According to news reports, the Prime Minister recently chaired a meeting with ministers to discuss an alternative plan (“Plan B”) for the National Food Security Bill, 2011 (hereinafter “Bill”). The Bill is currently pending with the Standing Committee of Food, Consumer Affairs and Public Distribution. It seeks to deliver food and nutritional security by providing specific entitlements to certain groups. The alternative proposal aims to give greater flexibility to states and may bind the centre to a higher food subsidy burden than estimates provided in the Bill. It suggests changes to the classification of beneficiaries and the percentage of the national population to be covered by the Bill, among others. Classification of beneficiaries The Bill classifies the population into three groups: priority, general and excluded. Individuals in the priority and general groups would receive 7 kg and 3 kg of foodgrain per person per month respectively at subsidized prices. Plan B suggests doing away with the priority-general distinction. It classifies the population on the basis of 2 categories: included and excluded. Those entitled to benefits under the included category will receive a uniform entitlement of 5 kg per person per month. Coverage of population Experts have suggested that the Bill will extend entitlements to roughly 64% of the total population. Under the Bill, the central government is responsible for determining the percentage of people in each state who will be entitled to benefits under priority and general groups. Plan B suggests extending benefits to 67% of the total population (33% excluded), up from 64% in the Bill. The Ministry has outlined two options to figure out the number of people in each state that should be included within this 67%. The first option envisages a uniform exclusion of 33% in each state irrespective of their poverty level. The second option envisages exclusion of 33% of the national population, which would imply a different proportion excluded in each state depending on their level of prosperity. The Ministry has worked out a criterion to determine the proportion of the population to be included in each state. The criterion is pegged to a monthly per capita expenditure of Rs 1,215 in rural areas and Rs 1,502 in urban areas based on the 2009-10 NSSO survey. Thus, persons spending less than Rs 40 in rural areas and Rs 50 in urban areas per day will be entitled to foodgrains under the alternative being considered now. Financial estimates Newspaper reports have indicated that the revised proposal will add Rs 7,000 to Rs 10,000 crore per year to the current food subsidy estimate of Rs 1.1 lakh crore. According to some experts, the total cost of the Bill could range anywhere between Rs 2 lakh crore to Rs 3.5 lakh crore (see here and here).
These are challenging times for chit fund operators. A scam involving the Saradha group allegedly conning customers under the guise of a chit fund, has raised serious questions for the industry. With a reported 10,000 chit funds in the country handling over Rs 30,000 crore annually, chit fund proponents maintain that these funds are an important financial tool. The scam has also sparked responses from both the centre and states: the Finance Ministry, Ministry of Corporate Affairs and SEBI have all promised to act and the West Bengal Assembly has passed The West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013, with Odisha and Haryana considering similar legislation. What is a chit fund? A chit fund is a type of saving scheme where a specified number of subscribers contribute payments in instalment over a defined period. Each subscriber is entitled to a prize amount determined by lot, auction or tender depending on the nature of the chit fund. Typically the prize amount is the entire pool of contribution minus a discount which is redistributed to subscribers as a dividend. For example, consider an auction-type chit fund with 50 subscribers contributing Rs 100 every month. The monthly pool is Rs 5,000 and this is auctioned out every month. The winning bid, say Rs 1000, would be the discount and be distributed among the subscribers. The winning bidder would then receive Rs 4,000 (Rs 5,000 – 1,000) while the rest of subscribers would receive Rs 20 (1000/50). Winners cannot enter the auction again and will be liable for the monthly subscription as the process is repeated for the duration of the scheme. The company managing the chit fund (foreman) would retain a commission from the prize amount every month. Collectively, the subscribers to a chit fund are referred to as a chit group and a chit fund company may run many such groups. What are the laws governing chit funds? Classifying them as contracts, the Supreme Court has read chit funds as being part of the Concurrent List of the Indian Constitution; hence both the centre and state can frame legislation regarding chit funds. States like Tamil Nadu, Andhra Pradesh and Kerala had enacted legislation (e.g The Kerala Chitties Act, 1975 and The Tamil Nadu Chit Funds Act, 1961) for regulating chit funds. Chit Funds Act, 1982 In 1982, the Ministry of Finance enacted the Chit Funds Act to regulate the sector. Under the Act, the central government can choose to notify the Act in different states on different dates; if the Act is notified in a state, then the state act would be repealed[i]. States are responsible for notifying rules and have the power to exempt certain chit funds from the provisions of the Act. Last year the central government, notified the Act in Arunachal Pradesh, Gujarat, Haryana, Kerala and Nagaland. Under the Act, all chit funds require previous sanction from the state government. The capital requirement for establishing chit funds is Rs 1 lakh and at least 10% of profits should be transferred to a reserve fund. The amount of discount (i.e. the bid) is capped at 40% of the total chit fund value. States may appoint a Registrar who would be responsible for regulation, inspection and dispute settlement in the sector. Any grievances over decisions made by the Registrar can be subject to appeals directed to the state government. Chit fund managers are required to deposit the entire value of the chit fund (can be done in 50% cash and 50% bank guarantee) with the Registrar for the duration of the chit cycle. Prize Chits and Money Circulation Schemes (Banning) Act, 1978 The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 defines and prohibits any illegal chit fund schemes (e.g. schemes where auction winners are not liable to future payments). Again, the responsibility for enforcing the provisions of this Act lies with the state government. Reports suggest that the government is discussing amendments to this Bill in the wake of the chit fund scam. West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013 Last month the West Bengal Assembly passed the West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013. This was a direct response to the chit fund scam in West Bengal. While not regulating chit funds directly, the Act regulates and restricts financial establishments to curb any unscrupulous activity with regards to deposits. Chit funds are specifically included under the definition of deposits. The state government will appoint a competent authority to conduct investigations. What is the role of RBI and SEBI? The Reserve Bank of India (RBI) is the regulator for banks and other non banking financial companies (NBFCs) but does not regulate the chit fund business. While chit funds accept deposits, the term ‘deposit’ as defined under the Reserve Bank of India Act, 1934 does not include subscriptions to chits. However the RBI can provide guidance to state governments on regulatory aspects like creating rules or exempting certain chit funds. As the regulator of the securities market, SEBI regulates collective investment schemes. But the SEBI Act, 1992 specifically excludes chit funds from their definition of collective investment schemes. In the recent case with Sarada Group, the SEBI investigation discovered that Sarada were, in effect, operating a collective investment scheme without SEBI’s approval.
[i] The central act repeals the Andhra Pradesh Chit Funds Act, 1971; the Kerala Chitties Act, 1975, the Maharashtra Chit Funds Act, 1974’, the Tamil Nadu Chit Funds Act, 1961 (applicable in Chandiragh and Delhi), the Uttar Pradesh Chit Funds Act, 1975, Goa, Daman and Diu Chit Funds Act, 1973 and Pondicheery Funds Act, 1966.
