In Kerala, firms that charge exorbitant rates from gullible but helpless borrowers are called ‘blade companies’ or ‘blade mafia’. It is fair to say Popular Finance, which duped gullible investors, was one such firm.

Until a week ago, the website of Kerala-based ‘Popular Finance’, a financing firm with dubious background, described the company in the following words: “The trusted hand which supports you in everything. The trusted hands which HELP you when you NEED money.”

Today, Popular Finance stands for anything but “trust”. And, the website no longer exists.

All the 284 branches of the finance firm, which used to take public deposits and lend against gold jewellery and operating across five states, have down their shutters. All operations have halted overnight.

What happened?

The firm no longer has the money to repay their depositors on maturity, allegedly due to the fraud perpetrated by promoters.

Across India, more than 200 cases have been filed by several depositors. The promoters of the firm, Thomas Daniel and his wife Prabha Thomas Daniel, were arrested over the week-end. Daniel’s daughters, Rinu Mariam Thomas and Riya Ann Thomas too were arrested by Police from Delhi airport as the duo were trying to escape abroad.

What is Popular Finance?

It all started in 1965 as a local chit fund in Vakayar, a sleepy town in Pathanamthitta district of Kerala by one TK Daniel and his family. The chit fund soon grew to a moneylender and gold loan lender. When T K Daniel handed over the reins to his son, Thomas, who was far more ambitious and aggressive than his father, the operations expanded rapidly even outside the state.

All went well till recently when regular lending business didn’t appeal the family anymore and greed took over. Funds raised from public were misused for personal gains. According to local businessmen I spoke to, the company no longer could manage the public deposits on account of huge diversion of funds. What followed later was logical. All hell broke loose, when depositors started filing police complaints one by one.

A familiar script 

This is a classic case of a finance company fraud. Such companies give loans at exorbitant rates with minimum documentation to gullible customers, take deposits. In Kerala, locals call such companies are known as ‘blade companies’ (those which charges exorbitant rate of interest from low income borrowers) or ‘blade mafia’. These promoters typically have influence in political circles and bureaucracy that helps them to keep the show on for a long time.

But, so far, investigations have revealed that a fraud worth almost Rs 2,000 crore has been committed by the family which ran the Popular finance. The final figure could be more. The fraud was done by running several illegal companies under the ‘Popular Brand’. Most of these investors are NRIs or retirees who put their money in Popular for better interest rates. What attracts NRI investors to such firms is less scrutiny and instant processing.

All in the family

Information available so far by investigators reveal that Popular Finance was largely run as a family concern even when the firm dealt with crores of public deposits. The trust built among the common public by customers were grossly misused to raise large amount of public deposits and move it to personal benami investments by the Daniel family to investments in Australia. There were at least 21 companies that were formed as limited liability partnerships under Popular brand, many operating without necessary approvals. When the tide turned, the company plunged to severe financial crisis and failed to repay many investors, leading to panic. The exact reasons for this are not yet known. The findings of a detailed probe is awaited. Since the money invested in overseas assets, the investors may have to wait to get their money back.

Not the first case

This isn’t the first ‘blade company’ collapse in Kerala. There have been several cases involving multi-level marketing companies, illegal chit funds, money lending firms where thousands of crores worth of public money has been swindled by wily promoters.

In September 2017, Nirmal Krishna Chit Fund Company, a finance firm based in Palukal in Tamil Nadu and close to Kerala border, allegedly duped over 13,600 investors from Kerala and Tamil Nadu who had deposited over Rs 500 crore under various schemes promising high returns.

In March 2018, under Operation Kubera, Kerala cops busted several moneylending rackets. According to information shared by the then government, 2,663 cases were registered and 1,577 persons were arrested in the first phase . In 934 cases, charge-sheet had been filed in courts.

In March, 2019, a chit fund scam was busted in the state when the Police arrested one KP Joshy of Nayarambalam, the managing director of Trading and Chit Funds Company Limited for cheating investors for Rs 60 lakhs worth deposits . Early this year another scam worth Rs16 crore was busted when the state government ordered to attach the assets of promoters of Tathwamasi Chits and Investments Private Limited for cheating investors for about Rs 16 crore investments.

The list is endless.

What is common in all these cases is innocent investors falling for the promise of high returns and park their lifesavings in poorly regulated companies floated by dubious promoters. Popular finance case is by far the biggest such scam Kerala has witnessed in recent years.

What are the lessons here? The key takeaway is that investors should stay away from unregulated finance companies promising high returns. They should put their hard-earned money in well regulated companies even though the returns are less. Also, this is another reminder to the Reserve Bank of India that it should aim for tighter scrutiny of financial institutions collecting money from investors under various pretexts.Banking Central is a weekly column that keeps a close watch and connects the dots about the sector’s most important events for readers.

Source : https://www.moneycontrol.com/news/business/economy/income-tax-2019-20-five-things-you-need-to-know-if-youre-a-consultant-5776291.html