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 April 30, Telangana has 1,012 confirmed cases of COVID-19 (9th highest in the country). Of these, 367 have been cured, and 26 have died. In this blog, we summarise some of the key decisions taken by the Government of Telangana for containing the spread of COVID-19 in the state and relief measures taken during the lockdown.
Movement Restrictions
For mitigating the spread of COVID-19 in the state, the Government of Telangana took the following measures for restricting the movement of people in the state.
Closure of commercial establishments: On March 14, the government ordered for the closure of cinema halls, amusement parks, swimming pools, gyms and museums until March 21 which was later extended to March 31.
Lockdown: To further restrict the movement of people, the state and central governments announced lockdown in the state and country. The lockdown included: (i) closing down state borders, (ii) suspension of public transport services, (iii) prohibiting congregation of more than five people. The entities providing essential commodities and services were exempted from these restrictions.
Starting from April 20, the central government allowed certain activities in less-affected districts of the country. However, on April 19, the state government decided not to allow any relaxation in Telangana until May 7.
Health Measures
Telangana Epidemic Diseases (COVID-19) Regulations, 2020: On March 21, the government issued the Telangana Epidemic Diseases (COVID-19) Regulations, 2020. The regulations are valid for one year. Key features of the regulations include:
(i) All government and private hospitals should have dedicated COVID-19 corners,
(ii) People who had travelled through the affected areas should be home quarantined for 14 days,
(iii) Procedures to be followed in the containment zones among others.
Private Hospitals: On March 22, for increasing the availability of healthcare facilities in the state, the government issued an order prohibiting private hospitals from performing any elective surgeries. The hospitals were also instructed to have separate counters for respiratory infections.
Increasing the health workforce in the state: On March 30, the government issued notification for the recruitment of medical professionals on a short term basis.
Prohibition on spitting in public places: On April 6, the Department of Health, Medical and Family Welfare department banned spitting of paan, any chewable tobacco or non-tobacco product, and sputum in public places.
Welfare measures
To mitigate the hardships faced by the people, the government took various welfare measures. Some of them are summarized below:
Relief assistance: On March 23, the government announced the following measures:
Factories: On March 24, the government directed the management of factories to pay the wages to all workers during the lockdown period.
Migrant Workers: On March 30, the government decided to provide 12 kg of rice or atta and one time of support of Rs 500 to all migrant workers residing in the state.
Regulation of school fees: On April 21, the government ordered all private schools not to increase any fees during the academic year of 2020-21. The schools will charge only tuition fees on a monthly basis.
Deferment of collection of rent: On April 23, the government notified that house owners should defer the rent collection for three months. Further, the owners should collect the deferred amount in instalments after three months.
Administrative Measures
Deferment of salaries: The government announced 75% deferment of salaries of all the state legislators, chairperson of all corporations and elected representatives of all local bodies. The government employees will have salary deferment from 10% to 60%. Employees of the Police Department, Medical and Health Department, and sanitation workers employed in all Municipal Corporations and Municipalities are exempted from deferment of salary.
Chief Minister's Special Incentives: The government granted special incentives to certain categories of employees as follows:
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.
