Source: Economic Times
Manifest pedagogy: Chit Funds and other forms of alternative investment schemes have been a gateway to financial savings and thus, are required to be a fail safe for people to meet exigencies, in light of such arguments, it is expedient to have proper legal and institutional regulations for these products.
In news: The Parliament has passed the Chit Funds (Amendment) Bill, 2019.
Placing it in syllabus: Micro finance institutions (explicitly mentioned)
- What is a chit fund?
- What are alternative investment schemes?
- Regulation of chit funds in india
Current dimensions: Scams in chit funds & Chit funds amendment bill
What is a chit fund?
- Chit fund is defined as per Section 2(b) of the Chit Fund Act, 1982.
- Chit funds are often microfinance institutions.
- Chit Funds are also known as the Chitty, Kuree, chit.
- It is a type of rotating savings and agreement among different persons to subscribe a certain sum of money for a specified period of time.
- After specified period the amount is returned to the subscribers with interest.
- Chit fund helps in collecting the small savings of the individuals.
- It helps small traders and businessmen save excess cash on a daily or monthly basis.
- Chit companies are more active in rural and town areas.
What are alternative investment funds (AIFs)?
- Alternative investment funds are defined in Regulation 2(1)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012.
- It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).
- Hence AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.
- AIFs shall seek registration in one of the three categories
- Category I: Mainly invests in start- ups, SMEs or any other sector which Government considers economically and socially viable.
- Category II: These include private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator. Category I and II are close ended, tenure shall be for a minimum of three years.
- Category III: Hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended. They may also be close ended.
Regulation of chit funds in India:
- The Chit Funds in India are regulated by the Chit Fund Act, 1982.
- Under this law, registration of the chit fund business can be done only by the respective state governments.
- The Chit Registrar is appointed by the Government under section 61 of Chit Fund Act, 1982.
- If the chit is not registered with the registrar of chits then neither it is legal nor bound to pay the deposited amount of the subscribers.
- The approval of a chit scheme may be refused by the registrar if
- the chit organiser has been convicted of any offence under the Act or
- has defaulted in the payment of fees or
- has been convicted of any offence and sentenced to imprisonment and a period of 5 years has not been lapsed since the release.
- All the banks (including co-operative banks) are prohibited from conducting chit business as per Section 86 of the Chit Fund Act, 1982.
Scams in chit funds:
Saradha chit fund scam:
- Saradha Group chit fund scandal duped 1.4 million investors in West Bengal and neighbouring states.
- As much as Rs 1,200 crore was raised through its illicit money pooling schemes before the company collapsed in April 2013.
- The group used collections from new investors to make payments to the previously-enrolled members, rather than from income generated through investments.
- The activities of these companies were found to be in serious violations of the Companies Act, SEBI Act and several provisions of the Indian Penal Code.
- It was alleged that the Mamata Banerjee led West Bengal government had a direct link with Sudipta Sen, the Chairman of the chit fund group.
- Following the unearthing of the scam in April 2013, Mamata Banerjee-led West Bengal government set up a Rs 500 crore relief fund for small investors who had put money in the scheme.
- Of the list of 87 such companies presented in Parliament, against whom complaints had been received for indulging in Ponzi schemes, seventy-three were from West Bengal.
- On April 23, 2013, Sudipta Sen, along with Debjani Mukherjee and Arvind Singh Chauhan, were arrested from Kashmir.
- After serious allegations of international money laundering, the case was transferred to the CBI by the Supreme Court of India in 2014.
- By the time the CBI took over the case, the Special Investigation team (SIT) had arrested 11 people, traced 224 immovable properties, seized 54 vehicles and had filed chargesheets in nearly 300 cases.
Rose Valley chit fund scam:
- Rose Valley scam is the financial fraud which rocked state of West Bengal in 2013.
- As per Enforcement Directorate (ED) estimates Rs 17,520 crore was reportedly raised from investors across India.
- The All India Small Depositors Association pegged the amount at Rs 40,000 crore.
- The Rose Valley group had allegedly floated a total of 27 companies for running the alleged chit fund operations of which only half a dozen were active.
- It is alleged that the company had made “cross investments” in its various sister firms to suppress its liabilities towards investors.
- According to ED, a portion of the money was also used to bribe politicians so that the scam could run smoothly.
- In 2015, Rose Valley chairman Gautam Kundu was arrested.
- The government froze all the 2,600 bank accounts of the Rose Valley Group, which held around Rs 800 to 1,000 crore.
- On January 25, 2019, CBI arrested Bengali film producer Srikant mohta for duping rose Valley group by Rs 25 crore.
Chit funds amendment bill:
-> The Act specifies various names to refer to a chit fund such as chit, kuri. The bill additionally inserts ‘fraternity fund’ and ‘rotating savings and credit institution’ to this list.
-> The Bill changes the names of the terms ‘chit amount’, ‘dividend’, ‘prize amount’ mentioned in the Act to ‘gross chit amount’, ‘share of discount’ and ‘net chit amount’, respectively.
-> The Act specifies that a chit will be drawn in the presence of at least two subscribers. The Bill seeks to allow these subscribers to join via video-conferencing.
-> The Bill seeks to increase the commission of foreman from 5% to 7% and allows the foreman a right to a lien against the credit balance from subscribers. (Lien is right to keep possession of property belonging to another person until a debt owed by that person is discharged).
-> The Act specifies the maximum amount of chit funds as
(i) one lakh rupees for chits conducted by individuals and for every individual in a firm with less than four partners
(ii) six lakh rupees for firms with four or more partners.
The Bill increases these limits to three lakh rupees and 18 lakh rupees, respectively.
-> The Act does not apply to:
(i) any chit started before it was enacted
(ii) any chit where the amount is less than Rs 100
The Bill removes the limit of Rs 100 and allows the state governments to specify the base amount over which the provisions of the Act will apply.