The Chit Funds (Amendment) Bill, 2019, was passed by the Lok Sabha today, aiming at preventing fraud under the guise of money-multiplying schemes. The government had introduced the Chit Funds (Amendment) Bill, 2019, in the Lok Sabha on Monday. Now this bill will be introduced in the Rajya Sabha.
Minister’s assurance: Chit funds will be safer
During the debate in the House on the issue, Minister of State for Finance Anurag Thakur said the bill had been brought with an intention of protecting the interests of investors belonging to the poor and marginalised sections of society. He said the government wanted that the invested money should be returned on time to depositors who had been cheated in such schemes.
Answering a question, Thakur said that the government had conducted financial literacy workshops in different parts of the country to create awareness among the people.
Chit funds: Dark history, late redress
Many scams related to chit funds have destroyed small investors and their families for decades in the country. These firms found loopholes galore in the existing laws to take their customers for a ride. But now the government has decided to change the 1982 law governing chit funds.
The Ministry of Corporate Affairs says, till 31 October 2014 there were more than 5,000 listed chit fund firms in India. Some have even been operating for over 100 years. But there was no law governing them until 1982.
The 1982 law permitted a chit fund firm to collect subscriptions up to 10 times its net worth. The bill is meant to plug these loopholes. The need of at least two members for conducting a draw and preparing the minutes of the meeting stays, but the draw of chits must be recorded on video. Further, the two members may join the proceedings via videoconferencing, and sign the minutes within two days.
The amendment bill aims at bringing transparency in the trade. It will be difficult to cheat in the name of chit funds now. The bill says that chit fund firms can develop in a better way. Necessary provision has been made for this:
- The limit of investment of individuals and companies in a chit fund has been increased
- There is a proposal to increase the limit of personal investment in a chit fund from Rs 1 lakh to Rs 3 lakh
- There is another proposal to increase this limit from Rs 6 lakh to Rs 18 lakh for companies for firms with four or more partners
- The maximum commission for foreman (person responsible for handling the process) has been raised from 5% to 7%
- The foreman can lien against the credit balance from subscribers
- Whatever decision a company takes while managing chit funds, it will be necessary to have at least two subscribers.
- A provision has been made to ensure that chit funds are not misused
Legal definition; how they cheat
According to the Chit Funds Act, 1982, a person or group of people reaching a ‘compromise’ to take a chance of multiplying the investors’ money qualifies as a chit fund. A chit fund is a type of rotating savings and credit association system practised in India. Chit fund schemes may be organised by financial institutions, or informally among friends, relatives, or neighbours. In some variations of chit funds, the savings are for a specific purpose. Chit funds are often microfinance organizations.
A chit fund company has to obtain a certificate of incorporation (CIN) from the Registrar of Companies. It should then apply for registration with the chit fund department of the State where the firm is based. A depositor may verify the details of a chit fund company by looking for its CIN in the Ministry of Corporate Affairs’ website.
The chit registrar is appointed by the government under Section 61 of the Chit Funds Act, 1982. The registrar and the State government have the right to take action in cases of chit fund fraud.
Chit fund companies fall under the category of non-banking companies (NBFC). Such companies are allowed to raise funds from the general public on behalf of the Reserve Bank and SEBI for a specific period under certain schemes, such as term (fixed deposits) and daily deposits (daily deposits).
The schemes that are touted while seeking depositors’ money may be valid. But after getting permission from a depositor to use his money in a certain trade, the firm may ignore the scheme that is its mainstay and instead create other lucrative schemes to attract other customers. This way, none of the schemes gets the attention it deserves and finally these dubious operators flee or threaten the small investors against taking a legal recourse.
Expertspeak on amendment bill
“This Act will not only prohibit unregulated deposit-taking activities but will also provide deterrent punishment for promoting or operating a UDS. We have seen many companies collect deposits from the public and then refuse to repay, claiming a bad market or no funds. Companies and institutions running such schemes exploit existing regulatory gaps and lack of strict administrative measures to dupe poor and gullible people,” said Sangeeta Lakhi, partner, Rajani Associates.
Rajesh Narain Gupta, managing partner, SNG & Partners, is as optimistic. He said, “The existing legislation comes into play after a fraud has occurred. The proposed law would prohibit Ponzi scheme frauds from occurring by banning all unregularised deposit-taking schemes.”