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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.
As of May 4, 2020, there are 42,533 confirmed cases of COVID-19 in India. Since April 27, 14,641 new cases have been registered. Out of the confirmed cases so far, 11,707 patients have been cured/discharged and 1,373 have died. As the spread of COVID-19 has increased across India, the central government has continued to announce several policy decisions to contain the spread, and support citizens and businesses who are being affected by the pandemic. In this blog post, we summarise some of the key measures taken by the central government in this regard between April 27 and May 4, 2020.
Source: Ministry of Health and Family Welfare; PRS.
Lockdown
Extension of lockdown until May 18, 2020
The Ministry of Home Affairs passed an order extending the lockdown for two weeks from May 4, 2020 (until May 18, 2020). Activities that remain prohibited in the extended lockdown include:
Travel and movement: Passenger movement by: (i) air (except for medical and security purposes), (ii) trains (except for security purposes), (iii) inter-state buses (unless permitted by central government), and (iv) metro, remains prohibited. Inter-state movement of individuals is also prohibited except for medical reasons or if permitted by the central government. Intra-state movement of persons for all non-essential activities will remain prohibited between 7pm and 7am.
Education: All educational institutions such as schools and colleges will remain closed except for online learning.
Hospitality services and recreational activities: All hospitality services such as hotels will remain closed except those being used as quarantine facilities, or those housing persons such as healthcare workers, police, or stranded persons. Further, recreational facilities such as cinemas, malls, gyms, and bars will remain closed.
Religious gatherings: All religious spaces will remain closed and congregation for religious purposes will remain prohibited.
The revised guidelines for the lockdown include risk-profiling of districts into red, green and orange zones. Zone classifications will be decided by the Ministry of Health and Family Welfare and shared with states on a weekly basis. States may include additional districts as red or orange zones. However, they may not lower the classification of any district. For a district to move from a red zone to an orange zone, or from an orange zone to a green zone, it must have no new cases for 21 days. Classification of and activities permitted in the zones include:
Red zones or hotspots: These districts will be identified based on the total number of active cases, doubling rate of confirmed cases, and testing and surveillance feedback. Additional activities prohibited in red zones include: (i) cycle and auto rickshaws, (ii) taxis, (iii) buses, and (iv) barber shops, spas and salons. Activities that are permitted include: (i) movement of individuals (maximum two persons in four wheelers, and one person in two wheelers), (ii) all industrial establishments in rural areas and certain industrial establishments in urban areas such as manufacturing of essential goods, and (iii) all standalone and neighbourhood shops.
Green zones: These zones include districts with no confirmed cases till date or no confirmed cases in the last 21 days. No additional activities are prohibited in these zones. In addition to activities permitted in red zones, buses can operate with up to 50% seating capacity.
Orange zones: These zones include all districts that do not fall in either red or green zones. Inter and intra-state plying of buses is prohibited in these zones. Activities that are permitted (in addition to those permitted in red zones) include: (i) taxis with a maximum of one driver and two passengers, (ii) inter-district movement of individuals and vehicles for permitted activities, and (iii) four wheeler vehicles with a maximum of one driver and two passengers.
Certain areas within red and orange zones will be identified as containment zones by the district administration. Containment zones may include areas such as residential colonies, towns, or municipal wards. In containment zones, local authorities must ensure 100% coverage of Aarogya Setu App, contract tracing, quarantine of individuals based on risk, and house to house surveillance. Further, movement of persons in or out will be prohibited except for medical emergencies and essential goods, amongst other measures.
Movement of stranded persons
The Ministry of Home Affairs has permitted the movement of migrant workers, pilgrims, tourists, students, and other stranded persons, by special trains. To facilitate this, all states and union territories will designate nodal authorities for sending, receiving, and registering stranded persons. The state sending persons and the state receiving persons both need to agree to the exchange. Each train can carry up to 1,200 persons and no train may run at less than 90% capacity. Passengers approved for travel by the state governments may be required to pay some part of the ticket fare.
Education
UGC issues guidelines on examinations and the academic calendar for universities
The University Grants Commission (UGC) issued guidelines on examinations and the academic calendar for universities in view of the COVID-19 pandemic.
Academic Calendar: Classes for the even semester in universities were suspended from March 16, 2020 onwards. The guidelines prescribe that online teaching must continue till May 31 through social media (WhatsApp / YouTube), emails, or video conferencing. The examinations for the current academic year should be held in July, 2020 and the results for the same should be declared by July 31 (for terminal year students) and by August 14 (for intermediate year students)
The Academic Session 2020-21 may commence from August 2020 for old students and from September 2020 for fresh students. The admission process for the fresh students can be done in August. Consequently, the commencement of even semester for 2020-21 can be from January 27, 2021. The commencement of academic session 2021-22 may be from August 2021. The universities may follow a 6-day week pattern to compensate the loss of teaching for the remaining session of 2019- 20 and the 2020-21 academic session.
Examination: The universities may conduct semester or yearly examinations in offline or online mode. This has to be done while observing the guidelines of “social distancing” and ensuring fair opportunity for all students. They may adopt alternative, simplified methods of examinations such as multiple choice questions based examinations or open book examination. If examinations cannot be conducted in view of the prevailing situation at the time, grading may be done on the basis of internal assessments and performance in previous semester. The universities may conduct the Ph.D viva examinations through video conferencing.
Other guidelines: Every University should establish a COVID-19 cell for handling student grievances related to examinations and academic activities during the pandemic and notify effectively to the students. Further, a COVID-19 cell will be created in the UGC for faster decision making.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.
