Why Did the Nidhis Go Bankrupt?

A minor riot is under way at Trikone Mutual Benefits' branch-office at B-17, Sector C, Mahanagar, Lucknow. Incensed investors are ransacking the place after realising that the nidhi is closing down its operations, and that they may not get their money back-ever. There are a few angry shouts, but, in general, the crowd is going about the demolition job with a methodical ferocity that belies the anger they feel after being deprived of their lifetime's savings.

"The restrictions imposed on the nidhis, and the asset-liability mismatch will ensure that, sooner or later, they close down." Mohammed Haroon Shabab Islamic Investment & Mutual Benefits

Investors have been seared not just by the malpractices of the nidhis, but also by the problems faced by their bona fide cousins. First, the recession has generated thousands of defaults from borrowers to whom the nidhis lent. Accelerating the collapse was the sharp drop in the values of the assets that the nidhis have been investing their deposits in: gold and real estate. Since 1995, the Companies Act has forbidden them from investing in shares and debentures, or entering any business other than plain vanilla lending and collecting deposits. So, most nidhis diverted their funds to real estate, attracted by the boom which saw prices rising by 100 per cent in a year. While Kuber Mutual Benefits, for instance, poured in 80 per cent of its funds into real estate, NSDRN invested an equal percentage of the money it raised in gold.

Unfortunately for the nidhis, both real estate and gold prices have crashed since 1996. While domestic gold prices have fallen by 53 per cent, real estate prices have dropped by an average of 40 per cent. Agrees Veera Raghavan, 50, the Secretary of the Chennai-based Chamber Of Nidhis, which has 352 members: ''The fall in property- and gold-prices has significantly impacted our members.'' Unable not only to service their deposits, but also to meet their depositors' redemption demands, many a nidhi was forced to sell its assets at whatever price they fetched, incurring huge losses, eroding its asset-base, and, ultimately, going bankrupt. Exclaims S.K. Garg, 57, the Managing Director of the Lucknow-based construction company, Eldeco, who holds a licence to start a nidhi: ''I am happy that I didn't go ahead with the plan. Given the current state of affairs, there is no question of launching a mutual benefit fund.''

The classic case, of course, is Kuber's. In December, 1998, there was a run on Kuber Mutual Benefits because of its failure to pay back its investors when the company was unable to liquidate its properties in time. And real-estate buyers used the opportunity to close in. Says Pradyuman Kumar Sharma, 47, Chairman, Kuber Mutual Benefits: ''I was offered Rs 2 for what was worth at least Rs 10. So, I refused to sell.'' Instead, Kuber offered the same assets to its depositors in lieu of cash. For example, the flats it had purchased at Binaula and Varsova in Mumbai were offered at Rs 33 lakh apiece. However, the depositors refused them since their market value had crashed to as low as Rs 15 lakh. No wonder Kuber hurtled into bankruptcy.

"The fall in property-and gold-prices-- the principal collateral of nidhis--has significantly impacted our members.." Veera Raghavan Secretary, Chamber of Nidhi

Scores of nidhis in South India, their money locked up in gold, are facing similar crises. While alarmed depositors are demanding that their money be returned, recession-struck creditors are defaulting on their borrowings. Caught in a bind, the nidhis are trying to sell the gold pledged with them, only to realise far lower prices than they can afford to. As any banker knows, this kind of asset-liability mismatch can only end with a bail-out-which the nidhis cannot expect-or bankruptcy. Explains S. Subramaniam, 56, Promoter, RBF Nidhi: ''The best way to avoid a mismatch is cautious lending and proper collateral. A nidhi should expand only as much as it can manage.'' Muses Mohammed Haroon, 45, Director, Shabab Islamic Investment & Mutual Benefits (deposits: Rs 2.50 lakh, members: 1,500): ''Sooner or later, we'll all have to close down.''

As with the depositors of the NBFCs that vanished, investors who put their money in the nidhis that have disappeared are unlikely to be ever recompensed. As for those nidhis that want to continue in business, they must be prepared to operate as nbfcs. True, the RBI has provided them some breathing-space by giving the nidhis time till April 1, 2002, to conform to the new norms. However, since these new standards have taken away the one freedom that nidhis leveraged-to lend and borrow at uncontrolled rates of interest-the breed will have little to offer investors by way of a USP. The only conceivable option, therefore, is to start operating as conventional NBFCs.

That is going to be a difficult transition. The nidhis that haven't made the grade, obviously, do not have net-owned funds of even Rs 10 lakh, or a capital adequacy ratio of 10 per cent while the threshold for an NBFC is Rs 25 lakh and 12.50 per cent, respectively. That the RBI will not ease up on its demands before registering the nidhis is obvious: last month, it rejected the applications of 1,032 companies seeking its permission to operate as nbfcs while approving only 584. The same uncompromising approach towards the nidhis will, probably, see their numbers whittle down-dramatically. Avers Ramesh Khanduri, 50, President, Hinduja Finance: ''It is imperative that the regulators maintain strict control over the nidhis.''

However, the rearguard action may prove too late. Mostly by design, and partly by circumstance, India's nidhis have added to the body of disillusioned, duped, and, ultimately, defenceless investors. While those who have lost their savings will never get them back, the merciless glare of the investigative spotlight will almost certainly ensure that investors of the future are no longer gulled into parting with their money in the hope of higher returns alone. As the string of experiences with stockbrokers, NBFCs, and, now, nidhis, demonstrate, no one can offer investors interest rates that are guaranteed to be higher than those that the market provides-and still be above-board. Sure, high returns are available, but they come with high risks. The investor must realise, once and for all, that lucrative earnings and utter safety can never go hand in hand even after the nidhi nightmare has ended

--Additional Reporting by R. Sridharan, M.P. Vinod Kumar,
Ranju Sarkar, & Gautam Chakravorthy

Nebulous Nidhis I : Kuber Mutual

How fitting that Pradyuman Kumar Sharma's 20-year-old fraudulent empire should crumble on All Fool's Day. That was when Kuber Mutual Benefits was barred by the Reserve Bank of India (RBI) from either raising fresh deposits or disposing off its assets. No matter how brave a front the 47-year-old Sharma puts up-''I can pay all my depositors''-his nidhi and financial business may be over for good. For the promoter of the 11 companies that constitute the Kuber Group (total assets: Rs 560 crore), this was the price for being foolhardy-or was it plain fraudulent? Sharma's journey to financial catastrophe was triggered by the RBI's rejection of his application to start a bank named Bank of Northern India in 1979. Unperturbed, Sharma, a former state-level hockey player, launched Kuber Savings in the same year. But rapid expansion in the late 1980s and the1990s proved to be his undoing. In fact, the first blow was delivered by the Department of Company Affairs (DCA), which issued a show-cause notice to Kuber Mutual Benefits (deposits base: Rs 230.38 crore) on June 8, 1998. Apart from alleging that the nidhi-which earned net profits of Rs 13.48 lakh on a turnover of Rs 53.68 crore in 1997-98-had extended Rs 56 crore of loans to group companies like Prem Vir Investment, Tanwar Investment, and Sehgal Investment, the notice stated that more than 55 per cent of its Rs 193.77 crore of loans as on March 31, 1998, were unsecured. Both these violated Section 620 (A) of the Companies Act. While Sharma denied these allegations in his reply (dated June 30, 1998), to the DCA, the RBI conducted a 15-day audit of Kuber's accounts in August, 1998. But the RBI report (dated October 28, 1998) found that the nidhi's assets (Rs 213.18 crore) were higher than its liabilities (Rs 211.87 crore). That was on paper, based on market valuations. Unfortunately for depositors, when there was a run on Kuber in December, 1998, Sharma suddenly realised that the value of his Rs 160-crore investments in property had taken a tumble. Faced with the prospect of a default, the bombshell on April 1, 1999, proved to be the last straw for the self-styled god of wealth

Nebulous Nidhis II : GNS Nidhi

It's a golden example of how to make a nidhi go bust. Until 1995, the Chennai-based gns Nidhi was the typical neighbourhood nidhi, operating with a small deposit-base of just more than Rs 8 lakh, and managing to maintain its spreads with the usual (read: safe) loans to entrepreneurs who were well-known faces in the locality. That year, all that changed, as the snazzy jewellery shop located at T. Nagar in Chennai, Devi Gold House, decided to enter the business by buying gns Nidhi. Under the guidance of its new owner, S. Karunakaran, the nidhi morphed into a trans-metro operation. In the next 18 months, the nidhi expanded to Hyderabad and Bangalore besides spreading its reach across Chennai through 40 branches. Building flashy offices-and using them to prove to potential depositors that it was a big-time player-and dangling incentives like gold coins worth Rs 500, GNS multiplied its deposit-base rapidly, and many times over. Soon, it was managing a corpus of close to Rs 100 crore, contributed by more than 33,000 depositors. Unfortunately, ambition proved to be inversely proportional to prudence. Cashing in as they were on the business boom to lend at high rates of interest without the borrowers defaulting, Karunakaran and his money-managers made an attempt to become mega-financiers through reckless lending, without taking into account the credibility of the borrowers. With much of the money lent by the nidhi being poured into unproductive and non-performing assets, like loans to film-producers, GNS nidhi went under in 1997. As word spread of its collapse, depositors began queuing up for refunds-only to find GNS Nidhi broke. In October, 1997, the Chennai High Court appointed a provisional liquidator to take charge of the nidhi's assets. But, 19 months later, the depositors are still waiting for their money. The owners have vanished: neither the Chennai Police, nor the Central Investigation Department's Andhra Pradesh wing-both of which are handling the investigations into the complaints filed by depositors under Sections 406 (cheating) and 428 (misappropriation of funds) of the Indian Penal Code-have managed to make an arrest. The depositors, being members of the nidhi, cannot really claim not to have known of the risks. And they know as much. As with many other nidhis, here too the line between a genuine bankruptcy and a full-fledged fraud remains a thin one. Did GNS really go bust because of bad loans, or were its owners siphoning off funds through loans to spurious borrowers? Whether the investigations reveal the answers or not-chances are, they won't-the investor will remain in the dark about the whereabouts of their money forever. For, they'll never get it back from GNS Nidhi.

Nebulous Nidhis III : Sahara, Singh, & Trikone

They're the terrible troika of nidhidom. At least, both the regulators, the Reserve Bank of India (RBI) and the Department of Company Affairs (DCA), think so. That's why the DCA is currently scrutinising the financial accounts of Sahara India Mutual Benefit Company (deposit base: Rs 750 crore), Singh Mutual Benefit (Rs 15 crore), and Trikone Mutual Benefit (Rs 60 crore) to fathom whether they too have crossed the rigid boundaries of the existing guidelines. Confirms T.S. Krishnamurthy, 59, Secretary, DCA, without officially acknowledging the identities of the three under investigation: ''We are examining a few cases of failure based on complaints received by us and the RBI. We have also been tightening the provisions governing the working of the nidhis to prevent future failures.'' Two of the three nidhis deny breaking the laws. Says Amit Kumar Agarwal, 30, General Manager, Singh Mutual Benefit Company: ''Because of the Kuber fiasco, the DCA is investigating other nidhis like us. But we have no problems since we extend loans only against deposits, submit our audited accounts to the RBI, DCA, and the Company Law Board, and have always repaid our depositors on time.'' As for Sahara India Mutual Benefit Company, it admits that it has stopped accepting new deposits since April, 1997, but maintains that there have been no defaults. Avers O.P. Srivastava, 45, Director, Sahara India Mutual Benefit Company: ''Since 1995, the rules have been a hindrance to conducting business. But we have never been investigated.'' Yet, neither he, nor his company, is willing to answer the allegations made by the Income Tax Department in its show-cause notice (dated March 27, 1997) that Sahara's nidhi was only a front to raise money for other companies in the group. However, there is no doubt that Trikone Mutual Benefit has simply vanished, leaving behind thousands of hapless investors. Says Chandra Shekhar, 35, a paan-shop owner, located just outside Trikone's branch-office in Mahanagar, Lucknow: ''The nidhi owes me Rs 16,500-money I had saved for my sister's marriage and to buy a television. But I stopped depositing more money in May, 1998. Two or three months later, the promoters vanished.'' In fact, it is not just the depositors who have suffered. Trikone's promoters sold their headquarters to 2 buyers, who are now fighting a legal battle to stake their claim to the building. Clearly, its depositors can only look forward to despair.

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