KASARAGOD: Manjeshwar MLA M C Kamaruddin's Fashion Gold was illegally accepting deposits from the public at exorbitant interest rates, and the newer deposits or 'investments' were being used to service the old loans -- a classic Ponzi model -- said investigating officers.
"I cannot reveal the details, but early evidence point towards that," said P Vivek Kumar, assistant superintendent of police (ASP), who is leading the special investigating team (SIT) formed to probe the charges of cheating against the MLA.
Around 115 depositors in the four gold jewellery companies of Kamaruddin have accused the MLA of cheating (Section 420 of the IPC) after his business went kaput. The SIT has taken up cases of 72 complainants who have collectively accused the MLA and his business partner and Islamic religious leader T K Pookoya Thangal of swindling Rs 13 crore.
The MLA was arrested on Saturday. The SIT has sought his police custody for two days for further questioning.
Deposits or investment?
Apart from cheating, the police have charged Kamaruddin with a criminal breach of trust by a public servant (Section 409 of IPC), which attracts a sentence up to life imprisonment; and criminal breach of trust (section 406 of IPC).
He is also booked under Section 3 of the Banning of Unregulated Deposit Schemes Act for raising money from the public under an unregulated deposit scheme. He is also held in violation of Section 5 of the Kerala Protection of Interests of Depositors in Financial Establishments Act, 2013.
Under the section, if a financial establishment defaults, the management can be punished for a term which may extend to 10 years.
On the question of whether Fashion Gold could be considered as a financial establishment, investigating officers said the Act has clearly defined it. The Act defines 'financial establishment as a company registered under the Companies Act, 1956 carrying on the business of receiving deposits under any scheme or arrangement. "And Fashion Gold was accepting deposits," said an officer.
Kamaruddin's lawyer K Vinod Kumar, however, contested the charges under the Act saying the four companies of Kamaruddin cannot be classified as financial establishments because they were not accepting deposits but investments with a promise of fixed dividends.
"But if the prosecution persists with the Act, the cases will have to be transferred to a special court. That's what the Act says. The local courts do not have jurisdiction to try cases under this Act," he said.
According to the agreements signed between Fashion Gold and the 'investors', Kamaruddin and Pookoya Thangal assure them not only of fixed returns every month, but also promise to return the initial 'investment' as and when they ask for it. Irrespective of the semantics, for all practical purposes the four companies were accepting deposits with assured monthly returns at 12% to above 14% interest rates.
High-interest rates
Kamaruddin's lawyer said the MLA and Pookoyal Thangal were done in by high-interest rates they offered to their investors.
"They did not swindle the money of the public. But they were paying interest rates to money taken as far back as 2007. So the new investments they got went into servicing the expensive loans taken during the early days of the business. It was not sustainable. And when demonetisation came, the business crashed," Vinod Kumar said.
On September 11, TNIE reported how the flawed business model of Fashion Gold had all the traits of a Ponzi Scheme. His lawyer said the gravest charge against Kamaruddin was Section 409 of the IPC or the criminal breach of trust by a public servant, which attracts life imprisonment. The charge has been pressed by the police because they alleged that Kamaruddin sold the property on which Fashion Gold's Payyannur store stood and usurped the proceeds.
"The reality is it was not a sale. The land was given to the investors as part of a deal brokered by the investors' action committee. The land will be sold to clear part of the debt," he said.
When Fashion Gold's four stores in Kasaragod, Cheruvathur, Payyannur, and Thalassery started folding up in late 2019, a few investors and employees at Payyannur stole the gold jewellery weighing over 5kg from the store. Pookoya Thangal had filed a robbery case with Payyannur police station. However, when officials of Goods and Services Tax raided the shop and found the gold jewellery missing, they considered it as sold and slapped a tax of Rs 1 crore on the company, he said.
"Today, Kamaruddin is broke," he said. He said the MLA has filed a petition in the high court seeking the quashing of the criminal FIRs and converting them to civil cases.
"We have challenged only one FIR. If the high court agrees to our plea, we will challenge all the 115 FIR," he said. ASP Vivek Kumar said as long as the court does not quash every FIR, the SIT can continue with its criminal investigation.
"There is no bar on investigating the criminal aspects of Section 420. And each case is treated as a different case," he said.
MLA blames his partner
The police have issued a lookout notice against Pookoya Thangal after he is suspected of evading arrest in the case.
According to sources, he was supposed to turn up at the office of the District Police Chief on Saturday. But after Kamaruddin was arrested, he reportedly went into hiding.
Meanwhile, the Special Investigating Team has sought the police custody of Kamaruddin for two days for further questioning. The Hosdurg court will hear the matter on Monday.
The MLA's lawyer Vinod Kumar said he has also applied for bail but the police request may get preference.
"We will press for bail after police questioning," he said. Kamaruddin -- remanded in judicial custody for 14 days -- is now in a private COVID Care Centre near the District Hospital, where he is awaiting COVID results.
In his statement given to the SIT, Kamaruddin blamed Pookoya Thangal, the managing director of the four companies that ran Fashion Gold stores in Kasaragod, Cheruvathur, Payyannur, and Thalassery. The MLA said he was busy with his political work, and he was the chairman of the four companies only on paper. Pookoya Thangal was running the show, he told the SIT.