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Indian real estate group fined $1.1bn for preying on investors

Prashanth Vishwanathan | Bloomberg | Getty Images

Indian regulators have slapped a $1.1 billion fine on a New Delhi real estate company which raised at least $8.3 billion from 58 million investors who believed that they were buying land.

In its order against Pearls Agrotech Corporation, the Securities and Exchange Board of India said it hoped the heavy penalty would "give a strong message" to those running schemes preying on unsophisticated Indians trying to parlay hard-won savings into greater wealth.

"In the recent past, the country has suffered a lot in [the] hands of entities who engage in such illegal money mobilisation under various schemes, wherein the hard-earned money of the common man has been duped," the order read.

Pearls, which began operating in the late 1990s, raised money from people who thought they were buying valuable plots — which the company promised to develop and sell on, ostensibly generating lucrative returns.

But investors — lured through a network of agents who received commissions of up to 35 per cent — were often assigned vaguely defined plots in regions far from where they lived, leaving them unable to check out the realities on the ground.

The Central Bureau of Investigation argued that the company was essentially a Ponzi scheme which began to unravel early last year after authorities froze its accounts. The CBI move followed years of court battles about whether SEBI had regulatory powers over Pearls, which continued to raise money throughout its legal battle against the watchdog.

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In ordering the $1.1 billion fine, Amit Pradhan, the SEBI adjudicating officer, said "the amount of penalty is commensurate with the defaults committed" by the company and its directors.

The SEBI fine is the latest judgment against Pearls, which is being dismantled. The regulator in August ordered Pearls immediately to refund the nearly $8.3 billion it had taken from investors.

In April, India's Supreme Court ordered the liquidation of all Pearls' assets, including properties, to refund investors — a process that is supposed to be supervised by a court committee.

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Indian authorities are getting increasingly tough on the many opaque schemes which attract vast sums of money from unsophisticated Indians hoping to get rich quick.

Subrata Roy, the flamboyant founder of the Sahara India Pariwar — whose business empire was ostensibly built by taking deposits from millions of small investors — has been in jail since March 2014, after failing to pay $1.6 billion to authorities to refund investors.

But such schemes still proliferate, often operating under the patronage of politicians. West Bengal was rocked by the 2013 collapse of a so-called collective investment scheme which raised money from at least 1.7 million depositors who were encouraged to invest by members of the state's ruling Trinamul Congress party.