Literature Review
Content
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Financial Regulation in a Changing World
Regulating the Unregulated
Abstract
The recent Chit Fund fiasco in West Bengal has not only pushed the
panic button for the Indian Investors, but also opened the Pandora‘s Box
of our corrupt system and the state of awareness of the State
Government about their control on such scams. This is a case in which
all the three parties are to be blamed equally – the Investors, the System
or the Government and the investment Agencies. Though the issue of
cheating and fraud came to light because of Saradha fiasco in West
Bengal, Odisha is not far behind in any sense. "Chit funds in India are
governed by the Chit Funds Act, 1982. Under this Act, the chit fund
businesses can be registered and regulated only by the respective State
Governments". After such clarification from the Centre the affected
states are now trying to revamp the wound of ill fated investors of their
states. No one is giving a fair solution to prevent the chit fund scams.
Also no one is trying to find out the root cause of such scams. As a result
the investors are in dark about the refund of their funds. It is going to be
treated as a combined failure of state as well as country. Expectation of
easy money return in short time, fake success stories by the agents of
such companies motivate the illiterate rural people to invest in the chit
funds. The poor literacy in rural areas gives a wide dimension for the
fraud chit fund companies for growth. No investor is interested to know
about the strategy of the company behind such attractive offers.
Rasananda Mohanty
Research Scholar,
Deptt. of Commerce
Ravenshaw University
Cuttack, Odisha
Tushar Kant Pany
Reader
School of Commerce &
Management Studies,
Ravenshaw University,
Cuttack, Odisha
Keywords: investment, compensate, stringent regulatory, administration
Introduction
Now many questions come to the discussion table when everything
is lost. Questions like why such scams are not identified from the beginning
stage, why the administration is not taking any action to prevent such
scams, why state Govt. will not compensate the investors, what will be the
future of the money invested, why the growth of chit fund companies is not
being restricted and many more.
So it is the time to raise voice against such scams. We must try to
find out the root of such cheats. We should try to aware ourselves about
such fraudulent offers. Strong administration and systematic rule can be a
solution to melt down such scams. Strong awareness programs must be
initiated by the Government for a fair investment for the investors. The
Govt. should design a stringent regulatory mechanism to control activities
of mushrooming of chit funds, many of which dupe investors of their life's
savings.
The role of SEBI and RBI must be redefined to monitor the activities of chit
fund companies. The chit fund companies operated in breach of Company
Deposit Rules, 1975 which prohibit all companies (except public sector
undertakings) from accepting deposits which are unsecured instruments
(debentures or otherwise) for more than 10% of their net worth. RBI must
come up with an adequate solution to protect the investors from the chit
fund companies. The regulation of the Chit Fund industry was put in place
by the Government of India to address the problem of misuse of informal
Chit Funds by unscrupulous promoters and founders running away with the
participants‟ funds, leaving the members with little recourse to retrieve their
money back.
Literature Review
Chit Funds…Past, Present & Future…
A Chit fund is a kind of savings scheme practiced in India. Chit funds
are the Indian equivalent of the Rotating Savings and Credit Associations
(ROSCA) that are famous throughout the world. ROSCAs are a means to
―save and borrow‖ simultaneously. It is considered one of the best
instruments to cater to the needs of the poor. It enables poor people to
convert their small savings into lump sums. The concept of chit funds
originated more than 1000 years ago. Chit funds are savings schemes
under which a person enters into an agreement with a specified number of
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persons who agree to subscribe a certain sum of
money over regular installments for a certain period in
return for interest and lends money to those wanting
to purchase property, etc. On the other hand, nidhis
are restricted to smaller groups and accept deposits
and lend money only to member-borrowers.
According to Primitive civilizations, a book written by
Edith Jemima Simcox, the ‗Malabar Kuri‘ system
existed from ancient Dravidian times and is somewhat
similar to the systems in China. In China it developed
to what is popularly known today as the Chinese
lottery. ―The concept of Chit funds came into being in
the 1800‘s when Raja Rama varma, ruler of erstwhile
Cochin State gave a loan to a Syrian trader, keeping a
certain portion of it to himself for administrative and
other expenses. Later, to manage the increasing
number of those seeking loans, he ordered a cast of
lots and gave the accumulated amount to those who
drew the lot on the principle of equity.
A Chit fund company means a company
managing, conducting or supervising, as foremen,
agent or in any other capacity, chits as defined in
Section 2 of the Chit Funds Act, 1982. According to
Section 2(b) of the Chit Fund Act, 1982, "Chit means
a transaction whether called chit, chit fund, chitty,
kuree or by any other name by or under which a
person enters into an agreement with a specified of
persons that every one of them shall subscribe a
certain sum of money (or a certain quantity of grain
instead) by way of periodical installments over a
definite period and that each such subscriber shall, in
his turn, as determined by lot or by auction or by
tender or in such other manner as may be specified in
the chit agreement, be entitled to the prize amount".
They have served as a medium of saving for
many people. Chit fund is a typical indigenous
financial institution peculiar to South India, particularly
Andhra Pradesh, Tamil Nadu and Kerala. The
progenitor of chit funds in Tamil Nadu is known as
Moyy Murai. The term Moyy means call money pooled
and Murai means custom. Under this system, a group
of persons in a village or locality, known to each other
joined together to pool their resources to meet the
need of an individual of the group. There were some
well-defined needs such as celebrating marriage,
buying of land, building of houses and purchasing of
cattle that were prescribed under the system. It was a
Sahaya-Nidhi, with a strong element of co-operative
spirit. In course of time, the term Moyy was replaced
by the term chit or olai (palm leaf), which was the
notice of demand for payment of a member‘s
contribution to the pool. Later the names of the
members of the group were written on chits or small
pieces of paper or palm leaf, rolled up and shuffled to
pick out the person to whom the amount of fund was
to be given. That was the origin of the chit fund. Chit
funds resemble co-operative credit societies in some
respects. Both co-operative credit societies and chit
funds work on the same principles of self-help and
mutual help. The membership is voluntary and
members pool their resources for mutual benefit in
both the organizations. In many respects both the
organizations are different. Co-operatives have been
sponsored by the Government and are given financial
assistance, directly as well as through Reserve Bank.
Co-operatives also enjoy tax benefits and
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concessions in the matter of stamp duty. Chit funds
do not receive any special assistance from the
Government, but are tending to be regulated in an
Chit funds grew at a time when banking and credit
facilities were inadequate and people in general had
to rely to a large measure on indigenous sources for
their many productive and consumption needs. Chit
funds have been meeting a part of the genuine credit
needs of the people, both in urban and rural areas.
In present scenario chit funds are identified as
Cheat Funds. The state Govt. has no defined
guidelines to start up a chit fund so any financial
sound group of people come together to start such
business. They start to serve the people as a pool of
saving with a commitment to help in their need time
but slowly they start gambling with the investors by
utilizing the fund for their own benefits. As the
borrowing aspect of the chit fund raised, it gave
momentum to the expansion of the chit fund business
and a new class of institutional foremen developed.
The chit fund business now a days became a modern
business serving the credit needs of the all categories
of rural as well as urban people with branches spread
all over the country. Chit fund companies pool the
resources by diverting the surplus funds from one
branch to the other and maintain the liquidity properly
in order to meet the customer‘s credit requirements in
time. With the help of these branches it runs various
chit schemes of various denominations ranging from
daily or weekly chits to help small traders and daily
vendors. With the crisis in the micro finance sector,
chit fund companies are now eager to tap lower
income group households. Thus, over the past year,
chit funds of lower denomination, with a higher
number of participants, fuelled the growth of the
industry in the southern states.
As there are no guidelines on the investment
strategy of chit fund companies so they get freedom
to distribute the funds in any means. Particularly in
rural areas the chit fund companies grow rapidly.
There are many reasons stand in favor of such
growth. The chit fund companies invest the public
money for their luxury. They utilize the funds in film
making, costly car, flats and gold. The unregistered
chit funds invest the public money in many grey fields.
As a result the investors face a lot of difficulty at their
need time. Finally failing upon which them attempt
suicide. The chit fund companies design many
attractive schemes by showing a high rate of return
initially. Once an investors cut in their trap they start
exploiting. For instance, Astha International designed
a scheme in which an investor has to invest Rs.500
per month for five years and after completion the
th
return amount after 6 year will be Rs 50,000/-. If we
will see the rate of return is approximately 70%. The
rural investors blindly put their hard earned money
without taking a second thought. After completion of
th
4 year the company declared that the money
deposited in that scheme has been shifted to another
scheme where the return rate will be little high and the
collection month from the investors has been
increased for next 4 years. This example clearly
shows the fraud as well as the means how the chit
funds keep the investors in dark.
The future of the registered Chit fund
companies will be affected by the frauds made by the
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unregistered chit funds. The deposit volumes and the
membership volume will be reduced. The continuity of
the unregistered chit funds depend on the regulations
which are going to be formulated by The Securities
and Exchange Board of India as well by the
respective state Govt. The unregistered chit funds
which will rectify their mistakes by compensating the
investors without any hesitation may survive. The
registered chit funds following the guidelines will
survive and continue in the business. The money
utilization policy and the products of the chit fund
companies must be verified by the financial regulators
to provide a reliable financial assistance to the need
people of the society. From time to time, the financial
world has been rocked by stings involving multi-level
marketing companies, art funds, time-sharing
schemes and, maybe one day, a Bernard Madoffinspired Ponzi schemes.
List of Bogus Chit Fund Companies (Not in order
of fraud.some states in notice)
West Bengal
Odisha
Tamilnadu
Delhi
M/s. Saradha
Seashore
M/s
M/s
Speakasia
Construction
Group
Unipay 2U
Online Pte.
s Company
Marketing
(Unregistered)
Pvt. Ltd.
Pvt. Ltd.
M/s. Rose
Astha
M/s Unipay
M/s. Basil
Valley Real International
Creative
International
Estates
Pvt Ltd
Business
Ltd.
Construction
Pvt. Ltd.
s Ltd.
M/s. Modern Artha Tatwa M/s Unipay M/s. Vamshi
Investment
Group
2U
Chemicals
Traders Pvt.
Production
Ltd.
Ltd.
Pvt. Ltd.
M/s. Golden
Green Ray
M/s.
M/s.
Life Agro
International Goldquest
Appeline
India Ltd.
Ltd.
International Cosmetics &
Pvt. Ltd.
Toiletries
Ltd.
M/s. Happy
Swastik
M/s.
M/s. Basil
Life Realty
India
Questnet
Express Ltd.
(India) Ltd.
Enterprises
India Pvt.
Ltd.
According to the Ministry of Corporate Affairs
there are 4276 registered chit funds are operating in
the country out of which not a single chit fund
company of Odisha is registered. The highest number
of chit fund companies belong to West Bengal. In
odisha besides the above companies, some are
Mideast, Sri Gayatri, Sunraj, SLB, Specimen, Swastik
India, Sai Kishore, Vista Credit, Evos, Rajiv Gandhi
Memorial Multistate, Green India, Flourish India, Rose
Vally, Utkal Multistate and Jansahyog Sahkari Credit
Society, Microfinance. But data suggests that despite
laws prohibiting them, unregistered chit funds, which
operate among members of informal networks such
as relatives, friends or work colleagues, outnumber
registered chit funds by a wide margin. This poses
several risks to such chit fund members who may find
themselves being short-changed and without
adequate or timely legal recourse. ―Be safe than
Sorry‖ should be followed sincerely when we plan to
invest in chit funds.
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The lack of Government concentration on chit
fund business is effecting the growth and reputation of
the business. Due to Government‘s negligence many
small chit funds sprouting all over the state and
misusing the subscriber‘s funds. Some of these
companies are pooling the money and winding up
without any notice to subscribers, because of these
companies entire industry is under question. Not only
new chit funds but also very well established chit fund
companies having a good track record of more than
twenty years are also defaulting and deceiving their
customers by absconding with the money of the
subscribers. Crores of rupees are still unrecovered by
these companies. These companies stood as
obstacles in the smooth running of the chit funds.
If we plan to join a chit fund, it‘s best to keep off
the unregistered ones and stick with registered
players of good repute. A list of registered chit funds
is available on the Web site of the Ministry of
Corporate Affairs. Make enquiries about the chit
fund‘s track record. With chit fund companies being
unlisted, there may be little information about them in
the public domain.
Importantly, be sure about your financial ability
to stay the whole course, else the penalties and
interest charges, and security encashment could burn
a hole in your pocket. The loss of face will add salt to
injury.
Objective
The chit fund scheme, floated by the West
Bengal-based Saradha Group, has been in the news
recently for allegedly mopping up close to Rs 1,200
crore through its bogus operations, duping gullible
investors. Odisha has a much more 'consistent' record
when it comes to rolling out the red carpet for bogus,
fly-by-night chit fund companies, which lure the
gullible small investors promising the moon before
vanishing into thin air. At last the punishment goes to
the investors causing loss of life. In light of the rising
incidents of unregulated collective investment
schemes (CIS) going bust leading to huge losses to
the public at large, the market watchdog Securities
and Exchange Board of India (Sebi) has proposed a
separate regulator to control chit funds and nidhis.
The objective of this study is to lighten the
possible reasons of chit fund frauds which are
happened to the investors of different parts of our
state and to suggest possible solutions for that. The
objective is
1. To study the reasons of growth of Chit funds in
rural areas as compared to urban areas.
2. To understand the financial needs of poor
households and also to determine to what extent
their financial needs are met by chit funds.
3. To study the financial investment as well return
policy of the unregistered chit fund companies
4. To study the state rules and SEBI guidelines to
protect the investors fund from unregistered chit
funds.
Hypothesis
Inadequate banking facility and lack of
financial literacy opens the opportunity for chit
fund investment.
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allows to access cash when needed. Chit fund model
is an easy and innovative method of access to finance
for the low income households. It caters to the needs
of different sections of the society, mainly in the
income generating households. Chit schemes have
traditionally been generic, differentiating only in value
and duration. The need for customization of products,
to address varied requirements of chit members, is
evident. Chit funds, an indigenous savings and credit
mechanism, are prevalent in many regions of the
country. The flexibility offered by these funds to
borrow and to save without much paperwork has
contributed to its popularity. Businessmen too use chit
funds to meet their funding needs quickly. There is
more risk in investing in unregistered chit funds than
registered chit funds because the unregistered chit
funds do not come under the rules of the chit fund act
1982. They don‘t face the audit process as a result
the chances of misappropriation is more. The chit
fund industry is very prominent in five states of our
country viz- Tamil Nadu, Karnatak, Andhra Pradesh,
Delhi & Kerla. Now Odisha is not far behind the list.
Scenario of Chit Funds (Odisha)
Last year (2013), the frauds by so many chit
fund companies of odisha, which is unbelievable
came into the notice of State Govt. The Saradha Chit
fund fraud in Balasore unlock the log of chit fund
scams. After wards the Odisha Govt ordered probe
into the functioning of 15 renowned chit fund
companies. They are AT Group, Mideast, Sri Gayatri,
Sunraj, SLB, Specimen, Swastik India, Sai Kishore,
Vista Credit, Evos, Rajiv Gandhi Memorial Multistate,
Green India, Utkal Multistate and Jansahyog Sahkari
Credit
Society,
Microfinance.
Fifteen
teams
comprising two members each have been formed to
conduct detailed inspection about the firms( on the
functioning and financial irregularities). The teams will
also look into the money deposit schemes run by the
companies. The Economic Offences Wing of CB,
Odisha has sealed a 3,000 sqft guest house owned
by Seashore Group. The Commissionerate Police on
Monday had unearthed Artha Tatwa group-owned
properties worth Rs 130 crore.
Such companies grow due to the massive
collections they made from the rural areas. They
opened their branch offices in rural areas of all parts
of Odisha with high salaried collection agents. The
company appoints local agents which works as a key
point to convince the investors of their locality. As a
result the funds came to the company in one way
format by the agents for a fixed period. In the mean
time these chit companies get ample of time to utilize
the funds in different ways.
Saradha group promoter Sudipta Sen claimed
to have paid Rs 3 crore as ‗protection money‘ for his
Odisha operations. The Director of AT group Pradip
Sethi claimed that he has paid a huge amount to
politicians of State. While the Seashore group, the
biggest of them all, is widely believed to be a front for
Odisha Jan Morcha leader Pyari Mohan Mohapatra,
Pradip Sethy of the AT group is said to have gifted
expensive cars and apartments to influential ruling
party politicians. The CMD of Seashore Group Mr P.
Dash was a lecturer in a private college till a few
years ago. He started his operations under the
Seashore banner only in 2005 and built up an empire
Poor administration and loose SEBI guidelines
give opportunity for growth of Chit fund
companies.
Scenario of Chit Funds ( INDIA)
After the crisis in the MFI sector especially in
Andhra Pradesh, investment opportunities in NBFCs
(Non-Banking Finance Companies) have shrunk.
Investors are looking at alternative investment options
and a chit fund is one better option of investment
though the returns may not be as alluring as the MFI
sector. The southern states of Kerala, Tamilnadu, and
Andhra Pradesh, where the MFI crisis got
precipitated, account for 1/3rd of the chit fund industry
in India. The total size of the industry in the country is
estimated at 45,000 crore. The total number of
registered companies in the country is 40,000 and the
unregistered sector is 100 times bigger than the
registered one. The industry grew around 20 Per cent
last year, against a usual growth of 15-20 per cent.
Typically, these companies cater to middle-income
group clients, due to the high cost of operations and
cap on revenue. Chit Funds mobilize huge amounts of
small savings, and in return allow members to have
access in the form of loans to lump sum amount of
money that they would often not be able to get from
traditional banks. Easy accessibility and flexibility are
important aspects of this form of financing. Compared
to banks, Chit Funds require less documentation, are
more flexible about collateral, and allows to determine
own interest rate (within the constraints of a given chit
scheme). A country like India, which is most
predominantly agricultural country, and is being
industrializing itself, the trade, communications and
transport needs of the country are increasing on a
massive scale. This situation increased the credit
needs of the country. The organized banking sector
being limiting its credit to certain types of business
and under severe restrictions and conditions to extend
credit, the credit needs of various sectors is being met
on a large scale by the non-banking sector of the
economy. Even after the nationalization of the
commercial banks and enormous branch expansion
the credit needs of the vendors, petty trades, poor
agriculturists and the very poor sections of the
economy, who need credit for a very short period of
time varies from a day to a week or a month, are not
met properly by the commercial banks. This untapped
segment of the credit needs of the country and also a
part of the credit needs of industry and trade are met
by the unorganized and individual money lending
facilities available in the country. The Governments
credit squeezing policies to control inflation and
demand increased the demand for money through
unorganized sector. The unorganized and the
individual money-lending facilities supplement the
institutional credit in the economy. The role of nonbanking finance companies and chit fund companies
has been increasing in serving the credit needs of the
middle class and poor rural segment of the economy.
Furthermore, there is no need to determine upfront
whether funds are used for saving or borrowing. This
is a salient feature of chit funds as it not only puts in
place a disciplined saving mechanism, but it also
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that has been estimated to be worth over Rs.1,000
crore in just seven years. There is reason to believe
the role of the politicians in the growth of such
companies.
Shubhranshu Lenka, the state head of the
Surat-based Astha International who was motivated
the people by showing dreams in air. According to a
reliable source in the Crime Branch, Sethy of the AT
group has named at least seven media persons as
having received amounts ranging from Rs 5 lakh to
Rs 25 lakh from him to buy their silence. Over 200
such companies, big and small, have already been
identified at last count, their cumulative ‗turnover‘
touching Rs 20, 000 crore as per one estimate. Green
Ray International Limited (GRIL), promoted by Mir
Sahiruddin of Balasore, alone has reportedly
mobilised deposits of over Rs 2, 000 crore from
gullible people spread across several states. The
company, which had forayed into various sectors, had
roped in cricketer Irfan Pathan as the brand
ambassador for its apparel division and got the then
Health Minister Prasanna Acharya, who is now the
Finance Minister, to inaugurate its pharmaceutical
division. The ongoing investigation has also brought
to the fore the lavish lifestyle the chit fund Czars used
to lead before the crackdown began. A host of BMWs,
Jaguars and Mercedes Benzs have been seized and
luxury villas and farmhouses sealed by the police.
Some of them have been found to have invested their
ill-gotten money in the Odia film industry. Narayan
Chandra Nayak, the promoter of Umamani Creations
which has duped investors of at least Rs 50 crore with
promise of land in Bhubaneswar, has produced two
films – ‗Prema Rogi‘ and ‗Prema Adhei Akshara‘. Chit
fund companies like Saipragati went bust in
November last year after making a cool Rs 500 crore
in Odisha. No wonder almost every major chit fund
company with its headquarters in Kolkata has
operations in the state -- Saradha and Rose Valley
being the better known ones. Saradha alone has
raked in Rs 50 crore from investors in Balasore—
which, for reasons that remain to be investigated, has
emerged as the chit fund capital of Odisha—and Rs
15 crore in Puri.
In the wake of the current spotlight on the chit
fund business, the finance department of the Odisha
government has drawn up a list of about 20
companies which have operations in the state.The
Economic Offences Wing (EOW) began tightening the
screws around it in the wake of the melt down of
Saradha.
Sectors like real estate, agriculture (it even
signed a MoU with the state-owned Agriculture
Promotion and Investment Corporation of Odisha
Limited for food processing), insurance, IT, telecom,
retail trade, FMCG, education, hospitality, transport,
cooperatives, tourism, healthcare, entertainment
and—perhaps inevitably—media are chosen by the
chit fund companies as a source of investment.
The Orissa Self Help Cooperative Act framed in 2001
by the BJD government was thought as a reformist
law that would boost the cooperative movement in the
state. Till March 31 last year, 1,634 self-help
cooperatives were registered with Registrar of
Cooperative Societies of Orissa. Of them, 979 were
credit and multipurpose self help cooperative
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societies, which raised money from public with
assurance of massive returns in a short time. But
most of these cooperatives have turned out to be
huge scams running away with the depositors' money.
In the wake of the post-Saradha churning, the Odisha
government is now planning a series of measures to
protect the interests of the investors. Among them are
strengthening the EOW of Crime Branch, expediting
Presidential assent to the Odisha Protection of
Interests of Depositors (in financial establishments)
Bill passed by the Assembly back in December, 2011
and requisitioning the services of officers of Reserve
Bank of India (RBI) and Securities and Exchange
Board of India (SEBI) officials to detect cases of fraud.
Analysis
We find that the money circulated in the
registered chit fund industry ranges from 10 per cent
to 50 per cent of bank finance when compared to the
total deposits and credits in the bank. The number of
chit schemes registered has been reducing over the
years. The average percentage change in the number
of schemes registered from 2003 to 2006 is
approximately a negative 10 per cent. While the
number of schemes has reduced, the total value of
registered chit schemes increased by approximately
13 per cent from 2003 to 2006. Our survey of the chit
fund members shows that as much as 72 per cent of
the members participate in chit funds for saving.
Additionally, 96 per cent of the current and noncurrent chit fund members think that chit funds are
safe. Majority of the current and non-current chit fund
members belong to low-income households. Our
study
also
suggests
that
the
institutional
arrangements which govern the functioning of the chit
scheme that have emerged seem to serve the interest
of all participants irrespective of their socio-economic
status. Perhaps, this could explain why this industry
has survived for such a long period of time.
Our findings point to the fact that though chit
funds are an important source of finance for small
businesses and low-income households in India, there
has been a general exodus of low value chit schemes
from the registered chit fund market. This is mainly
because registered chit funds find it less lucrative to
serve the poor due to the increased cost of operating
such schemes imposed by the regulators. We find
that the chit fund industry addresses the savings
needs of people, is considered very safe and also
offers loans at lower interest rates than
moneylenders.
As chit funds do not form part of collective
investment schemes, SEBI cannot systematically
regulate such activities in accordance with the CIS
Regulations.
The present case drives home the point that
while we have a robust legal and regulatory
machinery for administering CIS or, for that matter,
chit funds, we must ensure that the powers given to
appropriate authorities have the necessary ‗bite‘ to
ensure enforcement and prosecution under applicable
laws.
SEBI chairman U K Sinha told that there's a
need for separate regulator for chit funds and nidhis.
any kind of scheme that requires raising funds from
the public, irrespective of the number, should be
approved and regulated by the regulator.
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In India, where banking penetration is still very low (40
per cent of the households still remain unbanked), chit
funds have been one of the major means of
multiplying money, especially in the rural parts of the
country.
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7.
Audit programs and supervision by the Income
Tax Dept is essential for such companies.
8. A chit fund grievance cell must be initiated in
each District of Odisha By Economic Offence
wing or by the Government.
9. SEBI must declare the names of Registered Chit
funds which are safe for the investors.
10. Chit fund institutions may be prohibited from
conducting any other type of business except
chit business or granting of loans to subscribers
against their paid up subscriptions.
Findings
The researcher has analyzed the chit fund
companies activities in the state of Odisha. As there is
no concrete data available regarding the financial
policy of the chit funds due to the ongoing
investigation so the Hypothesis taken above could not
be tested. However the information captured above
are analyzed and summarized as below.
District administration has no control over the
operating of chit fund companies.
The rural investors put their heard earned money
due to insufficient knowledge about such
companies and for high rate of return in short
time.
It is seen educated and salaried individuals also
invest in chit funds only because of high and
quick return on investment.
Lack of Banking facility and poor financial
assistance to rural people are also main reasons.
There is no clear instruction from the state
financial secretary to the district administration to
enquiry or to report about such companies.
The involvement of politicians, renowned persons
at the inaugural function of such companies
drizzle flower on the road of success of such
fraud companies.
The role of the local representatives of such chit
fund companies must be checked.
SEBI must strengthen the chit fund act and
guidelines regarding fund utilization policy,
financial products of chit fund companies, audit
process and many important aspects of such
companies.
Absence of Odisha chit fund Act and absence of
state chit legislation are also important factors.
Huge communication gap between the investors
and SEBI
Recommendations
After a thorough study about the activities of
chit fund companies and it‘s effect on the rural
innocent and needy investors in Odisha the following
suggestions concluded.
1. Adequate awareness programs must be initiated
by the State Govt. in collaboration with SEBI
through district administration in rural areas
regarding the lucrative offers of chit fund
companies.
2. Strict rules must be made for the administrative
personnel on attending public interactive
programs initiated by the chit fund companies in
their locality.
3. Enhancement in banking facility and easy
financing process for the rural people
4. The unemployed educated youths must be
educated about the registered and unregistered
chit fund operation.
5. SEBI should initiate a Help Line to assist the
gullible investors.
6. Property attachment act should be implemented
quickly.
11. Chit fund companies should obtain the prior
approval of the Director of Chits within whose
jurisdiction their registered offices are situated.
The Director of Chits should take certain criteria
into account before granting permission for the
opening of offices. Unincorporated bodies
should not be allowed to conduct business at
more than one place.
12. The duration of chits should not ordinarily
exceed five years; but chits of a longer duration
up to ten years may be started in very special
cases only by chit fund companies/banks with
the prior approval of the State Government
concerned which should take into account
factors such as the financial position and
methods of operation of the company in
question,
interests
of
the
prospective
subscribers, requirements, as to security, etc.
13. Ceiling in respect of the aggregate amount of
chits that may be conducted at any point of time:
The aggregate amount of chits conducted by a
chit fund company at any point of time may not
exceed 50 per cent of the net worth of company,
i.e.; the paid up capital plus free reserves less
the balance of accumulated loss and other
intangible assets such as deferred revenue
expenditure and goodwill, if any.
14. The central chit fund act must be implemented
in every state. According to this act a person
who desires to set up a chit fund company
needs to deposit 100 per cent security at the
time of registration of the chit group with the
registrar of chits, whereas under the state chit
act one requires to deposit only 50 per cent.
15. The formal paper work in Banks and registered
chit fund companies delays the financing facility
to the needy customers as a result they prefer
unregistered chit funds.
Conclusion
Lots of unregistered chit fund companies
operating without any control by the Government.
Because of these unregistered chit funds, Registered
companies stopped operating small ticket schemes.
Another reason that the established registered
companies away from small value chits is high
operating costs (rent of the office building, salaries to
the employees, stationery, stamp duties and power).
Because of this reason low income people
approaching their neighborhood unregistered chit
funds, where accessibility of money is even easier but
very risky. Keeping the credit needs of the low income
people, Government should take an effective action or
pass a rule to protect the interests of the poor and
safe guard their money from the hands of these
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foremen. The Government should provide the
required facilities in the form of subsidy to the industry
to conduct small value chits and encourage the chit
fund industry which is so far working independently
without Government‘s support.
Reference
1. Chit Funds, the evolution, operational scenario,
Role and Regulatory Framework
2. Chit Funds - A boon to small Enterprises By
Preethi Rao (Research Associate of Institute of
Financial Management and Research)
3. The co-operative movement in Odisha
4. Financial Sector in India, Regulation and Reforms
5. The Orissa Self Help Act 2001
6. Odisha Chit Fund Scenario ( Times of India)
7. 'Don't confuse 'Ponzi schemes' with chit funds'
Times of India May-2013
8. SFIO recommends body to curb fraudulent chit
funds, MLMs (Multi Level Marketing Scheme)
The Economic Times - April 2013
9. Odisha Chit Fund Scam – The Hindu – Sep 2013
10. Orissa chit fund scam: Investigation panel gets 7
lakh petitions The Financial Express – Nov 2013
11. Odisha Chit Fund Scam – www.nuaodisha.com
36
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SHRINKHALA : VOL-1 * ISSUE-9*MAY-2014
Financial Regulation in a Changing World
Regulating the Unregulated
Abstract
The recent Chit Fund fiasco in West Bengal has not only pushed the
panic button for the Indian Investors, but also opened the Pandora‘s Box
of our corrupt system and the state of awareness of the State
Government about their control on such scams. This is a case in which
all the three parties are to be blamed equally – the Investors, the System
or the Government and the investment Agencies. Though the issue of
cheating and fraud came to light because of Saradha fiasco in West
Bengal, Odisha is not far behind in any sense. "Chit funds in India are
governed by the Chit Funds Act, 1982. Under this Act, the chit fund
businesses can be registered and regulated only by the respective State
Governments". After such clarification from the Centre the affected
states are now trying to revamp the wound of ill fated investors of their
states. No one is giving a fair solution to prevent the chit fund scams.
Also no one is trying to find out the root cause of such scams. As a result
the investors are in dark about the refund of their funds. It is going to be
treated as a combined failure of state as well as country. Expectation of
easy money return in short time, fake success stories by the agents of
such companies motivate the illiterate rural people to invest in the chit
funds. The poor literacy in rural areas gives a wide dimension for the
fraud chit fund companies for growth. No investor is interested to know
about the strategy of the company behind such attractive offers.
Rasananda Mohanty
Research Scholar,
Deptt. of Commerce
Ravenshaw University
Cuttack, Odisha
Tushar Kant Pany
Reader
School of Commerce &
Management Studies,
Ravenshaw University,
Cuttack, Odisha
Keywords: investment, compensate, stringent regulatory, administration
Introduction
Now many questions come to the discussion table when everything
is lost. Questions like why such scams are not identified from the beginning
stage, why the administration is not taking any action to prevent such
scams, why state Govt. will not compensate the investors, what will be the
future of the money invested, why the growth of chit fund companies is not
being restricted and many more.
So it is the time to raise voice against such scams. We must try to
find out the root of such cheats. We should try to aware ourselves about
such fraudulent offers. Strong administration and systematic rule can be a
solution to melt down such scams. Strong awareness programs must be
initiated by the Government for a fair investment for the investors. The
Govt. should design a stringent regulatory mechanism to control activities
of mushrooming of chit funds, many of which dupe investors of their life's
savings.
The role of SEBI and RBI must be redefined to monitor the activities of chit
fund companies. The chit fund companies operated in breach of Company
Deposit Rules, 1975 which prohibit all companies (except public sector
undertakings) from accepting deposits which are unsecured instruments
(debentures or otherwise) for more than 10% of their net worth. RBI must
come up with an adequate solution to protect the investors from the chit
fund companies. The regulation of the Chit Fund industry was put in place
by the Government of India to address the problem of misuse of informal
Chit Funds by unscrupulous promoters and founders running away with the
participants‟ funds, leaving the members with little recourse to retrieve their
money back.
Literature Review
Chit Funds…Past, Present & Future…
A Chit fund is a kind of savings scheme practiced in India. Chit funds
are the Indian equivalent of the Rotating Savings and Credit Associations
(ROSCA) that are famous throughout the world. ROSCAs are a means to
―save and borrow‖ simultaneously. It is considered one of the best
instruments to cater to the needs of the poor. It enables poor people to
convert their small savings into lump sums. The concept of chit funds
originated more than 1000 years ago. Chit funds are savings schemes
under which a person enters into an agreement with a specified number of
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persons who agree to subscribe a certain sum of
money over regular installments for a certain period in
return for interest and lends money to those wanting
to purchase property, etc. On the other hand, nidhis
are restricted to smaller groups and accept deposits
and lend money only to member-borrowers.
According to Primitive civilizations, a book written by
Edith Jemima Simcox, the ‗Malabar Kuri‘ system
existed from ancient Dravidian times and is somewhat
similar to the systems in China. In China it developed
to what is popularly known today as the Chinese
lottery. ―The concept of Chit funds came into being in
the 1800‘s when Raja Rama varma, ruler of erstwhile
Cochin State gave a loan to a Syrian trader, keeping a
certain portion of it to himself for administrative and
other expenses. Later, to manage the increasing
number of those seeking loans, he ordered a cast of
lots and gave the accumulated amount to those who
drew the lot on the principle of equity.
A Chit fund company means a company
managing, conducting or supervising, as foremen,
agent or in any other capacity, chits as defined in
Section 2 of the Chit Funds Act, 1982. According to
Section 2(b) of the Chit Fund Act, 1982, "Chit means
a transaction whether called chit, chit fund, chitty,
kuree or by any other name by or under which a
person enters into an agreement with a specified of
persons that every one of them shall subscribe a
certain sum of money (or a certain quantity of grain
instead) by way of periodical installments over a
definite period and that each such subscriber shall, in
his turn, as determined by lot or by auction or by
tender or in such other manner as may be specified in
the chit agreement, be entitled to the prize amount".
They have served as a medium of saving for
many people. Chit fund is a typical indigenous
financial institution peculiar to South India, particularly
Andhra Pradesh, Tamil Nadu and Kerala. The
progenitor of chit funds in Tamil Nadu is known as
Moyy Murai. The term Moyy means call money pooled
and Murai means custom. Under this system, a group
of persons in a village or locality, known to each other
joined together to pool their resources to meet the
need of an individual of the group. There were some
well-defined needs such as celebrating marriage,
buying of land, building of houses and purchasing of
cattle that were prescribed under the system. It was a
Sahaya-Nidhi, with a strong element of co-operative
spirit. In course of time, the term Moyy was replaced
by the term chit or olai (palm leaf), which was the
notice of demand for payment of a member‘s
contribution to the pool. Later the names of the
members of the group were written on chits or small
pieces of paper or palm leaf, rolled up and shuffled to
pick out the person to whom the amount of fund was
to be given. That was the origin of the chit fund. Chit
funds resemble co-operative credit societies in some
respects. Both co-operative credit societies and chit
funds work on the same principles of self-help and
mutual help. The membership is voluntary and
members pool their resources for mutual benefit in
both the organizations. In many respects both the
organizations are different. Co-operatives have been
sponsored by the Government and are given financial
assistance, directly as well as through Reserve Bank.
Co-operatives also enjoy tax benefits and
SHRINKHALA : VOL-1 * ISSUE-9*MAY-2014
concessions in the matter of stamp duty. Chit funds
do not receive any special assistance from the
Government, but are tending to be regulated in an
Chit funds grew at a time when banking and credit
facilities were inadequate and people in general had
to rely to a large measure on indigenous sources for
their many productive and consumption needs. Chit
funds have been meeting a part of the genuine credit
needs of the people, both in urban and rural areas.
In present scenario chit funds are identified as
Cheat Funds. The state Govt. has no defined
guidelines to start up a chit fund so any financial
sound group of people come together to start such
business. They start to serve the people as a pool of
saving with a commitment to help in their need time
but slowly they start gambling with the investors by
utilizing the fund for their own benefits. As the
borrowing aspect of the chit fund raised, it gave
momentum to the expansion of the chit fund business
and a new class of institutional foremen developed.
The chit fund business now a days became a modern
business serving the credit needs of the all categories
of rural as well as urban people with branches spread
all over the country. Chit fund companies pool the
resources by diverting the surplus funds from one
branch to the other and maintain the liquidity properly
in order to meet the customer‘s credit requirements in
time. With the help of these branches it runs various
chit schemes of various denominations ranging from
daily or weekly chits to help small traders and daily
vendors. With the crisis in the micro finance sector,
chit fund companies are now eager to tap lower
income group households. Thus, over the past year,
chit funds of lower denomination, with a higher
number of participants, fuelled the growth of the
industry in the southern states.
As there are no guidelines on the investment
strategy of chit fund companies so they get freedom
to distribute the funds in any means. Particularly in
rural areas the chit fund companies grow rapidly.
There are many reasons stand in favor of such
growth. The chit fund companies invest the public
money for their luxury. They utilize the funds in film
making, costly car, flats and gold. The unregistered
chit funds invest the public money in many grey fields.
As a result the investors face a lot of difficulty at their
need time. Finally failing upon which them attempt
suicide. The chit fund companies design many
attractive schemes by showing a high rate of return
initially. Once an investors cut in their trap they start
exploiting. For instance, Astha International designed
a scheme in which an investor has to invest Rs.500
per month for five years and after completion the
th
return amount after 6 year will be Rs 50,000/-. If we
will see the rate of return is approximately 70%. The
rural investors blindly put their hard earned money
without taking a second thought. After completion of
th
4 year the company declared that the money
deposited in that scheme has been shifted to another
scheme where the return rate will be little high and the
collection month from the investors has been
increased for next 4 years. This example clearly
shows the fraud as well as the means how the chit
funds keep the investors in dark.
The future of the registered Chit fund
companies will be affected by the frauds made by the
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unregistered chit funds. The deposit volumes and the
membership volume will be reduced. The continuity of
the unregistered chit funds depend on the regulations
which are going to be formulated by The Securities
and Exchange Board of India as well by the
respective state Govt. The unregistered chit funds
which will rectify their mistakes by compensating the
investors without any hesitation may survive. The
registered chit funds following the guidelines will
survive and continue in the business. The money
utilization policy and the products of the chit fund
companies must be verified by the financial regulators
to provide a reliable financial assistance to the need
people of the society. From time to time, the financial
world has been rocked by stings involving multi-level
marketing companies, art funds, time-sharing
schemes and, maybe one day, a Bernard Madoffinspired Ponzi schemes.
List of Bogus Chit Fund Companies (Not in order
of fraud.some states in notice)
West Bengal
Odisha
Tamilnadu
Delhi
M/s. Saradha
Seashore
M/s
M/s
Speakasia
Construction
Group
Unipay 2U
Online Pte.
s Company
Marketing
(Unregistered)
Pvt. Ltd.
Pvt. Ltd.
M/s. Rose
Astha
M/s Unipay
M/s. Basil
Valley Real International
Creative
International
Estates
Pvt Ltd
Business
Ltd.
Construction
Pvt. Ltd.
s Ltd.
M/s. Modern Artha Tatwa M/s Unipay M/s. Vamshi
Investment
Group
2U
Chemicals
Traders Pvt.
Production
Ltd.
Ltd.
Pvt. Ltd.
M/s. Golden
Green Ray
M/s.
M/s.
Life Agro
International Goldquest
Appeline
India Ltd.
Ltd.
International Cosmetics &
Pvt. Ltd.
Toiletries
Ltd.
M/s. Happy
Swastik
M/s.
M/s. Basil
Life Realty
India
Questnet
Express Ltd.
(India) Ltd.
Enterprises
India Pvt.
Ltd.
According to the Ministry of Corporate Affairs
there are 4276 registered chit funds are operating in
the country out of which not a single chit fund
company of Odisha is registered. The highest number
of chit fund companies belong to West Bengal. In
odisha besides the above companies, some are
Mideast, Sri Gayatri, Sunraj, SLB, Specimen, Swastik
India, Sai Kishore, Vista Credit, Evos, Rajiv Gandhi
Memorial Multistate, Green India, Flourish India, Rose
Vally, Utkal Multistate and Jansahyog Sahkari Credit
Society, Microfinance. But data suggests that despite
laws prohibiting them, unregistered chit funds, which
operate among members of informal networks such
as relatives, friends or work colleagues, outnumber
registered chit funds by a wide margin. This poses
several risks to such chit fund members who may find
themselves being short-changed and without
adequate or timely legal recourse. ―Be safe than
Sorry‖ should be followed sincerely when we plan to
invest in chit funds.
SHRINKHALA : VOL-1 * ISSUE-9*MAY-2014
The lack of Government concentration on chit
fund business is effecting the growth and reputation of
the business. Due to Government‘s negligence many
small chit funds sprouting all over the state and
misusing the subscriber‘s funds. Some of these
companies are pooling the money and winding up
without any notice to subscribers, because of these
companies entire industry is under question. Not only
new chit funds but also very well established chit fund
companies having a good track record of more than
twenty years are also defaulting and deceiving their
customers by absconding with the money of the
subscribers. Crores of rupees are still unrecovered by
these companies. These companies stood as
obstacles in the smooth running of the chit funds.
If we plan to join a chit fund, it‘s best to keep off
the unregistered ones and stick with registered
players of good repute. A list of registered chit funds
is available on the Web site of the Ministry of
Corporate Affairs. Make enquiries about the chit
fund‘s track record. With chit fund companies being
unlisted, there may be little information about them in
the public domain.
Importantly, be sure about your financial ability
to stay the whole course, else the penalties and
interest charges, and security encashment could burn
a hole in your pocket. The loss of face will add salt to
injury.
Objective
The chit fund scheme, floated by the West
Bengal-based Saradha Group, has been in the news
recently for allegedly mopping up close to Rs 1,200
crore through its bogus operations, duping gullible
investors. Odisha has a much more 'consistent' record
when it comes to rolling out the red carpet for bogus,
fly-by-night chit fund companies, which lure the
gullible small investors promising the moon before
vanishing into thin air. At last the punishment goes to
the investors causing loss of life. In light of the rising
incidents of unregulated collective investment
schemes (CIS) going bust leading to huge losses to
the public at large, the market watchdog Securities
and Exchange Board of India (Sebi) has proposed a
separate regulator to control chit funds and nidhis.
The objective of this study is to lighten the
possible reasons of chit fund frauds which are
happened to the investors of different parts of our
state and to suggest possible solutions for that. The
objective is
1. To study the reasons of growth of Chit funds in
rural areas as compared to urban areas.
2. To understand the financial needs of poor
households and also to determine to what extent
their financial needs are met by chit funds.
3. To study the financial investment as well return
policy of the unregistered chit fund companies
4. To study the state rules and SEBI guidelines to
protect the investors fund from unregistered chit
funds.
Hypothesis
Inadequate banking facility and lack of
financial literacy opens the opportunity for chit
fund investment.
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allows to access cash when needed. Chit fund model
is an easy and innovative method of access to finance
for the low income households. It caters to the needs
of different sections of the society, mainly in the
income generating households. Chit schemes have
traditionally been generic, differentiating only in value
and duration. The need for customization of products,
to address varied requirements of chit members, is
evident. Chit funds, an indigenous savings and credit
mechanism, are prevalent in many regions of the
country. The flexibility offered by these funds to
borrow and to save without much paperwork has
contributed to its popularity. Businessmen too use chit
funds to meet their funding needs quickly. There is
more risk in investing in unregistered chit funds than
registered chit funds because the unregistered chit
funds do not come under the rules of the chit fund act
1982. They don‘t face the audit process as a result
the chances of misappropriation is more. The chit
fund industry is very prominent in five states of our
country viz- Tamil Nadu, Karnatak, Andhra Pradesh,
Delhi & Kerla. Now Odisha is not far behind the list.
Scenario of Chit Funds (Odisha)
Last year (2013), the frauds by so many chit
fund companies of odisha, which is unbelievable
came into the notice of State Govt. The Saradha Chit
fund fraud in Balasore unlock the log of chit fund
scams. After wards the Odisha Govt ordered probe
into the functioning of 15 renowned chit fund
companies. They are AT Group, Mideast, Sri Gayatri,
Sunraj, SLB, Specimen, Swastik India, Sai Kishore,
Vista Credit, Evos, Rajiv Gandhi Memorial Multistate,
Green India, Utkal Multistate and Jansahyog Sahkari
Credit
Society,
Microfinance.
Fifteen
teams
comprising two members each have been formed to
conduct detailed inspection about the firms( on the
functioning and financial irregularities). The teams will
also look into the money deposit schemes run by the
companies. The Economic Offences Wing of CB,
Odisha has sealed a 3,000 sqft guest house owned
by Seashore Group. The Commissionerate Police on
Monday had unearthed Artha Tatwa group-owned
properties worth Rs 130 crore.
Such companies grow due to the massive
collections they made from the rural areas. They
opened their branch offices in rural areas of all parts
of Odisha with high salaried collection agents. The
company appoints local agents which works as a key
point to convince the investors of their locality. As a
result the funds came to the company in one way
format by the agents for a fixed period. In the mean
time these chit companies get ample of time to utilize
the funds in different ways.
Saradha group promoter Sudipta Sen claimed
to have paid Rs 3 crore as ‗protection money‘ for his
Odisha operations. The Director of AT group Pradip
Sethi claimed that he has paid a huge amount to
politicians of State. While the Seashore group, the
biggest of them all, is widely believed to be a front for
Odisha Jan Morcha leader Pyari Mohan Mohapatra,
Pradip Sethy of the AT group is said to have gifted
expensive cars and apartments to influential ruling
party politicians. The CMD of Seashore Group Mr P.
Dash was a lecturer in a private college till a few
years ago. He started his operations under the
Seashore banner only in 2005 and built up an empire
Poor administration and loose SEBI guidelines
give opportunity for growth of Chit fund
companies.
Scenario of Chit Funds ( INDIA)
After the crisis in the MFI sector especially in
Andhra Pradesh, investment opportunities in NBFCs
(Non-Banking Finance Companies) have shrunk.
Investors are looking at alternative investment options
and a chit fund is one better option of investment
though the returns may not be as alluring as the MFI
sector. The southern states of Kerala, Tamilnadu, and
Andhra Pradesh, where the MFI crisis got
precipitated, account for 1/3rd of the chit fund industry
in India. The total size of the industry in the country is
estimated at 45,000 crore. The total number of
registered companies in the country is 40,000 and the
unregistered sector is 100 times bigger than the
registered one. The industry grew around 20 Per cent
last year, against a usual growth of 15-20 per cent.
Typically, these companies cater to middle-income
group clients, due to the high cost of operations and
cap on revenue. Chit Funds mobilize huge amounts of
small savings, and in return allow members to have
access in the form of loans to lump sum amount of
money that they would often not be able to get from
traditional banks. Easy accessibility and flexibility are
important aspects of this form of financing. Compared
to banks, Chit Funds require less documentation, are
more flexible about collateral, and allows to determine
own interest rate (within the constraints of a given chit
scheme). A country like India, which is most
predominantly agricultural country, and is being
industrializing itself, the trade, communications and
transport needs of the country are increasing on a
massive scale. This situation increased the credit
needs of the country. The organized banking sector
being limiting its credit to certain types of business
and under severe restrictions and conditions to extend
credit, the credit needs of various sectors is being met
on a large scale by the non-banking sector of the
economy. Even after the nationalization of the
commercial banks and enormous branch expansion
the credit needs of the vendors, petty trades, poor
agriculturists and the very poor sections of the
economy, who need credit for a very short period of
time varies from a day to a week or a month, are not
met properly by the commercial banks. This untapped
segment of the credit needs of the country and also a
part of the credit needs of industry and trade are met
by the unorganized and individual money lending
facilities available in the country. The Governments
credit squeezing policies to control inflation and
demand increased the demand for money through
unorganized sector. The unorganized and the
individual money-lending facilities supplement the
institutional credit in the economy. The role of nonbanking finance companies and chit fund companies
has been increasing in serving the credit needs of the
middle class and poor rural segment of the economy.
Furthermore, there is no need to determine upfront
whether funds are used for saving or borrowing. This
is a salient feature of chit funds as it not only puts in
place a disciplined saving mechanism, but it also
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that has been estimated to be worth over Rs.1,000
crore in just seven years. There is reason to believe
the role of the politicians in the growth of such
companies.
Shubhranshu Lenka, the state head of the
Surat-based Astha International who was motivated
the people by showing dreams in air. According to a
reliable source in the Crime Branch, Sethy of the AT
group has named at least seven media persons as
having received amounts ranging from Rs 5 lakh to
Rs 25 lakh from him to buy their silence. Over 200
such companies, big and small, have already been
identified at last count, their cumulative ‗turnover‘
touching Rs 20, 000 crore as per one estimate. Green
Ray International Limited (GRIL), promoted by Mir
Sahiruddin of Balasore, alone has reportedly
mobilised deposits of over Rs 2, 000 crore from
gullible people spread across several states. The
company, which had forayed into various sectors, had
roped in cricketer Irfan Pathan as the brand
ambassador for its apparel division and got the then
Health Minister Prasanna Acharya, who is now the
Finance Minister, to inaugurate its pharmaceutical
division. The ongoing investigation has also brought
to the fore the lavish lifestyle the chit fund Czars used
to lead before the crackdown began. A host of BMWs,
Jaguars and Mercedes Benzs have been seized and
luxury villas and farmhouses sealed by the police.
Some of them have been found to have invested their
ill-gotten money in the Odia film industry. Narayan
Chandra Nayak, the promoter of Umamani Creations
which has duped investors of at least Rs 50 crore with
promise of land in Bhubaneswar, has produced two
films – ‗Prema Rogi‘ and ‗Prema Adhei Akshara‘. Chit
fund companies like Saipragati went bust in
November last year after making a cool Rs 500 crore
in Odisha. No wonder almost every major chit fund
company with its headquarters in Kolkata has
operations in the state -- Saradha and Rose Valley
being the better known ones. Saradha alone has
raked in Rs 50 crore from investors in Balasore—
which, for reasons that remain to be investigated, has
emerged as the chit fund capital of Odisha—and Rs
15 crore in Puri.
In the wake of the current spotlight on the chit
fund business, the finance department of the Odisha
government has drawn up a list of about 20
companies which have operations in the state.The
Economic Offences Wing (EOW) began tightening the
screws around it in the wake of the melt down of
Saradha.
Sectors like real estate, agriculture (it even
signed a MoU with the state-owned Agriculture
Promotion and Investment Corporation of Odisha
Limited for food processing), insurance, IT, telecom,
retail trade, FMCG, education, hospitality, transport,
cooperatives, tourism, healthcare, entertainment
and—perhaps inevitably—media are chosen by the
chit fund companies as a source of investment.
The Orissa Self Help Cooperative Act framed in 2001
by the BJD government was thought as a reformist
law that would boost the cooperative movement in the
state. Till March 31 last year, 1,634 self-help
cooperatives were registered with Registrar of
Cooperative Societies of Orissa. Of them, 979 were
credit and multipurpose self help cooperative
SHRINKHALA : VOL-1 * ISSUE-9*MAY-2014
societies, which raised money from public with
assurance of massive returns in a short time. But
most of these cooperatives have turned out to be
huge scams running away with the depositors' money.
In the wake of the post-Saradha churning, the Odisha
government is now planning a series of measures to
protect the interests of the investors. Among them are
strengthening the EOW of Crime Branch, expediting
Presidential assent to the Odisha Protection of
Interests of Depositors (in financial establishments)
Bill passed by the Assembly back in December, 2011
and requisitioning the services of officers of Reserve
Bank of India (RBI) and Securities and Exchange
Board of India (SEBI) officials to detect cases of fraud.
Analysis
We find that the money circulated in the
registered chit fund industry ranges from 10 per cent
to 50 per cent of bank finance when compared to the
total deposits and credits in the bank. The number of
chit schemes registered has been reducing over the
years. The average percentage change in the number
of schemes registered from 2003 to 2006 is
approximately a negative 10 per cent. While the
number of schemes has reduced, the total value of
registered chit schemes increased by approximately
13 per cent from 2003 to 2006. Our survey of the chit
fund members shows that as much as 72 per cent of
the members participate in chit funds for saving.
Additionally, 96 per cent of the current and noncurrent chit fund members think that chit funds are
safe. Majority of the current and non-current chit fund
members belong to low-income households. Our
study
also
suggests
that
the
institutional
arrangements which govern the functioning of the chit
scheme that have emerged seem to serve the interest
of all participants irrespective of their socio-economic
status. Perhaps, this could explain why this industry
has survived for such a long period of time.
Our findings point to the fact that though chit
funds are an important source of finance for small
businesses and low-income households in India, there
has been a general exodus of low value chit schemes
from the registered chit fund market. This is mainly
because registered chit funds find it less lucrative to
serve the poor due to the increased cost of operating
such schemes imposed by the regulators. We find
that the chit fund industry addresses the savings
needs of people, is considered very safe and also
offers loans at lower interest rates than
moneylenders.
As chit funds do not form part of collective
investment schemes, SEBI cannot systematically
regulate such activities in accordance with the CIS
Regulations.
The present case drives home the point that
while we have a robust legal and regulatory
machinery for administering CIS or, for that matter,
chit funds, we must ensure that the powers given to
appropriate authorities have the necessary ‗bite‘ to
ensure enforcement and prosecution under applicable
laws.
SEBI chairman U K Sinha told that there's a
need for separate regulator for chit funds and nidhis.
any kind of scheme that requires raising funds from
the public, irrespective of the number, should be
approved and regulated by the regulator.
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In India, where banking penetration is still very low (40
per cent of the households still remain unbanked), chit
funds have been one of the major means of
multiplying money, especially in the rural parts of the
country.
SHRINKHALA : VOL-1 * ISSUE-9*MAY-2014
7.
Audit programs and supervision by the Income
Tax Dept is essential for such companies.
8. A chit fund grievance cell must be initiated in
each District of Odisha By Economic Offence
wing or by the Government.
9. SEBI must declare the names of Registered Chit
funds which are safe for the investors.
10. Chit fund institutions may be prohibited from
conducting any other type of business except
chit business or granting of loans to subscribers
against their paid up subscriptions.
Findings
The researcher has analyzed the chit fund
companies activities in the state of Odisha. As there is
no concrete data available regarding the financial
policy of the chit funds due to the ongoing
investigation so the Hypothesis taken above could not
be tested. However the information captured above
are analyzed and summarized as below.
District administration has no control over the
operating of chit fund companies.
The rural investors put their heard earned money
due to insufficient knowledge about such
companies and for high rate of return in short
time.
It is seen educated and salaried individuals also
invest in chit funds only because of high and
quick return on investment.
Lack of Banking facility and poor financial
assistance to rural people are also main reasons.
There is no clear instruction from the state
financial secretary to the district administration to
enquiry or to report about such companies.
The involvement of politicians, renowned persons
at the inaugural function of such companies
drizzle flower on the road of success of such
fraud companies.
The role of the local representatives of such chit
fund companies must be checked.
SEBI must strengthen the chit fund act and
guidelines regarding fund utilization policy,
financial products of chit fund companies, audit
process and many important aspects of such
companies.
Absence of Odisha chit fund Act and absence of
state chit legislation are also important factors.
Huge communication gap between the investors
and SEBI
Recommendations
After a thorough study about the activities of
chit fund companies and it‘s effect on the rural
innocent and needy investors in Odisha the following
suggestions concluded.
1. Adequate awareness programs must be initiated
by the State Govt. in collaboration with SEBI
through district administration in rural areas
regarding the lucrative offers of chit fund
companies.
2. Strict rules must be made for the administrative
personnel on attending public interactive
programs initiated by the chit fund companies in
their locality.
3. Enhancement in banking facility and easy
financing process for the rural people
4. The unemployed educated youths must be
educated about the registered and unregistered
chit fund operation.
5. SEBI should initiate a Help Line to assist the
gullible investors.
6. Property attachment act should be implemented
quickly.
11. Chit fund companies should obtain the prior
approval of the Director of Chits within whose
jurisdiction their registered offices are situated.
The Director of Chits should take certain criteria
into account before granting permission for the
opening of offices. Unincorporated bodies
should not be allowed to conduct business at
more than one place.
12. The duration of chits should not ordinarily
exceed five years; but chits of a longer duration
up to ten years may be started in very special
cases only by chit fund companies/banks with
the prior approval of the State Government
concerned which should take into account
factors such as the financial position and
methods of operation of the company in
question,
interests
of
the
prospective
subscribers, requirements, as to security, etc.
13. Ceiling in respect of the aggregate amount of
chits that may be conducted at any point of time:
The aggregate amount of chits conducted by a
chit fund company at any point of time may not
exceed 50 per cent of the net worth of company,
i.e.; the paid up capital plus free reserves less
the balance of accumulated loss and other
intangible assets such as deferred revenue
expenditure and goodwill, if any.
14. The central chit fund act must be implemented
in every state. According to this act a person
who desires to set up a chit fund company
needs to deposit 100 per cent security at the
time of registration of the chit group with the
registrar of chits, whereas under the state chit
act one requires to deposit only 50 per cent.
15. The formal paper work in Banks and registered
chit fund companies delays the financing facility
to the needy customers as a result they prefer
unregistered chit funds.
Conclusion
Lots of unregistered chit fund companies
operating without any control by the Government.
Because of these unregistered chit funds, Registered
companies stopped operating small ticket schemes.
Another reason that the established registered
companies away from small value chits is high
operating costs (rent of the office building, salaries to
the employees, stationery, stamp duties and power).
Because of this reason low income people
approaching their neighborhood unregistered chit
funds, where accessibility of money is even easier but
very risky. Keeping the credit needs of the low income
people, Government should take an effective action or
pass a rule to protect the interests of the poor and
safe guard their money from the hands of these
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foremen. The Government should provide the
required facilities in the form of subsidy to the industry
to conduct small value chits and encourage the chit
fund industry which is so far working independently
without Government‘s support.
Reference
1. Chit Funds, the evolution, operational scenario,
Role and Regulatory Framework
2. Chit Funds - A boon to small Enterprises By
Preethi Rao (Research Associate of Institute of
Financial Management and Research)
3. The co-operative movement in Odisha
4. Financial Sector in India, Regulation and Reforms
5. The Orissa Self Help Act 2001
6. Odisha Chit Fund Scenario ( Times of India)
7. 'Don't confuse 'Ponzi schemes' with chit funds'
Times of India May-2013
8. SFIO recommends body to curb fraudulent chit
funds, MLMs (Multi Level Marketing Scheme)
The Economic Times - April 2013
9. Odisha Chit Fund Scam – The Hindu – Sep 2013
10. Orissa chit fund scam: Investigation panel gets 7
lakh petitions The Financial Express – Nov 2013
11. Odisha Chit Fund Scam – www.nuaodisha.com
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