The Anubhav Plantations Scam

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Pruning the Plantations

Nobody could scrutinize the deployment of funds by these firms as they neither released any balance sheets, nor submitted regular reports to the RBI. As agricultural companies did not come under the RBI's purview, it was easy for these schemes to flourish.

In November 1997, the Union Ministry of Environment and Forests set up an inter-departmental group to examine the veracity of the claims made by various private plantations. Their findings were later examined by an inter-ministerial group, which included the environment, law and finance ministries. SEBI was invited by the Ministry of Finance to work out a comprehensive regulatory framework for the industry.

Following the public uproar over the failure of companies such as the DSJ Group and the Parasrampuria Group, SEBI appointed a committee under the chairmanship of S.A. Dave (former chairman of UTI and SEBI's first chairman) to frame a comprehensive set of regulations. SEBI then issued a set of directives regarding mandatory registration and credit rating. Only 540 companies complied with the registration requirement.

SEBI then appointed chartered accountants to audit the books of the top 50 of these companies and thereafter issued show cause notices to 11 of them for non-cooperation. Companies that did not file for registration were barred from raising fresh funds from the public till they complied with the directives.

Meanwhile, in the absence of precedents, the rating agencies primarily took into account the sustainability of the business through its per-year yield and the ability of the company to be able to raise revenue independent of fresh collections. The ratings also factored in the solvency and operational capabilities of the management and the ability of the company to realize high yields over the years. Almost all the companies failed the test and were assigned a grade point of 5 (indicating very high risk) by various rating agencies.

Anubhav was the only company that received a grade point of 4 (unsatisfactory grade) from Duff & Phelps (Duff & Phelps' said that in the absence of a past model and lack of any standardized policy in the balance sheet, the rating took into account projected cash flows, keeping in mind the nature of the risk involved.) Of the rated companies, 22 were placed in the non-investment grade.

Needless to say, by the time these measures were put in place, the damage had been done and the money invested by the investors had vanished forever.

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6] As per RBI guidelines, these companies were allowed to accept deposits from, at the most, 250 people. However, in reality they were accepting deposits from many more people. This was done in the following manner: A person 'X' is a partner in firm A, which has nine other partners. As per the norms, firm A accepted deposits from the 250 people it was allowed to. Now, X floated another firm B with nine partners, and firm B accepted deposits from another 250 people. This mechanism was repeated infinitely, and it was firm A or the person X which was packaged and marketed before prospective depositors.