india

Updated: Aug 04, 2017 10:25 IST

The central government is preparing to bring a law to regulate chit fund schemes, a savings and investment instrument that has been used to cheat lakhs of poor people across the country since the 1980s. The proposed legislation is aimed at overhauling and strengthening existing rules to shield investors from fraudulent companies.

“SEBI is looking into the existing chit fund cases. There are state laws to deal with them in Bengal and Odisha. But what to do with those who run operations throughout the country? We are drafting a central law and very soon we will bring it before you,” finance minister Arun Jaitley told the Lok Sabha on Thursday.

Since the 1980 Sanchayita scam involving over a lakh investors in West Bengal hit the headlines, there have been scores of similar cases across the country, including the recent Saradha and Rose Valley scams, that exposed the alleged nexus between fraudulent companies and politicians. There are over 30,000 registered chit fund companies operating in the country but the number is “100 times more” for the unregistered ones, according to the All India Association of Chit Funds (AIACF) that put its estimated size at Rs 35,000 crore. The attraction of chit fund schemes for investors is the substantially higher interest rates offered.

Government sources say discussions on the proposed legislation have begun and the legal framework will ensure that only registered chit fund companies are allowed to operate. Much like the mutual fund industry, they would have to maintain transparency and chalk out disclosure guidelines.

Chit funds are registered under the Chit Funds Act, 1982 but the absence of a regulator and a nationwide framework of guidelines makes investors vulnerable. Jaitley announced in the last budget that the government would amend the Multi-state Cooperative Act to protect the poor from dubious schemes.

Sources say the Chit Funds Act is obsolete and implementation has been a sore point with many other Acts governing Ponzi schemes. For example, it is mandatory for chit fund companies to mention the two words as part of all their schemes. However, because of poor implementation, this is not followed, making it easy for companies to bypass registration.

“The Centre is discussing the issue with the Reserve Bank of India and the Securities and Exchange Board of India to ensure stronger laws to penalise and prevent frauds. We also need cooperation from states,” said an official in the know of the matter.

For years, governments have adopted a reactive approach to chit funds, acting only when scams hit the headlines. The problem lies with multiple agencies governing the grey areas of such money deposit schemes. In case of irregularities, provisions under the Indian Penal Code, SEBI and Companies Act can be invoked to book entities behind the Ponzi schemes.

“At present, action against chit funds is taken only in cases of frauds and since they are also guided by Companies Act and Indian Penal Code, there are overlaps and they fall between the gaps... this needs to be addressed as protection of investors, many of whom are poor,” Manoj Kumar, corporate law expert and managing partner, Hammurabi and Solomon, said.

Industry representatives suggest a well-rounded approach. “Just because of a few failed Ponzi schemes and frauds, it is unfair to paint the entire industry of chit funds as dubious. In the proposed amendments, there is no discussion on insurance for the investment that is made under chit funds,” said TS Sivaramakrishnan, general secretary, All India Association of Chit Funds.