The Anubhav Plantations Scam

The Doomed Depositors

On 2nd December 1998, thousands of people from places like Shimla, Trichy, Sangli and
several other Indian cities and towns converged at the New Woodlands Hotel in
Chennai. All of them were investors in the collapsed Anubhav group's teak
plantation schemes, and a majority of them were on the brink of bankruptcy1. They
had come to Chennai in response to a letter from an advocate inviting them to come
and check all the records and the balance sheet of the company. The investors could
be seen everywhere - sitting on the pavements, standing around the building,
walking up and down the roads - all of them tense and worried.

The investors had sensed wrong doings at Anubhav when the cheques issued to
some of them bounced in mid-1998. Many depositors, who went to the group's
offices to collect their deposit amount after maturity, found the doors locked and
lodged complaints with the police. Later, thousands of investors demonstrated in
front of the company's headquarters in Chennai. But the main accused, C. Natesan,
Chairman, Anubhav Group (Natesan), had already gone underground.

The Anubhav group of companies was eventually found to have duped investors of over
Rs 400 crore. As details about the 'Great Plantation Scam of the 1990s' were revealed in
the media, Natesan's modus operandi shocked those who held the Anubhav group in high
regard.

Planting the Dream

A commerce graduate from Chennai's Vivekananda College and a chartered accountancy
course dropout, Natesan was a man who dreamt big. His ostentatious lifestyle, his cars,
and his plush office in Chennai's up market Royapettah area were frequently cited by the
media as examples of his lavish tastes.

Natesan started his career in 1983 by launching a consultancy firm, 'Yours Faithfully
Consultancy.' In 1984, he entered the construction business with three partners. Three
years later, he closed this venture and set up the Anubhav Foundation. In 1992, Anubhav
Plantations Ltd. (Anubhav) was floated as a public limited company. Over the years, the
Anubhav umbrella expanded to include various other companies such as Anubhav Homes
Ltd., Anubhav Resorts Ltd., Anubhav Finance & Investments, Anubhav Communications
& Advertising (Pvt.) Ltd., Anubhav Royal Orchards & Exports, Anubhav Hire Purchase
Ltd., Anubhav Green Farms & Resorts (Pvt.) Ltd., Anubhav Agro, Anubhav Security
Bureau, Anubhav Interiors and Anubhav Health Club. By 1998, Anubhav had become a
Rs 250 crore group which, apart from its teak-plantation schemes, was involved in the
timeshare, finance, and real estate businesses. These companies were backed by a
nationwide infrastructure of 91 offices and over 1,800 employees.
Natesan had plans to forward-integrate from teak into furniture and to get imported
machinery to make it. However, his growth strategy was focused mainly on mobilizing
funds from investors. The group had already raised vast sums of money from the public
in the form of fixed deposits, teak units, and a combination of fixed deposits and teak
units. Natesan was extremely secretive about the financial performance of his group.

In the plantations business, Anubhav was the market leader. It operated through four
companies: Anubhav Agrotech, Anubhav Green Farms & Resorts, Anubhav Plantations,
and Anubhav Royal Orchards Exports.

Natesan had associated Anubhav with the World Wide Fund For Nature2 (WWF) and
thus conveyed a positive image of his company to the media and the investors. Besides
the high returns, the investors were also attracted by the courteous, helpful behavior of
the firm's employees. (Unlike the indifferent treatment they received from public sector
bank officials). Since the interest earned on plantation schemes was treated as agricultural
income, it was exempt from tax. As a result, Anubhav's schemes became very popular
and attracted thousands of investors. Moreover, since the unit value of the teak schemes
was very small, investors could easily afford them.

Anubhav seemed to have worked out its schemes very well, including plans to service the
annual payment obligations. In 1998, the land prices in the interior Tamil Nadu, where
Anubhav's plantations were situated were quite low, averaging Rs 35,000 for 43,560 sft.
Thus, the cost of a 300 sft piece of land offered to the investor worked out to just Rs 240.3
Adding another Rs 10 for the saplings and other expenses, the unit's price worked out to
Rs 250, while Anubhav was charging Rs 6000 for it.

Even if Anubhav placed this money in relatively safe investments, earning 15%, it would
receive Rs 862.50 a year, falling only Rs 137.50 short of the payback liability of Rs 1000.
As for the Rs 3 lakh payment after 20 years, Anubhav had estimated that each of the three
trees would grow to a volume of 1.13 cubic meters, with each cubic meter fetching a
price of Rs 88,286, amounting to Rs 2.99 lakh for the three trees. Thus, assuming that
Anubhav's price and volume estimates were correct, it would have been in a position to
fulfill its promises to its investors. Studies regarding Anubhav's cash flows also pointed
out that investors could rely on these schemes.

However, officials from the Revenue & Forest Department of Maharashtra (RFD-M)
stated, "It will be a miracle if they can achieve it (their projections). The timber yield of
trees with a girth of 60 cm and above will be merely 5.10 cubic feet per tree in 15 years,
even if one uses quality soil."

Industry and market watchers had always been skeptical about the Anubhav group.
Sources commented that Natesan's business was highly speculative and that he had never
done 'solid' asset-based business like leasing or hire purchase. A market watcher said,
"You can never run this business on a sustained basis offering interest rates of 25-30%.
Whatever he claims, his assets are far too small compared to his liabilities."
average, while Rs 35 lakh was contributed from the promoter's side, the public funds
raised were usually above Rs 300 crore. Most of these companies did not even have
sufficient crop insurance. Also, the offer documents of these companies did not highlight
the risks involved. The lack of industry regulation made it virtually impossible for the
average investor to distinguish between a fly-by-night operator and a genuine player.

Table II
The Risks in Plantation Schemes - A Crisil Report

Over dependence on retail Inadequate equity base resulting in high

funds leverage
Non-disclosure of Due diligence for public raising of funds
promoters' stake not done
Huge asset-liability gap Erratic cash inflows
No access to organized
Exposed to vagaries of nature
sources of funding
Excessive expenditure for Inadequate cash inflows leading to low
raising resources debt servicing capability
Lack of standard accounting practices gives companies the opportunity
to follow liberal accounting policies

Source: ICMR

Most of these companies were reluctant to provide information about themselves. During
investigations conducted by Business India, officials at Parasrampuria Plantations refused
to even talk to the magazine. However, when the magazine sent people posing as
investors, the response was extremely enthusiastic. Investigations regarding the schemes
being offered by various companies across the country indicated that things were
definitely out of joint. Even those companies who talked to the magazine's reporters were
not able to convincingly answer the questions posed to them.

One major issue concerning these plantation schemes was the valuation of the teak and
the teak units. Most of the companies were selling the teak trees at Rs 1500-2000 per tree.
This was significantly higher than the Rs 10-15 figure quoted by NABARD, which had
years of proven experience in agriculture.4 Reacting to this, the plantation companies said
that forest cultivation was totally different from running private plantations, which spent
a lot more on irrigation and fertilizers. In a study conducted by the Maharashtra Revenue
and Forest Department (MRFD) on private plantations, the total cost of raising and
harvesting a teak tree was estimated to be around Rs 400.

Even if one ignored NABARD's figures, the plantation companies were still charging the
investors at least four to five times more than what experts thought was reasonable.
However, the plantation people rejected these estimates. Natesan said, "These estimates
are incorrect. Our charge of about Rs 1500 per tree has been arrived at after reckoning
maintenance, pruning, weeding, even security."
Another debatable issue concerned the future yield of timber per tree and its price. The
assumptions of yield and the price of teak 15-20 years later were critical for computing
the expected return on investment. A study by the Indian Institute of Forest Management,
Bhopal, concluded that the yield projections of private teak companies were nearly seven
times the highest known yields in a time frame of 20-25 years. Another study by
Maharashtra forestry officials revealed that while young teak trees up to about six years
old responded spectacularly to increased irrigation and soil nutrients, the efficacy of the
inputs declined notably as trees aged beyond seven years. A MRFD official commented,
"Even if one reckons sites with the best quality soil, the timber yield of trees with a girth
of 60 cm and above in 15 years would be about 5.1 cubic feet per tree."

Natesan dismissed these claims as being 'absurd and wrong.' He quoted the figures of
Anubhav's 50-acre plantation in Bhavnagar in Gujarat, which had 65,000 teak trees. He
said, "Over a period of six years, we have already obtained a yield of 8-9 cubic feet.

Even though the girth of the trees would be lower at six years than at 20 years, I am very
clear that my observations are correct and that Anubhav's claims are in fact conservative.
We have set records by growing teak trees to 32 feet in height in only 22 months, which
would have taken six years to attain under forest conditions." Anubhav claimed that the
yield of its trees would be 40 cubic feet. Experts claimed that the yield norm would be 10
to 15 cubic feet of timber per tree over a 20-year time frame. They also estimated the
internal rate of return (IRR)5 to be 30% for a teak plantation project. While the IRR of a
project with the best quality soil (grade I) was estimated to be 32%, for inferior soil
qualities, grade II and III, the figures were 23% and 13% respectively. Thus, the IRR that
the plantation companies claimed to offer - 25-40% - was regarded as highly unrealistic.

Regarding the price of timber upon the maturity of the schemes, most of the plantation
companies claimed that they had taken the most conservative prices by assuming the
future price to be the same or marginally higher than the current price.

These claims were refuted by experts, who said that with substitutes such as plastic,
plywood and particleboard becoming popular in the West, the demand for wood could
decrease in the future. The steady increase in teak prices during 1992-98 was projected to
be unsustainable because of increasing supply. MRFD studies revealed that teak prices
would drop sharply after 2009. An official said, "I expect a fall in prices after the year
2009. In fact, by the year 2015, I expect the price of teak timber, particularly those of
girth 60-75 cm, to decline to less than half of the price prevailing in the year 2009."

Plantation companies' procedures were also flawed. These companies did not directly
own the land, they only supervised the sale deed between the owner of the land and the
investors. Investors were issued certificates indicating the extent of ownership and, in
most cases, received only photocopies of the original sale deed. The certificates were
issued under the common seal of the company, but were unstamped, raising suspicions
about the commitment of the company. Most of the companies invariably linked the
transferability of these certificates to transfer of land back to them. Thus, in spite of
paying for the land, investors did not get absolute title to the land and were in no position
to transfer their rights to the land along with the timber.

In this entire procedure, plantation companies held all the cards. The certificates issued
under teak tree schemes were not delivered to investors until three months after the
payment of the final installment. The concerned company took these certificates back
three months prior to the closure of the schemes. In the interim, if the investors defaulted,
the company had the right to hold back the certificate. But if the company defaulted, the
investor could do very little legally since the certificates were with the company.

According to estimates, more than 4500 plantation companies had raised over Rs 25,000
crore from the public during the 1990s. The laxity of the concerned regulatory authorities
was a major factor behind these scams.

In the early 1990s, setting up a finance company was very simple as there was no
supervisory authority for sole trading or partnership firms, nor did they fall under any
regulatory framework. This gave them a competitive advantage vis-a-vis the other non-
banking financial companies (NBFCs). Though there was a limit on the number of
depositors these sole trading or partnership companies were allowed to have, there was
no ceiling on the amount of deposits they could collect. As per the Partnership Act, a
partner in one company could be a partner in numerous other partnership firms.6 Further,
the RBI did not have the powers to fix a ceiling on the interest offered by these firms on
deposits. Thus, these finance companies offered unbelievably high interest rates as well
as enormous cash incentives, gifts and prizes to entice depositors.

Nobody could scrutinize the deployment of funds by these firms as they neither released
any balance sheets, nor submitted regular reports to the RBI. As agricultural companies
did not come under the RBI's purview, it was easy for these schemes to flourish.

In November 1997, the Union Ministry of Environment and Forests set up an inter-
departmental group to examine the veracity of the claims made by various private
plantations. Their findings were later examined by an inter-ministerial group, which
included the environment, law and finance ministries. SEBI was invited by the Ministry
of Finance to work out a comprehensive regulatory framework for the industry.

Following the public uproar over the failure of companies such as the DSJ Group and the
Parasrampuria Group, SEBI appointed a committee under the chairmanship of S.A. Dave
(former chairman of UTI and SEBI's first chairman) to frame a comprehensive set of
regulations. SEBI then issued a set of directives regarding mandatory registration and
credit rating. Only 540 companies complied with the registration requirement.

SEBI then appointed chartered accountants to audit the books of the top 50 of these
companies and thereafter issued show cause notices to 11 of them for non-cooperation.
Companies that did not file for registration were barred from raising fresh funds from the
public till they complied with the directives.
Meanwhile, in the absence of precedents, the rating agencies primarily took into account
the sustainability of the business through its per-year yield and the ability of the company
to be able to raise revenue independent of fresh collections. The ratings also factored in
the solvency and operational capabilities of the management and the ability of the
company to realize high yields over the years. Almost all the companies failed the test
and were assigned a grade point of 5 (indicating very high risk) by various rating
agencies.

Anubhav was the only company that received a grade point of 4 (unsatisfactory grade)
from Duff & Phelps (Duff & Phelps' said that in the absence of a past model and lack of
any standardized policy in the balance sheet, the rating took into account projected cash
flows, keeping in mind the nature of the risk involved.) Of the rated companies, 22 were
placed in the non-investment grade.

Needless to say, by the time these measures were put in place, the damage had been done
and the money invested by the investors had vanished forever.

With the stock markets performing badly and banks cutting back on interest on deposits,
plantation schemes appeared very attractive for investors impatient for returns and
willing to take risks. An investor commented, "Why do people invest in these kinds of
firms? Because people want to make more money, fast. What do we get from the
nationalized banks as interest? A mere 5-7%! Whereas Anubhav was paying 21-24%
interest. Why can't the government pay better interest?"

Explaining why these schemes were so attractive to the public as well as the finance
companies, Natesan commented, "We offer 24% for all deposits of three years and above.
This is not high when compared to the interest charged on loans by banks. I borrow from
banks at 18%. When I do that, I have to offer security for a similar amount. That pushes
up my effective cost to 36%. Therefore it still works out cheaper when I offer high
interest to my depositors." Following the failure of major players such as Anubhav, a
majority of the plantation companies vanished overnight.

Court proceedings continued for years against the accused from various companies, even
after Natesan was released on bail.

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