The great Plantation Companies Scam

 Lessons from the plantations disaster

The plantation companies scam hit the nation in late 1990's and once again our regulatory agencies were found napping and gullible Investors lost crores of rupees.

What was the lure?

What, after all, do they have? 

Some land with some teak saplings still far from revenue-generating stage. 

Their assets would never add up to more than a fraction of what they owe investors. 

Indeed, many of these companies have closed shop and slunk away into the night. Many promoters are absconding.

The plantation scheme story has all the attributes of the classic financial disaster: greed, dishonesty, incompetence, collapse, panic, late reaction from the authorities.

HOW THEY DUPED YOU

We all know about these schemes. They offered investors teak saplings, promising them a certain amount of teak after 20 to 30 years. The companies said they would sell the teak and give investors the money at the end of the maturity period. 

The yearly returns promised varied from 25 per cent to an incredible 300. Post-dated cheques offered an illusion of full safety. 

Seductive advertising, and incentives in cash and kind completed the package.

The schemes were fraudulent at many levels. Investors' monies were being invited without proper disclosure, in most cases, of the risk factors associated with plantation activities. 

For instance, companies exaggerated potential output. It's not the entire tree, but the inner portion-the cut size-that fetches the teak price. Trees cut before 20 years contain moisture, and soft wood does not fetch a good price. 

In 20 years, under the best natural conditions, a teak tree can yield 15 cubic feet of timber and not 37.5 cubic feet or more as promised by most companies.

Companies like Enbee and Anubhav promised 37.5 cubic feet after 20 years; some others promised even more. So even if one were to presume that teak would fetch a price of Rs 1,600 per cubic feet after 20 years as against the current price Rs 1,000, a 37.5 cubic feet tree would bring in about Rs 16,000-20,000, and not Rs 62,000 or Rs 1 lakh claimed by the companies.

Also, the trees were insured, claimed the companies. But they were insured only for the input cost (which was next to nothing) and not on output value. 

Another issue: while most companies charged the investor anything between Rs 1,000 and Rs 3,000 per tree as initial investment, the cost of a teak sapling is minuscule. 

If planted on a large scale, the cost of a sapling works out to less than a rupee. So only a fraction of the amount raised was actually used for the plantation. Where did the rest of the money go?

HOW THEY GOT AWAY

They got away because they were operating in a legal no man's land. Companies engaged in agricultural activities are not governed by RBI. Also, the definition of deposits as per RBI excludes amounts received as advances against any goods or services to be delivered in the future, as in the case of plantation companies. They did not issue tradeable securities, so no Sebi purview either. 

It was only in 1997, after interest cheques started bouncing and companies' offices began closing down that the government asked Sebi to develop a regulatory framework for the industry. 

The government decided that schemes like agro bonds and plantation bonds would be treated as collective investment schemes that will fall under the provisions of the Sebi Act, 1992, and would be regulated by Sebi. Which set up the Dave committee.

It also filed a public interest litigation in the Delhi High Court on investors' behalf. The court froze the companies' assets, and disallowed promoters from selling assets for any reason other than to pay investors back. The court also ordered the companies to get themselves credit rated.

The result: not one of the 27 companies were rated as investment grade. Till Sebi announces its guidelines, the industry remains in a state of suspended animation.

WHY SEBI OR ANYONE ELSE CAN'T DO MUCH

Plantation companies raised money under the Companies Act, 1956, which would suggest that complaints should be filed with the Department of Company Affairs (DCA). But the government mandated Sebi to regulate these schemes. And Sebi's regulations will be prospective in nature. Which can't be helped. It isn't possible to set regulations with retrospective effect. The companies themselves allege that they have been prevented from running their businesses by Sebi and High Court rulings. Claims an ex-employee of a big plantation company: "Things were going on well till the rating. It took so long that the damage was done. Without a steady inflow of deposits, we had to close."

Although a large number of plantation companies have defrauded investors, there are a few genuine companies who are in a mess not of their making. They are willing to refund the money people have invested when the legal mess is sorted out. The real problem lies with small companies set up to make a fast buck.

Because these companies were not under the purview of Sebi earlier, Sebi cannot do much. This means the onus of getting justice is in the hands of the investors. 

Complaints have to be sent to the DCA and Company Law Board. This can be done only if the companies have subverted Company Law. The only other option is the courts.

WHAT INVESTORS SHOULD DO ?

Get organised. Join up with other investors, form an association registered under your state's Societies Registration Act. 

The legal battles will be time-consuming and involve a lot of legwork. Also, to get the Economic Offences Wing of the Crime Branch to investigate cases of financial fraud, the amount of money involved has to be greater than Rs 20 lakh. So you need to gang up. In fact, Sebi encourages the forming of associations.

When the post-dated cheque bounces..

As soon as the cheque bounces, you have to write to the company. The letter should say that if the company does not reply or make good the money, you will file a case under under Section 138 of the Negotiable Instruments Act for cheque dishonour. This is one way to pressure the company. But it may not be enough.

Anticipatory breach of trust. 

This option is particularly for those who have invested in schemes with longer tenures and been issued post-dated cheques to be deposited later. The company may not have technically defaulted yet. But if you find the office closed down, no one taking your phone calls and employees untraceable, sue for anticipatory breach of trust.

Wind-up petition. 

When the company defaults, you can go to court and ask for the company to be wound up and your money repaid. The court then appoints a liquidator charged with disposing off the company's assets and returning creditors' money. However, this option is the one investors could do without. The wheels of justice move slowly and resolution may take 10 to 15 years. 

File under Section 420. 

In this case, you will have to prove the company's intention to defraud you. You can do this by filing a complaint with the police or a magistrate. Settlement normally takes between three and 10 years. But this is an option where the intention is clearly to defraud.

Settle as a group. 

Not all plantation companies are frauds. Chances are if you negotiate as a group, the company will agree to settle, what with all the bad publicity and Sebi and the courts breathing down its neck. Some have already agreed to redeem the units or fixed deposits.

IN THE END, IT'S GREED

Plantation schemes seem to attract investors who are either ignorant of matters financial, or greedy. In either case, it's the lure of the big bucks without having to work for it. The investors allowed their scepticism to be dulled by visions of returns of as much as 100 per cent. But let's face it. No one can give you returns of 100 per cent from legitimate activity in the short run. Someone somewhere is cutting corners, lying, cheating, breaking laws to give you that return. In the process, you can be sure they are feathering their nests. 

Just so that when the inevitable happens, they have the money to pay the best lawyers in town. And go scot free. Someone blows the whistle (usually the regulator and usually too late). And investors blame their kismat.

The plantation scheme is only the latest example of financial frauds, and it will definitely not be the last. The only weapon you have is to stay alert. Eternal vigilance, to mangle a famous saying, is the price of financial security.