The Truth About ‘cheat’ Funds

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In the dock Saradha Group MD Sudipta Sen being taken into police custody
In the dock Saradha Group MD Sudipta Sen being taken into police custody

Concerns about chit funds in India are as old as chit funds themselves. Regulatory bodies like the Securities and Exchange Board of India (SEBI) have been flagging the complexities around collective investment schemes. This time, the case pertaining to the Saradha Group in West Bengal and its impact on the lives of common people has forced us to ask a few key questions. Do we have proper laws governing chit funds? Do regulators have enough teeth to sort out the mess? Will West Bengal’s legacy in chit funds and the powerful that run them come in the way of investigations?

It’s important to know that chit funds and collective investing schemes — though often used interchangeably — are actually different things. Ironically, it is this difference that makes scope for holes.

Chit funds are one of the oldest forms of indigenous financial institutions regulated in India by the Chit Funds Act, 1982, a Central statute, and various state-specific regulations. Under a chit fund, money collected is meant for use by an investor who is part of the fund (on a rotation basis like a kitty party). In case of a collective investment scheme (CIS), money is pooled by at least 10 people for the sole purpose of making further profits on their investment and depends on the efforts of a third party to help generate those gains. In effect, money collected by a CIS is invested in lucrative avenues and not given as a kitty to one investor. Unlike chit funds, CIS is mandatorily regulated by SEBI.

The problem is people often run a CIS in the guise of a chit fund to circumvent the more stringent CIS regulations. In the current controversy, companies under investigation include Rose Valley, Icore E-Services and Sunshine India Land Developers and some other West Bengal-based entities.

The Sahara Group too allegedly had its origins in a chit fund system. SEBI is investigating the group, trying to understand the many faceless “small investors”, who put their money in Sahara’s investment schemes.

In the 1990s, the Tree Plantation scam saw people sell trees for small chunks of money. A ‘Teak Tree Scheme’ lured investors to invest in saplings for a few thousand rupees and promised returns in lakhs after the trees were fully grown. Emboldened by these, larger schemes came into play that promised to invest people’s savings in the doomed real estate and other risky businesses.

The regulator’s job has not been easy. SEBI has faced major impediments in protecting investments in such cases. It has also faced difficulties in attaching properties, or enforcing its orders.

The agency does not have effective powers of search and seizure, and powers to call for information from any person in relation to inquiry or investigation.

“While legally the market watchdog can go after these funds, logistically, they will find it very difficult,” says Sandip Parekh of FinSec Law Advisors. Scrutiny of the operators of West Bengal’s many alleged ponzi schemes not only requires depending on the local government intelligence but also a deep investigation of its legacy in chit funds.

In March, during a visit to Kolkata, SEBI chief UK Sinha cautioned about the proliferation of chit funds in West Bengal. “We have requested the government to make a new set of laws to provide a single regulator for such companies,” he says.

According to Sandip Parekh, “state governments have the power to give SEBI all the support for investigations”, but in the case of Bengal, many in the political corridors are closely linked with the setting-up and protection of these investing schemes. State support to the investigations therefore has been questionable.

It is the human face of chit fund frauds more than the fact that such a fraudulent practice exists, that has forced the government to look for stricter laws to regulate such schemes. Suicides committed by bankrupt investors and duped agents have forced the government into some action.

Moreover, the loss to the State Bank of India because of Saradha has given it the impetus to seek a CBI probe into what is turning out to be a huge scam.

The tragedy is chit funds can prove to be an effective empowerment tool for people who have no access to organised banking. As they don’t need much paperwork or collateral, many people opt for this society-kitty chit funds. With the latest scam, these too will be adversely affected and West Bengal’s rural economy could come to a screeching halt.

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3 COMMENTS

  1. With the securities market and mutual funds not giving assured and big returns which many overambitious investors are interested in schemes like chit funds are always going to be vulnerable especially in places like Bengal where Central govt schemes are not trusted and have not reached well in time

  2. It is such a shame that journalist like in this one do not go in to study the vulnerablilities of the system before or do passive reporting but when scam breaks out media goes out berserk as if it has achieved something new and goes into history from jeep scandal to plantation scams of 90s like in this column why can’t journalist bring to light various vulnerabilities of financial system like informal moneylenders who charge high rate of interest from weak people to NBFCs and crimes by professional like CAs etc who make fake returns so that people can dodge taxes and also govt so that system can become strong once and for all

  3. Generally lower middleclass people, many a not so educated housewives resort to investments in chit funds perhaps due to lack of knowledge. As the author pointed how can one forget the 90s, especially Anubhav plantations which managed to take lot of educated people, senior citizens for a ride. Imparting knowledge to ingenuous investors or some form of alerts must be issued to reduce scams of this magnitude as the recent one in WB and promoting safer methods of investments is required.

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