Pearls Et Article

8/6/2019 Pearls Et Article

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NFIFWI, Tirunelveli Division [email protected]

Tue, Jun 28, 2011 | Updated 05.01PM IST

Sruthijith KK,ET Bureau

Rs 20,000 crore deposits & a land bank the sizeof Bangalore: 'Realtor' PACL's 'illegal schemes'may drown millions' money

NEW DELHI: On a recent Saturday afternoon, the A6 DDA market in West Delhi's Paschim

Vihar looked desolate. Rows of shops remained shut and a few people milled about unhurriedly

as the summer heat soared. On the third floor of the complex, up a dark flight of stairs with

betel-juice-stained walls, the office of an obscure real estate company called PACL India Ltd

was an oasis of activity.

Hundreds of people had gathered there, giving it the appearance of a busy bank branch on

payday. Transactions abounded across counters, people chatted animatedly in small groups,

and streamed in and out amid long, snaking queues.

From this office and 279 more across India, PACL runs an operation that the Securities and

Exchange Board of India (Sebi) deems illegal because it considers it a collective investment

scheme in the garb of a real estate company. But the final word has not yet been said about

what kind of an animal PACL actually is. That dispute will be settled by the Supreme Court,

where the case has lain for eight long years.

ET spent six weeks interviewing about two dozen people to piece together the picture of a

company that looks suspiciously like a pyramid scheme and whose downfall could wipe out the

savings of millions of people. While the dispute waits to be resolved by the Supreme Court,

PACL has grown a 100-fold, aided by customers who have given money to the company

ostensibly to book a plot of land they can't see or choose. Deposits with PACL-the companycalls them 'customer advances'-have ballooned to Rs 20,000 crore.

It has used the money to buy land in various parts of the country, including barren desert land.

Its land bank, PACL said in a filing with the Registrar of Companies, is 1.85 lakh acres, roughly

the size of Bangalore (In comparison, large realty firms such asDLFor Unitech typically own

12,000-15,000 acres). More than the prospect of owning land, customers are more likely lured

by the 'expected value of land' the company indicates for investment terms ranging from 5 to 10

years.

This works out to more than a 12.5% annual return on investment. PACL's deposits are brought

in by a network of about 8 lakh agents, who are organised in the manner of a classic pyramid

scheme, or "chain system", and stake their credibility for the company in return for attractive

commissions on deposits brought in by them and other agents linked to them in the chain.

If the Supreme Court decides in favour of Sebi and says PACL indeed operates a collective

investment scheme that must be strictly regulated, several million small investors risk losing the

savings they have invested in the hope of an attractive return.

Those at the bottom of the pyramid will be the worst affected. PACL is perhaps only the largest

among a number of such schemes mushrooming across the country.
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Their growth is fuelled by the universal lure of getrich-quick schemes, protected by lackadaisical

enforcement and, in some cases, ambiguous rules. Arrests have occurred on consumer

complaints in a few cases. The ministry of corporate affairs has launched an awareness

campaign through major newspapers across the country, warning investors against collective

investment schemes.

Looks, Walks & Talks Like Pyramid Plan

MCA secretary DK Mittal said the

government's advertising campaign was

prompted by a number of complaints

against online schemes and other

collective investment schemes. They have

not received complaints against PACL, he

said. Elsewhere, there have been

complaints. Gwalior collector Akash

Tripathi said he has received more than

10,000 complaints against 16 companies

running collective investment schemes,

including PACL.

His administration last month moved to

freeze the bank accounts of PACL and

similar companies, and started sealing theproperties owned by them. "This is a big

menace. These companies are saying they

are collecting deposits for land or cattle or

what not, but they are essentially a finance

operation," Tripathi said. PACL may look

like a pyramid scheme, walk like a pyramid

scheme and talk like a pyramid scheme, but it is not called a pyramid scheme.

"We are a real estate company. We are in the sales purchase business of land. Customers pay

us to buy land," said PACL director S Bhattacharya. "Customers pay for the land in instalments

and at the end of their term, they can decide to either get a randomly allotted plot, or we will


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help them sell that plot and get whatever is the value of the land at that time." Irrespective of

where the plot is-suburban Mumbai or rural Madhya Pradesh-the company treats them alike,

and assigns identical expected returns.

A brochure of the company distributed by its agents says PACL has more than 10 crore 'plot

owners'. Bhattacharya said the company has no more than 50 lakh customers. Even that

estimate means one in every 170 Indians over 15 years of age is a PACL customer.

PACL is unique in that not only are its plots randomly allotted, but when money is paid, the

company issues a certificate with the amount the customer is expected to get at the end of theplan term. If a customer puts down Rs 50,000 for a 500 square yard plot, he or she can expect

to get back Rs 1,01,365 in six years, or Rs 1.85 lakh in 10 years. Bhattacharya said abou t 80%

of customers opt to take the money at the end of the plan term instead of the plot of land they

supposedly paid for.

From a customer's point of view, he or she can entirely ignore the plot of land that is supposed

to back their investment, walk into a PACL branch, deposit money and expect to get a very

attractive return at the end of the plan term.

It is not hard to see how this plan quickly gets morphed into a "double your money in six years"

scheme. That is exactly what happens. Through the army of agents who get up to a 15%

commission on investments they help bring in, PACL's schemes have acquired a cult-like

following in many parts of the country, particularly in small towns and rural India.

Anyone who joins a PACL scheme can become an agent. It is these agents, a network of

exponentially growing microentrepreneurs, who give word-ofmouth publicity for PACL, staking

their credibility among friends, relatives and community for the company. From Paschim Vihar to

Madurai to Navi Mumbai, their elevator pitch remains the same. "PACL is a public limited

company". "It is a company under the Ministry of Corporate Affairs". "It's a company operating

since 1983 and has never missed a payment". A number of agents across the country repeated

these claims, indicating systematic training.

Any company with more than 50 shareholders is deemed a public limited company, even though

PACL agents use this term to insinuate some kind of government backing or the sanction of law.

Same is the case with the MCA claim, as all companies have to register with the ministry's

Registrar of Companies. The claim of a 28-year record is a more complex truth, as the company

was registered only in 1996. It is perhaps a reference to a related company- PGF Ltd-that was

indeed founded in 1983 and was asked to wind up and pay back investors in 2002.

Bhattacharya said the agents may make many promises or talk up the company to maximise

commissions but the company cannot be blamed for it. But at the Paschim Vihar office, wherethis correspondent spent the better part of two days, plenty of agents were peddling the "double

your money" line quite openly, using brochures and pamphlets that had complex charts showing

return on investments and agent commissions across levels.

Little effort seemed underway by the company to regulate these pitches. The agents perpetuate

the PACL cult, and the company benefits from it the most. Thirty-one-yearold Anil Verma, who

contracted polio as an infant and walks with the aid of crutches, is one such agent. Verma said

working as an independent agent for PACL has given him hope and a steady income. Unable to

pass the Class X exam, he dabbled in many jobs, including as a plumber.


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But Verma said it was not until he became a PACL agent that he started dreaming of a better

future. The PACL network of agents around him was a testimony to that. Verma knows one

agent who used to be a vegetable vendor at the Azadpur wholesale vegetable market in North

Delhi.

"Now he is big. He bought his own house, he has a car... you know, steady income every

month," Verma said. Two levels above Verma in the pyramid is a man who clears Rs 10 lakh in

commissions every month. "He has shown everyone the cheques." Under an incentive scheme,

PACL gifts motorcycles and cars to agents who recruit the most investors.

Typical of such networks, the few who make big money are motivation to the majority, like

Verma, who make a few thousand rupees every month in commission. On each depo sit, as

much as 33% is paid out as commission by the company to the network of agents linked to the

person recruiting the investor, according to the commission chart with the company's agents.

Bhattacharya said the company pays 7-8% as commission on each deposit. The company's

balance sheet suggests this figure is at least 12%.

Bhattacharya is not comfortable with the description of his agent network as a pyramid scheme

or a ponzi scheme. "There is a chain system, that's true," he said. There are agents with

thousands of agents below them-one agent in Madurai spoke of his boss who has 8,000 people

under him. Along with the millions of investors, lakhs of these agents will suffer if PACL runs into

trouble and payments are disrupted. It is a prospect that Verma said he cannot even imagine,

but is sure will never happen.

"If for the sake of argument let's say the company is not returning your money. The land is still

yours, no?" But there is no title deed to the land, only a computer-generated receipt. Verma said

there is still no problem. "You can always go to the MCA and show the slip. They are bound to

give you the land because this is a company under the MCA." This is the kind of disinformation

that sustains and perpetuates the PACL network.

HISTORY AND PROMOTERS

PACL started life in 1996 as Gurwant Agrotech Ltd, a company selling magnetic pillows and

other therapeutical products. (It subsequently changed its name to Pearls Agrotech Corporation


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Ltd and PACL India Ltd). Between 1996 and 1998, Nirmal Singh Bhangoo was a director of the

company.

Bhangoo was also the chairman and managing director of Pearls Golden Forest Ltd

(subsequently named PGF Ltd). PGF Ltd and PACL Ltd both followed similar business models,

even though at the time PGF was a much larger entity. In 1997, there was a huge uproar

against plantation companies, agro companies and other similar schemes that promised a high

rate of return and disappeared with investors' money.

The government announced that such companies would be regulated, and efforts commencedwith the formation of acommittee chaired by former UTI chairman SA Dave. The committee's

report formed the basis of Sebi's Collective Investment Scheme Regulations, 1999. The Dave

committee defined CIS schemes by three important characteristics-pooling of investments,

management by a separate entity and absence of day-to-day control of investors. "The principle

of no day-to-day control of the investor in management of the property should be the prime

criterion in determining the status of such schemes," the committee said.

When Sebi notified the CIS regulations in 1999, more than 1,000 companies were asked to wind

down and refund investors. Both PACL and PGF found themselves in the list. Both petitioned

high courts-PGF Ltd in Punjab and PACL Ltd in Rajasthan, where it is registered. The Punjab

High Court ruled that PGF Ltd was clearly a collective investment scheme, and asked it to shut

shop.

The court said PGF's claim that its sole activity was the sale, purchase and development of

agricultural land was "a sham and a mere paper transaction" carried out "with the aim and

object of screening its real activity". In 2008, a Sebi inquiry found that the company had not

complied with the order to refund investors, and banned its promoters and executives from the

securities markets for 10 years. Those thus banned include Bhangoo, PACL's Bhattacharya

(then a general manager at PGF) and PACL company secretary SK Gaur, who was also

company secretary of PGF Ltd. The schemes of PACL and those that PGF ran were identical.

Gaur said they were different in that in the case of PGF, plot sizes were much larger.

But the Rajasthan High Court took the view that PACL could not be considered a collective

investment scheme. Sebi appealed against this decision in the Supreme Court. The securities

market regulator declined to comment for this story While the question of the legality of PACL's

operations went to the Supreme Court, two things happened that helped PACL grow

dramatically. One was that the company now had a virtual monopoly as most competing

schemes wound up because of Sebi action. Another was that the group started a TV channel-

P7-in 2005.

The channel runs advertisement for PACL, giving the company the sheen of a credible

brand."It's on TV all the time. Don't you watch P7?" an agent in Navi Mumbai asked. In the

demographic PACL draws its business from, many claims go unquestioned, and television news

is highly credible. The exact relationship between PACL and group companies such as Pearls

Infrastructure Projects Ltd and the company that runs the Hindi news channel P7 are not clear.

Bhattacharya said they are all associate companies, refusing to comment on the ownership.

The ownership of PACL and other Pearls companies is hard to determine. PACL, for instance,

is owned by 73 different entities, many of them shell companies owned by other companies in

the list. It's an elabo-rate network that disguises the real owners of the company, and because

Indian laws don't mandate the disclosure of beneficial ownership, it works. Some clues are to be


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found in regulatory filings with the Registrar of Companies. There are at least 17 companies that

are shareholders in both PACL Ltd and Bhangoo-promoted PGF Ltd.

In April 2010, Bhangoo and his wife Prem Kaur transferred 14,78,000 shares (amounting to

7.36% of the company's paid-up capital) held by them in PACL to a number of different entities.

PACL MD Sukhdev Singh is a relative of Bhangoo, Bhattacharya revealed on persistent

questioning, although he maintained that Bhangoo has nothing to do with the company. The

website of an entity called Pearls Australasia is more instructive. The Australia-based company,

"launched by New Delhibased Pearls group", owns the Sheraton Mirage hotel on the GoldCoast. Bhangoo and son Harvindar Singh sit on the board of that company, which describes the

Pearls group on its website as one of India's "largest private landowners" and as "one of I ndia's

fastest-growing corporate groups".

Pearls Infrastructure, PACL India, Pearls Broadcasting Corporation, Pearls Spices, Pearls

Tourism and the Gian Sagar Medical College are listed on the website as part of the Pearls

group. While PACL does not advertise heavily, associate company Pearls Infrastructure

Projects has done some high-profile marketing. The company is now the lead sponsor of IPL

team Kings XI Punjab, and has hired Australian pacer Brett Lee as the brand ambassador. The

"Pearls Group" is also the title sponsor of the India-West Indies one-day international and T20

tournaments underway in the Caribbean islands.

"HYPOTHETICAL QUESTION"

Bhattacharya and Gaur dismissed as "a hypothetical question" the prospect of an adverse

Supreme Court ruling, which will instantly plug the cashflow required to keep up with the

company's burgeoning commitments. "We will obey the law and follow whatever instructions we

receive," Bhattacharya said.

The company has started valuing the vast land bank it owns with help from two global real

estate consulting firms. Bhattacharya claims provisional reports from the companies- JonesLang LaSalle and CB Richard Ellis-say the company's land bank is worth at least Rs 70,000

crore. Last year, stakeholders received an inadvertent peek into a small sample of the

company's land bank.

On January 25, 2010, The Times of India reported about a curious incident that had alarmed

officials in the ministry of defence. They realised that a company had been buying up land in the

barren desert in Barmer district in Rajasthan, close to the sensitive India-Pakistan border.

Through 681 separate transactions, the company had accumulated 10,000 acres of desert land,

typically not known to appreciate and regarded useless for all practical purposes. That company

was PACL Ltd.

http://economictimes.indiatimes.com/markets/real-estate/realty-trends/rs-20000-crore-deposits-a-land-bank-the-size-of-bangalore-realtor-pacls-illegal-schemes-may-drown-millions-money/articleshow/9020795.cms?curpg=1
http://economictimes.indiatimes.com/markets/real-estate/realty-trends/rs-20000-crore-deposits-a-land-bank-the-size-of-bangalore-realtor-pacls-illegal-schemes-may-drown-millions-money/articleshow/9020795.cms?curpg=1http://economictimes.indiatimes.com/markets/real-estate/realty-trends/rs-20000-crore-deposits-a-land-bank-the-size-of-bangalore-realtor-pacls-illegal-schemes-may-drown-millions-money/articleshow/9020795.cms?curpg=1http://economictimes.indiatimes.com/markets/real-estate/realty-trends/rs-20000-crore-deposits-a-land-bank-the-size-of-bangalore-realtor-pacls-illegal-schemes-may-drown-millions-money/articleshow/9020795.cms?curpg=1http://economictimes.indiatimes.com/markets/real-estate/realty-trends/rs-20000-crore-deposits-a-land-bank-the-size-of-bangalore-realtor-pacls-illegal-schemes-may-drown-millions-money/articleshow/9020795.cms?curpg=1http://economictimes.indiatimes.com/markets/real-estate/realty-trends/rs-20000-crore-deposits-a-land-bank-the-size-of-bangalore-realtor-pacls-illegal-schemes-may-drown-millions-money/articleshow/9020795.cms?curpg=1

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