenious ways of tantalizing gullible public to make deposits and thereby fall prey to temptation and the designs of those promoting such companies. For instance Saradha Group of Companies which is a major player in the field, had floated several schemes to allure the depositors to collect from the market a sizeable amount on the promise of the depositors getting attractive rewards and returns. These fraudulent (Ponzi) schemes included land allotment schemes, flat allotment schemes, and tours and travel schemes. The group had floated as many as 160 companies although four out of them were the front runners in this sordid affair. An interim forensic audit report submitted to the SEBI by Sarath & Associate, Chartered Accountants on 27th February, 2014 sums up in the following words, the background in which the schemes are floated and the public defrauded :company M/s Saradha Realty India Ltd. was involved in financial fraud involving in an attempt to deliberately mislead the general public by announcing dubious money multiplier schemes. It has also indulged in misleading the financial status of the group companies by incorrect disclosures in the financial statements in an attempt to deceive financial statement users and regulatory authoritiesThe investors lured to extraordinary returns is typically attributed to something that sounds impressive but is intentionally vague, such as hedge fund in land, resorts, tours and travel plans, high yield investment programsTypical to the Ponzi schemes the investors who are economically very poor have invested relatively small amounts such as Rs.100 and wait to see if the promised returns are paid. After one month the investor received maturity amounts, so the investor truly believes s/he has earned the promised return. What the investort realize is that the Rs.100 was a RETURN OF THE INVESTMENT AND NOT A RETURN ON THE INVESTMENT. In other words, the Rs.100 return came from the Rs.100 principal initially invested or from a newly-recruited investor, rather than from any profits generated by the investment opportunity. After a second month yields another Rs.100 payment, the investor isand typically will invest larger amounts in the scheme and will enthusiastically inform friends and family members about thisSince these early investors have actually received the promised returns, their promotion of the investment comes across as genuine and instills an almost irresistible urge in friends and family members to invest as wellIf pressed by skeptical investors for more detail, the promoters typically evade answering the question and instead talk about how recently-recruited investors have been receiving the promised returnsSince little, of the11. The Report suggests that the investors were promised very high returns by way of interest rate ranging from 10% to 18%. The said returns promised to the depositors were, according to the Report, too good to be true. The Report also suggests that a very large number of ‘agentswas created by the companies to extend the reach of these companies. For Saradha Realty India Ltd. itself as many as 2,21,000 agents were working, who were paid an unreasonably high brokerage of 30% of the instrument which became the driving force for the agents to go that extra mile to collect as much as possible. The Report indicates that investments that matured for payment were paid out of the cash collected from new members which was opposed to the normal business norms in which returns ought to be paid out of profits earned in the business. Besides, the cash collections were neither accurately shown in the books of accounts, nor did the bank accounts reveal the details of such cash collections. The Report states that the company had no real intention of doing any legitimate business activity and the money collected from the public was spread over 160 companies and spent away or siphoned off. No major revenue was seen to be generated by any group company. The companies had opened too many bank accounts for Round Tripping Transactions for the monies collected by them. Apart from as many as 218 branches spread over several States including West Bengal, Odisha, Bihar, Assam and other States the companies had as many as 347 bank accounts in 15 banks in the name of the Group Companies. The bank accounts were opened at the location of branches enabling deposit of the cash into accounts. The daily cash collected less expenses was deposited at branch account and the money pooled and transferred to other accounts as pers instructions and utilized to issue the cheques. The Report also points out violation of the Securities and Exchange Board of India Act, 1992, the Companies Act, 1956, The Reserve Bank of India Act, 1934 and the Income-Tax Act, 1961. It also points out fraudulent certification, non-compliance of accounting standards, material mis- statement of facts and gross negligence on the part of the statutory Auditors. The Interim Report eventually draws up the following conclusions:Reality India Ltd. and its other 3 group companies has collected money from the open market, reaching out to the general public by employing huge number of agents, in form of Investment under different Schemes viz., Fixed Deposits, Monthly Investment Scheme, Recurring Deposits. The SRIL has in pretext of land developers, construction of flats, running tours and travels, travel packages and resorts collected around Rs.2,459 crores over a period of 5 yearsSRIL has no valid registration under the SEBI Act for ‘collective Investmentnor has licenced under RBI Act for Nidhi/Chit fund/NBFC. Its MOA also does not permit the company to collect monies in form of deposits. SEBI had passed a winding up order in view of the collection of monies under one of thes schemes as Collective Investment scheme on 23/4/2013Company management, with fraudulent intent, has designed several investment schemes wherein the depositors invested in expectation of high return. It has also misrepresented its business in writing to income Tax department, SEBI, and to its depositors. The Depositors are promised fixed interest returns but management has promised tours, travel packages, land purchases, flat advances etc. on the receipts which in realty is not intended to be given to the depositorsThe SRIL did not comply with the KYC norms while collecting the deposits, all the deposits are identified by names and addresses, but the ID or address proves are not obtained. The authenticity of the investors is difficult to prove as the deposits are not KYC compliedThe agents are main part of the entire operations of the company, in evolving the new schemes, explaining the public and collecting the deposits. The agents are operated as a tree (chain) and each agent in the chain will get commission on each deposit. These commissions are paid in priority from the business cash collected (almost 30% of collections) and the balance money is used for meeting company expenses and the rest is either deposited at the bank in the location of the branch or sent to Head Office. The cheques collected are directly deposited in the Bank. Other than Commission the agents are awarded field allowance, prizes, and performance bonuses forming around 30% of the total deposits collectedSRIL has expanded rapidlythe business, takeovers in a very short span of five years. The Company has never utilised money so collected from investors for carrying out any legitimate business to earn returns to payback the investors. It has utilized the monies so collected in these takeovers, and venturing into new company for running the loss making businesses like media Channels, newspapers, Magazines, manufacturing automobiles. The group has incorporated 160 companies and the share capital monies, furniture & fixtures, plant and machines, huge staff salaries, fleet of cars on rent, buses, 320 branchrents, daily expenses, maintenance are all met through the deposits collected from the investorsOne of the company – Saradhaha announced as it is expanding to international by exporting business and opening a branch at Madrid, SPAIN, on its websiteAl the group companies are debt-free companies; the loans standing in the Financial Statements are partly of investors, other group company loans and advances. The Audited Financial Statements are misrepresenting the facts and Statutory Auditor is grossly negligent in discharging his duty to present the true and fair view of the state of affairs of the companies. Most of the groups Auditor is common12. The Report estimates the collection made by the Saradha Group of companies at Rs.2459 crores13. Failure of the group companies to refund the deposits made with them was bound to as it indeed has led to a public outcry against the scam on account of the huge amount that was collected by these companies by defrauding a very large section of the public majority of whom appear to be from middle class, lower middle class or poorer sections of the society. The Government of West Bengal acted in response to the protests and the public anguish over a fraud of such colossal magnitude and set up a Commission of Inquiry headed by Mr. Justice Shyamal Kumar Sen, retired Chief Justice, Allahabad High Court with four others to be nominated by the Government to inquire into the matters set out in a notification dated 24th April, 2013 issued in that regard. The Commission was empowered to receive all individual and public complaints regarding the Saradha Group of Companies and other similar companies involved in the scam and to forward such complaints to the authorities concerned including the Special Investigation Team for launching prosecution. The Commission was also authorized to send directives to the Special Investigation Team, identify the key persons responsible for the present situation, quantify the estimated amount of money involved in the alleged transactions, assess the assets and liabilities of the group of companies and to recommend ways and means for providing succor to those who had lost their savings. The Commission was also authorized to recommend remedial action and measures to the State Government so that such situations do not recur14. By another notification dated 27th August, 2013 the Government, relying upon the directions issued by the High Court of Calcutta in Writ Petition No.12163(W) of 2013 and Writ Petition No.12197(W) of 2013 empowered the Commission of Inquiry to dispose of all the assets belonging to the Saradha Group of Companies and/or their agents and/or their Benamidars and to adopt an appropriate mode of recovery of debts on behalf of the Saradha Group from its debtors and add the proceeds to the fund to be created for that purpose. The Commission was also clothed with the power to attach the bank accounts belonging to the Saradha Group of Companies and the personal bank accounts of the Directors apart from restraining the banks concerned from allowing anyone to operate such accounts unless authorized by the Commission. Pursuant to the above notifications the Commission has received nearly 18 lakhs complaints and claim petitions demanding refund of the amount deposited under such Ponzi Schemes15. In the counter-affidavit filed on behalf of the State of Bihar it is, inter alia, stated that the State Government has announced a sum of rupees 500 crores for payment to the aggrieved depositors apart from money that may be raised from selling off the assets of the companies including the Saradha Group of Companies. The affidavit further states that the Commission has passed orders for payment of compensation to the investors in the Saradha Group of Companies and that over one lakh beneficiaries have been paid while another 1,66,456 identified for such payment. The affidavit also states that as per the directions issued by the High Court of Calcutta in terms of the notification mentioned above as many as 224 immovable properties and 54 vehicles have been identified for attachment and possible sale and recovery of the amount due from the companies. The affidavit goes on to say that one Kunal Kumar Ghosh, Member of Parliament, Rajya Sabha, was arrested on 23rd November, 2013 in connection with the case registered in Bidhannagar South Police Station after being interrogated on several occasions. The said Kunal Kumar Ghosh was the media CEO of Saradha Group of Companies. In addition one Srinjoy Bose, Member of Parliament was also interrogated by serious Fraud Investigation Office in relation to the Saradha Group of Companies and that the Special Investigating Team and the police authorities are extending full support and cooperation to the Central Agencies like Enforcement Directorate, Serious Fraud Investigation Office etc. for effective investigation of the scam. The State has in that view opposed the prayer of the petitioner for transfer of the investigation from the State Police to the CBI16. When this case came up before us on 4th March, 2013 our attention was drawn by Mr. C.S. Vaidyanathan, Senior counsel appearing for the State of West Bengal to a statement appearing at page 474 of the said sur-rejoinder filed by the State which according to the learned counsel summarized the investments made by the Saradha group of companies from out of the money collected by it from the depositors. These details were sketchy and unsatisfactory especially when the trail of money collected remained obscure no matter it was one of the important, if not the single most important, angle to be investigated for unraveling facts leading to the scam and identifying those who had aided and/or abetted the same. Mr. Vaidhyanathan was, therefore, granted ten days time to file a comprehensive statement as to the amount collected by the said group of companies and the expenditure incurred/investments made over a period of time17. An affidavit was accordingly filed by the State of West Bengal in which the purchase value of the property acquired by Saradha Group of Companies was estimated at Rs.40 crores only as against a total collection of Rs.2,460 crores made by the said companies. Mr. Vaidyanathan argued that the investment in real estate could go upto Rs.110 crores on the basis of the information gathered from the software that was seized from the companies concerned. Even if that were so a significant discrepancy existed between investigation based estimated purchase value of the properties on the one hand and what could according to Mr. Vaidyanathan emerge from the software seized from the companies. Mr. Vaidyanathan argued that the discrepancy could be on account of the fact that a large number of properties referred to in the affidavit have been acquired by the companies on the basis of power of attorneys which do not indicate the value of the property covered by such deeds and transactions. Be that as it may, a huge gap between the amount collected and the investments made in real estate itself calls for effective investigation as to the trail of money collected by the group of companies. Investigation by the State Police has not unfortunately made any significant headway in this regard18. More importantly, the question whether the scam was confined only to those who actively managed and participated in the affairs of the companies or the same flourished on account of the support and patronage of others is an issue that has bothered us all through the hearing of this case. We had, therefore, directed the State to file a sample copy of the chargesheets said to have been submitted before the jurisdictional Courts. A perusal of the copies so furnished shows that the same relate only to individual deposits leaving untouched the larger conspiracy angle that needs to be addressed. It was argued by Mr. Bhattacharya that the Investigating Agency was deliberately avoiding to investigate that vital aspect. Mr. Vaidyanathan, however, contended that the larger conspiracy angle was being investigated separately in an FIR registered with Vidhannagar Police Station. He sought and was given time to file an affidavit setting out the particulars of the FIR in which the larger conspiracy angle was being examined and the progress so far made in that regard19. An additional affidavit was accordingly filed by Mr. Vaidyanathan in which it is, inter alia, stated that the larger conspiracy angle is being investigated in Crime No.102 registered in Bidhannagar Police Station (North) on 6th May, 2013 under Sections 406, 409, 420, 120B IPC. At the hearing of the case on 9th April, 2014 Mr. Vaidyanathan passed on to us a sealed cover containing a list of persons who according to the learned counsel need to be questioned in view of the disclosers made and the evidence collected so far by the Investigating Agency. The basis on which the Investigation Team has named the persons in the list was not set out in the list or elsewhere. Mr. Vaidyanathan, therefore, offered to file a synopsis of the evidence on the basis whereof the names mentioned in the list had been included in the said list and the evidence which incriminates them calling for further investigation into their role and conduct. An affidavit giving the synopsis was pursuant to the said order filed by Mr. Vaidyanathan indicating briefly the basis on which the persons named in the list were sought to be interrogated in connection with the scam. A perusal of the synopsis furnished and the names included in the list makes it abundantly clear to us that several important individuals wielding considerable influence within the system at the State and the national level have been identified by the Investigating Agency for interrogation. We do not consider it necessary to reveal at this stage the names of the individuals who are included in the list on the basis of which the Investigating Agency proposes to interrogate them or the material so far collected to justify such interrogation. All that we need point out is that investigation into the scam is not confined to those directly involved in the affairs of companies but may extend to several others who need to be questioned about their role in the sequence and unfolding of events that has caused ripples on several fronts

Court's reasoning:
31. The question is whether the above features call for transfer of the ongoing investigation from the State Police to the CBI. Our answer is in the affirmative. Each one of the aspects set out above in our view calls for investigation by an independent agency like the Central Bureau of Investigation (CBI). That is because apart from the sensitivity of the issues involved especially inter-state ramifications of the scam under investigation, transfer of cases from the State police have been ordered by this Court also with a view to ensure credibility of such investigation in the public perception. Transfers have been ordered by this Court even in cases where the family members of victim killed in a firing incident had expressed apprehensions about the fairness of the investigation and prayed for entrusting the matter to a credible and effective agency like the CBI. Investigation by the State Police in a scam that involves thousands of crores collected from the public allegedly because of the patronage of people occupying high positions in the system will hardly carry conviction especially when even the regulators who were expected to prevent or check such a scam appear to have turned a blind eye to what was going on. The State Police Agency has done well in making seizures, in registering cases, in completing investigation in most of the cases and filing charge-sheets and bringing those who are responsible to book. The question, however, is not whether the State police has faltered. The question is whether what is done by the State police is sufficient to inspire confidence of those who are aggrieved. While we do not consider it necessary to go into the question whether the State police have done all that it ought to have done, we need to point out that money trail has not yet been traced. The collections made from the public far exceed the visible investment that the investigating agencies have till now identified. So also the larger conspiracy angle in the States of Assam, Odisha and West Bengal although under investigation has not made much headway partly because of the inter-state ramifications, which the Investigating Agencies need to examine but are handicapped in examining32. M/s Vaidyanathan and Gopal Subramanium, learned counsel for the States of West Bengal and Odisha respectively argued that the CBI itself has in a great measure lost its credibility and is no longer as effective and independent as it may have been in the past. Similar sentiments were expressed by Mr. P.V. Shetty appearing on behalf of some of the investors and some other intervenors, who followed suit to pursue a similar line of argument33. There is, in our opinion, no basis of the apprehension expressed by the State Governments. It is true that a lot can be said about the independence of CBI as a premier Investigating Agency but so long as there is nothing substantial affecting its credibility it remains a premier Investigating Agency. Those not satisfied with the performance of the State Police more often than not demand investigation by the CBI for it inspires their confidence. We cannot, therefore, decline transfer of the cases only because of certain stray observations or misplaced apprehensions expressed by those connected with the scam or those likely to be affected by the investigation. We may in this regard gainfully extract the following passage from the decision of this Court in Sanjiv Kumar v. State of Haryana and Others (2005) 5 SCC 517, where this Court has lauded the CBI as an independent agency that is not only capable of but actually shows results: