Basic Knowledge About Chit Fund Business
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"Chit" means
a transaction ( whether called chit fund, chit, kuri or by any other name),
by which the foreman enters into an agreement with a number of subscribers
that everyone of them shall subscribe a certain sum for a certain period and
each subscriber in his turn as determined by lot or by auction, shall be
entitled to a prized amount.
Example: 25 subscribers agree to
subscribe an amount of Rs.4,000/- for 25 months i.e. for a total chit value
of Rs.1,00,000/-, each subscriber will get his chit amount in his turn as
determined by draw of lot or by auction. During auction all non-prized
subscribers bid by allowing percentage of subscription to be forgone. The
highest bidder i.e. who allows maximum percentage to subscribers is given the
chit amount. The amount, foregone by the subscriber is distributed as dividend amongst all the subscribers in every draw, after deducting 5%
commission/remuneration to be paid to the foreman of the company. Maximum bid
is normally between 20% to 40% and the duration of chit is normally between
12 months to 50 months. In case there are more than one highest bidder in an
auction, then draw of lots is made and chit amount given to the successful
subscriber.
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Saradha
mess is not a 'chit fund' scam :
Saradha Realty is being
portrayed as a chit fund by some functionaries in West Bengal. Sections of the
local media have even gone as far as naming it "Saradha Chit Fund".
This is where Sherlock Holmes
steps in. In "Silver Blaze", Holmes took note of a curious incident
of a "dog that did nothing in the night time". In Saradha Realty,
there is an equally curious question to be noted - if a chit fund must
have a chit and if Saradha Realty is a chit fund then where is the chit?
There have been thousands of
financial transactions all right, with thousands of people of small means. But
that alone does not give Saradha Realty the character of a chit fund. Section
11 (1) of the Chit Funds Act expressly requires a person to use the words
"chit fund", "chitty" or "kuri" in the name, if he has to carry on
the chit fund business.
But the words "chit
funds" are not mentioned anywhere on Saradha's website, nor was the
company registered as a chit fund. So the natural question to ask is: why is
Saradha Realty being portrayed as a chit fund?
Let us attempt to define
Saradha Realty. This is necessary for the determination of the correct laws and
sections for charging the entity and its promoters and associates.
Otherwise, one could unwittingly
(or may be deliberately) give the accused legally valid wings to fly by
charging the company under the wrong law.
This is the stage to invoke
Russell. As he once correctly observed, "Everything is vague to a degree
you do not realise till you have tried to make it precise".
When we try to define Saradha
Realty, we are confronted with a penumbra of uncertainty surrounding the
situations that show themselves "capable of yielding un-plausible
conclusions". Let us examine this statement more carefully.
Saradha's tacky website makes
for an interesting read. It is one more group in India that sees itself as
"the paribar" (family) and
declares itself as a "modern day Kalpataru".
The website lists the group's
diversified activities as construction, realty, exports, tours and travel, hotels
and resorts, agro industries, education, financial management services,
printing and publication, print and electronic media and shopping malls.
Saradha Realty is described as a
"professionally managed company established in 2008 under the Company's Act
1956 at Kolkata", for "developing the available land resource and to
facilitate agriculture and alike activities and thus render services to Indian
citizens by way of scientific farming and cultivation". That by no means
is a chit fund activity, under the Chit Funds Act, 1982.
So if
Saradha Realty is not a chit fund, will making a brouhaha about chit funds help
in taking action against Saradha?
On April 23, the Securities
and Exchange Board of India (Sebi) passed an order against the company and its
promoters. The order describes Saradha Realty's modus
operandus, which confirms that it was indeed running an
unregistered collective investment scheme (CIS).
Sebi, besides initiating
prosecution proceedings, directed Saradha Realty to wind up the existing CIS
and gave it three months to refund the money.
Sebi said it would be referring
the matter to the state government and the local police to register
civil/criminal cases against the company and its directors and managers for
apparent offences of fraud and cheating. Sebi will also be writing to the
ministry of corporate affairs to initiate the winding up of Saradha Realty.
It is logical to conclude that,
quintessentially, Saradha Realty was a well-crafted Ponzi scheme, camouflaged
as a CIS that was illegal and unauthorised. Such schemes can flourish for some
time with aplomb - in this case for five years - freely raising money
in an unauthorised manner. Then the cycle broke, as is wont in such cases
resulting in an inevitable cataclysm.
It remains to be seen how
the mess is sorted out, for it should have an impact on similar schemes
operating in other states, too. Effective time-bound resolution can only occur
when the state authorities and the regulatory bodies concerned act in a
concerted manner, but meaningful actions must be rational and curative,
preventive and prophylactic.
As a curative measure, doling out
funds from the state coffers, may bring some succour to the thousands of people
who lost their money, provided it can be ensured that the money reaches the
right people. In the absence of reliable records of the names and addresses of
the contributors, this will require humongous effort and time.
Otherwise, a populist
announcement may turn sour in no time. The state government must also resolve
to replenish the state coffers with the sale of Saradha Realty's assets.
As of now, where the Saradha
money came from and where it went is a matter of juicy speculation. Its
recovery will involve, first, an assessment of the ownership of the assets of
Saradha Realty and their valuation valid in the eyes of the law. This could
well be an unending nightmare.
As a preventive measure, the
state authorities must ruthlessly go after all unauthorised and illegal
money-raising schemes by any entity, however well known. Being well known is no
assurance to the legitimacy of the entity's operations. The promoters of
Saradha Realty, too, were well known.
They and those who abetted them
must be punished. In doing so, it is important that the state government
assists and stands by the regulatory authorities. As in a burglary, the primary
focus should be on punishing the burglar and recovering the assets, instead of
hanging the security guard.
The third set of actions will be
prophylactic, designed to caution people against investing in unauthorised
schemes and to create awareness about the precautions that have to be taken
before investing.
This has to be done at periodic
intervals like the polio vaccine campaign. This, in fact, may turn out to be
the most effective step by the West Bengal government, rather than making a law
when there was nothing seriously lacking with the existing laws except its bad
enforcement. Hurried measures taken in angst and anger are usually unfocussed.
*The writer is a former Executive Director of the Securities and Exchange Board of India