Mumbai, April 30: Chit fund companies in India are up in arms and furious at being blackballed by the Saradha Realty ponzi schemes that went bust earlier this month.
The All India Association of Chit Funds — which claims to represent a sizable chunk of the 4,256 chit fund entities registered with the ministry of corporate affairs — has slammed the way everyone, including the Centre and the state governments, has dubbed the Bengal boondoggle as a “chit fund scam”.
“Who cares what a chit fund really is? But everyone has been quick to dub it a chit fund scam,” says T.S. Sivaramakrishnan, general secretary of the Delhi-based forum for chit funds.
Sivaramakrishnan labours the point. The rackets perpetrated by the Sharada Group actually go under the rubric “collective investment schemes (or CIS)” and are not really chit funds in the legal sense.
The semantic distinction between chit funds and CIS cuts at the root of how these funds operate and the way they are regulated.
The chit fund dates back to a time that pre-dates the evolution of banking itself. In other parts of the world, the chit fund system goes under the label of Rotating Savings and Credit Associations (ROCSA). In India, the chit funds are classified as miscellaneous non-banking financial institutions under the Reserve Bank of India Act, 1934. They are governed by the Chit Fund Act, 1982, which is administered by the respective state government.
“There is an office of the Registrar of Chit Funds in every state, which monitors these entities. The Calcutta registrar of chit funds is housed in the third floor of Writers’ Buildings,” says Sivaramakrishnan.
Data from the ministry of corporate affairs show that the country’s oldest chit fund — Puraswakam Santhatha Sangha Nidhi Ltd — is based in Chennai and was formed on June 6, 1879, almost 134 years ago. The funds were also known as “chitti” in the 19th and 20th centuries.
The collective investment scheme (CIS), however, is a different animal altogether. For starters, it is regulated by the capital market watchdog, the Securities and Exchange Board of India (Sebi).
Of the 15 powers of regulation granted to the market watchdog, section 11 (1)(c) of the Sebi Act spells out that “registering and regulating the working of …collective investment schemes” is one of its functions.
But the real clincher is that the Sebi Act itself says that “chit business as defined in clause (d) of the section 2 of the Chit Fund Act 1982” shall not be treated as a collective investment scheme.
But in the collective consciousness, the term “chit fund” trips off the tongue easily — and carries some foretaste of unsavouriness, which is why it is widely used to describe all kinds of Ponzi funds and multi-level marketing schemes.
Even the governments do not seem to be aware of these semantic distinctions. In fact, the Centre issued a press release on April 27 relating to the Saradha scam and titled it thus: “Various Central Government Agencies Take Action Against Alleged Illegal Raising of Funds by Some Chit Fund Companies in West Bengal and the Eastern Region.”
The 73 companies in Bengal that have come under the radar of Sebi and the Serious Fraud Investigation Office within the MCA are, however, unregistered collective investment schemes.
So, the chit funds now want to shake off the epithet itself because of the odium attached to it. And that is why they have proposed that the existing chit funds should be re-categorised as Fraternity Funds. The naming game is a throwback to the time in the early fifties when a number of mutual societies morphed into insurance companies.
But will chit funds be able to shake off the stigma by calling themselves Frat Funds?
