Corporate Governance @ Popular Finance -Kerala

 

Popular Finance Pvt Ltd is a successfully functioning Gold Loan firm established in 1965, by founder Chairman T. K. Daniel, having the registered office at Vakayar, Pathanamthitta District of Kerala State. From its humble beginning, POPULAR had a steady and rapid growth. Later on it ventured into several business activities. Hence POPULAR is a conglomeration of various business concerns. The entire sister concerns support the parent organization by returning profits regularly. POPULAR has been accepted by its customers as a synonym for stability and reliability. Their services included Gold loan, Money transfer, Insurance, PAN Card service, Cellular Service, Air Tickets & VISA processing

The family shut the company’s registered office in Vakayar and went absconding by Aug 27, 2020. Based on complaints from the investors, Konni police registered a cheating case against Daniel and his wife Prabha. The company owes money to over 1,500 people including NRI investors. Popular Finance with 284 branches spread across 5 states in India. The company is said to have Rs 2,000 crore worth deposits defrauding thousands of investors, mostly senior citizens, with an elaborate plan based on shell companies and siphoning off money to Australia.   

Police had earlier issued a lookout notice against the board members, including managing partner Thomas Daniel Roy of 'Popular Finance'. However, the owner filed insolvency in the court just the other day. Meanwhile, airport authorities have been alerted by the police regarding the owners trying to escape to foreign nations. Konni CI, P S Rajesh has been placed in charge of the investigation and BJP district general secretary VA Sooraj also demanded detailed inquiry in the case.

Chief Minister Pinarayi Vijayan on Saturday Aug 29, 2020 announced a 25-member special team to probe the Popular Finance cheating case. Inspector General of Police, South Zone, Harshita Attaluri, will supervise the probe. K. G. Simon, District Police Chief, Pathanamthitta, would head the team. The Chief Minister said the police would seek the help of the Interpol to secure the custody of the some suspects believed to have absconded abroad. Investigators would also look into the foreign investments made by the accused. The police have arrested managing director Thomas Daniel and wife Prabha Daniel. The police had yesterday(Aug 28, 2020)  taken into custody the two daughters of the owner-couple from New Delhi Airport from where they were allegedly trying to escape to Australia.

Over 200 cases have been filed by various depositors and investors alleging fraud of around Rs 2,000 crore.  Cases have been registered under various provisions of the Indian Penal Code including Sections 406 (punishment for criminal breach of trust) and 420 (cheating). Meanwhile, many depositors and investors today staged a sit-in in front of various offices of the firm seeking to withdraw their deposits.

As per police investigations, customers have invested between Rs 10,000 to Rs 80,000 in the firm. Most of the customers had made the investments for constructing houses, for marriage and to earn income after retirement. The investors maintained that they were paid interests properly until last month. Further evidence which surfaced about the firm stated that the company was not functioning properly since the last four years.

       Growth is natural; But check & balance your track as you move

This sudden fall of the Popular group, which has enjoyed 50 long years of goodwill and trust, comes as a shock not just to its investors in Kerala but to non-resident Keralites who deposited lakhs in its branches outside the state. The company has 22 branches in Karnataka - its largest market outside of Kerala. Investors estimate they had Rs 200 crore worth of deposits in Karnataka alone. After that comes Tamil Nadu with 16 branches, Maharashtra (9) and Haryana (6). They had sold all their assets in Kerala but were stuck due to the lockdown.

In Karnataka, many of Popular’s investors are from the Malayali community who have settled in Karnataka for long. More than 80 percent of its investors, are elderly people and some of them had invested their life savings. There are retired couples who put all their money in the firm. Sometimes Rs 50 lakhs or 1.5 crore. It was an attractive option as the firm promised a higher interest rate compared to banks. For instance, if a nationalised bank gave 5 percent interest on Fixed Deposits, Popular Finance offered 9 percent. The company also offered gold loans on a higher interest rate, some say 12 percent, and it was the difference in interest (3 percent) which was their income.

The group’s modus operandi, was to use people’s goodwill to amass lots of money. The firm would recruit senior or retired bank employees who had lots of contacts, and make them branch managers. These branch managers would then get their connections to invest in the firm, which the latter would do so out of trust.

What went wrong?

The situation eventually spiralled out of control in the last two weeks (Aug 2020), when several depositors decided to withdraw their deposits which had matured, but could not do so. This is when they learned that the company had been re-pledging the gold (received for loans) deposited in their branches, and taking loans from nationalised banks. Some of the bank managers protested against this, as the gold had to be kept as reserve in the branches. But eventually they were pressurised. According to initial estimates, Rs 80 crore worth gold which the company held as security, had been re-pledged. Not just this, they had allegedly rerouted huge sums of money to the UAE and to Australia, where Roy and his family were planning to settle. 

While it was the coronavirus which eventually exposed the company, when promoters were in a pickle due to a number of factors. They had given a large number of microfinance loans which could not be recovered after the moratorium over COVID-19 kicked in.  Popular group had a shrimp-export business which slacked off during the lockdown. Moreover, with the lockdown, more people were taking gold loans and not paying interest. And lastly, the  pandemic hitting incomes, more savers were trying to withdraw the deposits which had matured, resulting in a liquidity crisis. 

The Enforcement Directorate (ED) which arrested Popular Finance MD Thomas Daniel and his daughter and CEO Rinu Mariam, is tracing the investments and deposits they made abroad. The ED suspects the lion’s share of the money from deposits and loans taken after mortgaging the gold pledged by its customers for loans were diverted to Australia and Dubai through hawala channels.

On Monday(11 Aug 2021), the agency questioned the father-daughter duo for over six hours after which their arrest was recorded under the Prevention of Money Laundering Act (PMLA). It had branches across Kerala, Karnataka, Haryana, Maharashtra and Tamil Nadu. The  High Court then directed the CBI to take over the probe. “The current assets and deposits are worth a little less than Rs 125 crore. It is revealed in our and police investigation that several investments were made by the accused in Australia and Dubai. We suspect the money was sent abroad via hawala channels. This is under investigation,” an ED official said.

As investigations progress(Aug 19, 2021), basically, one family that ran the company, its   promoters operated 1,760 accounts across different banks, had investments in several countries to which the money raised from local investors was routed and illegally ran many subsidiaries.

By Sept 12, 2020, widespread allegations were raised that the order to transfer all cases to Konni Police station and club these under one FIR was an attempt to help Popular Finance. The CPM District committee has approached the chief Minister to rectify the DGP’s order. According to the party, the govt should take steps to ensure that  the assets of the owners of Popular finance are not transferred. They have demanded the provisions of Kerala Protection of Interests of Depositors in financial establishments Act 2015 be invoked in the case. Though the State formulated the law based on the Centre’s instructions after the Sahara investment scam, its provisions were seldom  invoked .

 

 

 

 

 

Deposits were converted to limited liability shares of nine  shell companies. The money was then diverted to an NBFC, three Nidhi companies and then misappropriated, the statement(15 Sept 2020) from State Govt in High court.

As on Sept 26, 2020 six petitions were filed before the High Court of Kerala in this connection.

High Court of Kerala directed to take measures to ensure safety of gold and other documents of investors in the 271 branches of Popular finance as per the Investor Protection Act. It also restored use of individual FIR per complaint.

 

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."

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.

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.

 

In order to collect more money, the firm collected more Fixed Deposits. However, they created 15 shell companies Limited Liability Partnerships that acted as shell companies and rerouted the money into these firms. Some of them were Saan Marine LLP, Saan Infrastructure LLP etc. The most shocking thing was, instead of Fixed Deposits, shares of these companies were sold to the elderly investors who did not realise this. They were not intimated by the branch managers either. Apart from the receipt where it was marked that their money was received in return for shares purchased. An LLP meant that shareholders would also receive dividend when the company made profits, and its partners too were not liable for the company’s loss making. Several of these elderly investors would have overlooked the receipts they received from the shell companies.

They got investors to deposit money under the brand of Popular Finance. 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.

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.A bank fixed deposit (FD) gives 7-9 percent and mutual funds and equities typically give 3-4 percent higher returns on an average but no one could match what Popular offered. And that’s what made the firm ‘Popular’ in Kerala. 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.

 

 

Questions

1.      Define

a.       Business Ethics

b.      Corporate Governance

c.       Agency Theory of Corporate Governance

2.      List the Stakeholders of Popular finance

3.      Stakeholder Theory of Corporate finance is a superior theory compared to Agency theory as far as Business Ethics is concerned. Substantiate using facts of the case study given above

4.      Finance business has got several laws requiring compliance and disclosure. But Popular Finance Pvt Ltd escaped these checks and balances.

a.       Examine the stakeholder relationships that got afflicted by lack of business ethics.

b.      List the Laws applicable to money lending business institutions

c.    As business grow, diversification is sure to happen. According to you, why Popular Finance didn’t go for NBFC certification from RBI.

5.      It is not lack of Laws that created this scam, but the lack of compliance & disclosure as per available laws. Substantiate.

 

References

 

1.       http://www.populargroup.org/index.php?app=content&tpl=view&task=details&mid=5

2.       https://www.thehindu.com/news/national/kerala/special-team-to-probe-popular-finance-scam/article32478205.ece

3.       https://www.moneycontrol.com/news/business/owners-of-kerala-based-finance-company-popular-finance-held-in-rs-2000-crore-fraud-5772801.html

4.       https://www.daijiworld.com/news/newsDisplay.aspx?newsID=745166

5.       https://www.thenewsminute.com/article/popular-finance-fraud-scores-investors-outside-kerala-grapple-losses-132401

6.       https://www.newindianexpress.com/states/kerala/2021/aug/11/popular-finance-scam-ed-on-trail-of-hawala-links-2343015.html

7.       https://www.moneycontrol.com/news/business/banking-central-lessons-for-investors-from-popular-finance-scam-5952281.html

8.       https://www.onmanorama.com/news/kerala/2020/09/12/cpm-opposes-dgp-order-transfer-all-cases-against-popular-finance-konni.html

9.       http://timesofindia.indiatimes.com/articleshow/78114127.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

10.   https://english.mathrubhumi.com/news/kerala/popular-finance-scam-high-court-directs-police-to-file-separate-fir-for-each-complaint-1.5057660

11.   https://www.moneycontrol.com/news/business/banking-central-lessons-for-investors-from-popular-finance-scam-5952281.html

12.   https://www.livemint.com/news/india/popular-finance-fraud-keralites-lose-millions-to-the-ponzi-scheme-11599136685473.html