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.
Recently, the Parliament passed a law that addresses the issue of sexual harassment in the work place. The Bill, introduced in the Lok Sabha on December 7, 2010, drew on the 1997 judgment of the Supreme Court (known as the Vishaka judgment) to codify measures that employers need to take to address sexual harassment at the work place. (See PRS analysis of the Bill here). The Bill was first passed in the Lok Sabha on September 3, 2011. It incorporated many of the amendments recommended by the Standing Committee on Human Resource Development that examined the Bill. The Rajya Sabha passed it on February 27, 2013 without any new amendments (see Bill as passed by Parliament). We compare the key provisions of the Bill, the Standing Committee recommendations and the Bill that was passed by Parliament (for a detailed comparison, see here).
| Bill as introduced | Standing Committee recommendations | Bill as passed by Parliament |
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Clause 2: Status of domestic workers |
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| Excludes domestic workers from the protection of the Bill. | The definition should include (i) domestic workers; and (ii) situations involving ‘victimization’; | Includes domestic worker. Does not include victimisation. |
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Clause 4: Constitution of Internal Complaints Committee (ICC) |
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| The committee shall include 4 members: a senior woman employee, two or more employees and one member from an NGO committed to the cause of women. | The strength of ICC should be increased from 4 to at least 5 (or an odd number) to facilitate decisions in cases where the bench is divided. | Disqualifies a member if (a) he has been convicted of an offence or an inquiry is pending against him or (b) he is found guilty in disciplinary proceedings or a disciplinary proceeding is pending against him. |
| Members may not engage in any paid employment outside the office. | Barring paid employment outside the office goes against NGO members who may be employed elsewhere. This clause must be edited. | Deletes the provision that disallows NGO members to engage in paid employment outside. NGO members to be paid fees or allowances. |
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Clause 6: Constitution and jurisdiction of Local Complaints Committee (LCC) |
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| An LCC is required to be constituted in every district and additional LLCs at block level. At the block level the additional LCC will address complaints where the complainant does not have recourse to an ICC or where the complaint is against the employer. | The functions of the district level and the block level LCCs are not delineated clearly. It is also unclear whether the block level LCCs are temporary committees constituted for dealing with specific cases. Instead of creating additional LCCs at the block level, the District level LCC may be allowed to handle cases. A local member from the block may be co-opted as a member to aid the LCC in its task. | Accepted. |
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Clause 10: Conciliation |
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| The ICC/ LCC shall provide for conciliation if requested by the complainant. Otherwise, it shall initiate an inquiry. | Distinction should be made between minor and major offences. Conciliation should be allowed only for minor offences. | Adds a proviso that monetary settlement shall not be the basis on which conciliation is made. |
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Clause 11: Inquiry into Complaint |
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| ICC/LCC shall proceed to make inquiry into a complaint in such manner as may be prescribed. | No suggestion. | Inquiries will be conducted in accordance with service rules or in such manner as may be prescribed.For domestic workers, the LCC shall forward the complaint to the police within seven days if a prima facie case exists. The case shall be registered under section 509 of Indian Penal Code (word, gesture or act intended to insult the modesty of a woman). |
| Sources: The Protection of Women Against Sexual Harassment at Work Place Bill, 2010; the Standing Committee on HRD Report on the Bill; the Sexual Harassment at Work Place (Prevention, Prohibition and Redressal) Bill, 2012; PRS. | ||
