Prosecution Of Fraudulent Credit Cooperatives
I. Legal Framework for Prosecuting Fraudulent Credit Cooperatives
1. Relevant Laws
Fraudulent cooperative societies are typically prosecuted under multiple statutes:
Indian Penal Code (IPC), 1860
Section 406 – Criminal breach of trust.
Section 409 – Criminal breach of trust by banker, agent, or in position of fiduciary responsibility.
Section 420 – Cheating and dishonestly inducing delivery of property.
Sections 467, 468, 471 – Forgery and use of forged documents.
Section 120B – Criminal conspiracy.
Maharashtra Protection of Interest of Depositors (in Financial Establishments) Act, 1999 (MPID Act) and similar state acts (like TNPID Act in Tamil Nadu, APID Act, etc.)
→ These laws allow attachment of property of fraudulent financial establishments that default on repayment of public deposits.
Companies Act / Cooperative Societies Act (Central or State)
→ Mismanagement, violation of registration rules, and illegal acceptance of deposits.
Prize Chits and Money Circulation Schemes (Banning) Act, 1978
→ When the cooperative society actually runs a ponzi or multi-level deposit scheme.
Prevention of Money Laundering Act (PMLA), 2002
→ Applied when large-scale public funds are diverted and laundered.
II. Typical Prosecution Procedure
Complaint or FIR – Filed by depositors or Registrar of Cooperative Societies.
Investigation – Economic Offences Wing (EOW) or local police investigates misappropriation and tracing of funds.
Attachment of property – Under MPID/TNPID to secure investor interests.
Filing of charge sheet – Under IPC and special acts.
Trial before Special Court – Evidence of misappropriation, accounting irregularities, and conspiracy.
Conviction and sentencing – Depending on proof of fraudulent intent, embezzlement, and conspiracy.
III. Major Indian Case Studies
Let’s now study six major cases in detail, showing how the prosecution works.
1. Saradha Chit Fund & Credit Cooperative Scam (West Bengal)
Facts:
“Saradha Group” operated several “credit cooperative societies” promising high returns on deposits.
Over ₹2,400 crores collected from investors across eastern India.
The society diverted funds into media, real estate, and luxury assets.
When the group collapsed (2013), thousands of small investors were defrauded.
Legal Issues:
Charges under Sections 406, 409, 420, 467, 471, 120B IPC, and Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
Also prosecuted under MPID Act and PMLA, 2002.
Court Reasoning:
The scheme was not a genuine cooperative but a “collective investment fraud.”
Promoters used cooperative registration to evade SEBI scrutiny.
Misappropriation and diversion of deposits were proven through ledgers and money trails.
Outcome:
Promoters (including Sudipta Sen) were arrested and charge-sheeted by CBI and ED.
Assets worth hundreds of crores attached.
Criminal trials ongoing; several convictions recorded for related offences.
Key Takeaway:
Registration as a “cooperative” does not shield an entity that essentially runs a ponzi scheme — fraudulent intent overrides formal structure.
2. Rose Valley Credit Cooperative Case (West Bengal & Odisha)
Facts:
The Rose Valley Group collected approximately ₹15,000 crores from investors through “Rose Valley Credit Cooperative Societies.”
It promised high monthly returns and resorted to forgery in issuing receipts.
Legal Issues:
Charges under Sections 420, 409, 467, 471, 120B IPC, PMLA, and Prize Chits Act.
Attachment of assets under MPID Act.
Court Findings:
It was proved that the cooperative was used as a shell to divert public funds.
Records and investor receipts were falsified.
Several investors testified that officials induced them by false promises.
Outcome:
Chairman Gautam Kundu arrested; CBI and ED attached assets worth ₹2,000 crores.
Trial before Special PMLA Court; multiple convictions for money laundering.
Key Takeaway:
Fraudulent credit cooperatives are often fronts for laundering public deposits; inter-agency prosecution ensures complete accountability.
3. IMA (I Monetary Advisory) Credit Cooperative Scam (Karnataka, 2019)
Facts:
IMA Group claimed to operate as a Sharia-compliant credit cooperative society in Bengaluru.
It collected over ₹4,000 crores from thousands of investors, promising monthly profit shares.
The owner, Mansoor Khan, absconded; operations stopped abruptly.
Legal Issues:
Sections 406, 409, 420, 471, 120B IPC, Karnataka Protection of Interest of Depositors Act (KPID Act), and PMLA.
Charges of criminal breach of trust and cheating.
Court’s Reasoning:
The cooperative structure was used to conceal illegal deposit collection without RBI or Registrar approval.
False profit statements and fictitious investments constituted deliberate deception.
Outcome:
Mansoor Khan arrested; Special Court directed attachment of assets under KPID and PMLA.
Investigation revealed political and bureaucratic collusion, showing systemic corruption.
Key Takeaway:
Religious or cooperative façade does not protect fraudulent financial establishments; PMLA and State Depositor Acts are effective prosecutorial tools.
4. Sahara Credit Cooperative Society (Pan-India, 2012-2024)
Facts:
Sahara Group created multiple cooperatives like “Sahara Credit Cooperative Society Ltd.” and “Sahara Q Shop” to collect deposits after SEBI restrained its housing investment schemes.
The cooperatives continued collecting money from small investors nationwide.
Later, refunds were delayed or denied.
Legal Issues:
Allegations under Sections 406, 409, 420 IPC, Cooperative Societies Act, and PMLA for diversion of funds.
Court Proceedings:
Supreme Court ordered investigation and refund through SEBI.
Cooperative societies found to have overlapped with the earlier prohibited schemes.
Outcome:
Several state police units filed criminal cases; assets under Sahara Group attached.
Recently, the Supreme Court directed transfer of recovered funds to depositors through the Central Registrar mechanism.
Key Takeaway:
When credit cooperatives are used as continuations of banned deposit schemes, courts pierce the corporate veil and treat it as fraud.
5. Adarsh Credit Cooperative Society Scam (Gujarat, 2019)
Facts:
Founded by Mukesh Modi, Adarsh Credit Cooperative collected over ₹9,000 crores from more than 2 million investors across India.
Money was siphoned to shell companies controlled by family members.
Legal Issues:
Sections 406, 409, 420, 467, 468, 471 IPC, Rajasthan Protection of Interest of Depositors Act, and PMLA.
Court’s Analysis:
Financial records showed circular transactions, inflated profits, and bogus loan accounts.
The cooperative violated RBI norms by functioning as an unlicensed NBFC.
Outcome:
ED arrested promoters and attached properties worth ₹1,400 crores.
Court rejected bail due to the magnitude and public impact.
Key Takeaway:
Fraudulent use of cooperative registration to collect unregulated deposits attracts both IPC and money-laundering liability.
6. Srijan Credit Cooperative Fraud (Bihar, 2017)
Facts:
“Srijan Mahila Vikas Sahyog Samiti,” a registered cooperative in Bhagalpur, siphoned off government funds meant for women’s welfare schemes into its own accounts.
The funds were then used for personal enrichment and property purchases.
Legal Issues:
Criminal breach of trust (409 IPC) and forgery (468, 471 IPC).
Misappropriation of public funds (since government grants were involved).
CBI later took over investigation.
Court’s Reasoning:
The cooperative was a front to embezzle government money under the guise of development work.
Documentary evidence showed falsified bank statements and fake letters of authorization.
Outcome:
Promoters convicted under Sections 409, 468, and 120B IPC; main accused died during trial, but co-accused were sentenced to 5–10 years imprisonment.
Key Takeaway:
Even when funds are public rather than depositor-based, misuse by a cooperative is treated as criminal breach of trust of the highest gravity.
7. Aalayam Credit Cooperative Fraud (Tamil Nadu, 2015)
Facts:
“Aalayam Credit Cooperative” collected over ₹400 crores from investors in Coimbatore and Tirupur districts, promising 24% annual returns.
When investors demanded repayment, offices were shut down.
Legal Issues:
Sections 406, 409, 420 IPC, and TNPID Act, 1997.
Court’s Decision:
The court held that collecting public deposits without authorization under the Banking Regulation Act amounts to cheating.
Property of the society and its directors attached under TNPID.
Outcome:
Promoters sentenced to 7 years imprisonment and ordered to refund investors after liquidation of assets.
Key Takeaway:
TNPID and similar state laws are powerful tools ensuring depositors’ protection against fraudulent cooperatives.
IV. Consolidated Observations from All Cases
| Pattern Observed | Legal Interpretation |
|---|---|
| Misuse of cooperative registration for deposit collection | Treated as cheating and breach of trust; registration no defence. |
| Diversion of public deposits to personal or shell companies | Invokes IPC + PMLA offences. |
| False receipts and investor documents | Forgery under Sections 467–471 IPC. |
| Non-repayment or absconding | Clear mens rea for cheating (420 IPC). |
| State Protection of Depositors Acts | Allow immediate property attachment and compensation process. |
| Cooperative officials and board members | Treated as agents; liable under Section 409 IPC. |
| Judicial approach | Courts focus on “substance over form”: whether money was taken dishonestly, not what the society was called. |
V. Conclusion
The prosecution of fraudulent credit cooperative societies in India is built upon a multi-layered legal framework—criminal, regulatory, and financial. Courts consistently hold that:
“Any cooperative society collecting deposits with an intention not to repay or using the funds for purposes other than authorized constitutes a criminal conspiracy and cheating under the IPC.”
These prosecutions demonstrate that misuse of cooperative status to defraud investors is punished as severely as any banking scam, with attachment of property, imprisonment of promoters, and restitution to victims.
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