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Saradha, Rose Valley effect: Change in chit fund law to shield investors

In a chit fund scheme, individuals come together for a predetermined time period and contribute to a common pool at regular intervals.

Saradha scam, Rose valley scam, Ponzi schemes, chit funds, chit fund scams, chit fund, Finance minister, Finance ministry chit fund, CBI, India news, indian express news The Finance Ministry is amending the Chit Funds Act to limit participation to only “fraternity funds”. (File photo)

Moving to insulate small savers from ponzi schemes floated by firms such as Saradha and Rose Valley, the Finance Ministry is amending the Chit Funds Act to limit participation to only “fraternity funds”. It is also changing the 1982 law to allow e-auction of chit funds.

Definitions in sections 2 (b) and 11 (1) of the Act are being tightened to replace chits with “fraternity fund” — this will signify its inherent nature of being a borrowing and saving scheme, and not one that just takes deposits.

In a chit fund scheme, individuals come together for a predetermined time period and contribute to a common pool at regular intervals. Until the end of the scheme, the collected pool of money is loaned out internally through a bidding mechanism to the most deserving member.

Sources said the new “fraternity fund” nomenclature will distinguish its working from prize chits or marketing schemes that are barred under the Prize Chits and Money Circulation Schemes (Banning) Act.

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Under the law, chit funds cannot accept deposits and cannot offer other financial products or services. But companies have come under the scanner for luring small savers from rural areas under the garb of chit subscriptions. While Saradha took deposits from people to fund real estate schemes, Rose Valley peddled a holiday membership plan.

Last month, around the time the CBI started making arrests in the Rose Valley scam, the Finance Ministry moved a Cabinet note to introduce the Chit Funds (Amendment) Bill to “facilitate orderly growth of the sector and remove bottlenecks faced by the industry”.

Ushering technology, the Bill proposes to allow the two minimum required subscribers at any chit auction to join through “duly recorded video presence” as physical presence of subscribers towards the final stages of a scheme was not forthcoming.

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Presently, section 16 requires at least two subscribers to be physically present at the auction for the chit to be confirmed by the registrar.

In chit fund schemes, enforcement remains the primary responsibility of the state government. The draft Bill gives them more freedom to regulate such funds.

It has proposed that states be allowed to decide the aggregate amount of the chit fund that would come under the Act’s purview. At present, all chits with aggregate amount Rs 100 and below are exempted from provisions and penalties of the Act.

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“It is proposed to amend section 85 (b) to allow state governments, which administer the schemes, to prescribe this ceiling and to increase it from time to time,” sources said. Chit funds fall in the Concurrent List and states are free to issue their own law.

A new clause is being introduced to protect companies or individuals that act as foreman of the chit fund whereby the promoter would be allowed a right to goods, securities or any other assets of the borrower until the debt is repaid.

“Lien for dues would be permitted so that a set-off is allowed to the chit fund for subscribers who have already drawn funds,” sources said.

The draft amendment Bill also suggests raising the ceiling of the foreman’s commission to a maximum of seven per cent from current 5 per cent as the rate has remained static since 1982 while overheads and inflation have increased manifold.

The Bill, however, does not address a key concern raised by the Key Advisory Group in September 2013 which sought a provision for insurance coverage in case of default by the foreman so that the interest of the investors is protected.

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At present, there are around 30,000 registered businesses in India, generating a yearly turnover of Rs 35,000 crore. Non-registered chit fund businesses are estimated to be 100 times the size of those registered.

First published on: 06-01-2017 at 04:18:45 am
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