![](/images/main_logo.png)
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.
With 4,203 confirmed cases of COVID-19, Maharashtra has the highest number of cases in the country as of April 20, 2020. Of these, 507 have been cured, and 223 have died. In this blog, we summarise some of the key decisions taken by the Government of Maharashtra for containing the spread of COVID-19 in the state.
Measures taken prior to lockdown
By March 12, the state had registered 11 cases of COVID-19. Consequently, the state government took measures to: (i) prepare hospitals for screening and testing of patients, and (ii) limit mass gathering given the highly contagious nature of the disease. The measures taken by the government before the lockdown are summarised below.
Health Measures
On March 14, the government notified the Maharashtra COVID-19 regulations to prevent and contain the spread of COVID-19 in the state. Key features of the regulations include: (i) screening of COVID-19 patients in hospitals, (ii) home quarantine for people who have travelled through the affected areas, and (iii) procedures to be followed in the containment zones, among others.
Movement Restrictions
On March 15, with 31 COVID-19 cases in the state, the Department of Public Health ordered the closure of cinema halls, swimming pools, gyms, theatres, and museums until March 31. On March 16, all educational institutions and hostels in the state were closed till March 31. The teaching staff was advised to work from home. All exams were also deferred until March 31.
Administrative Measures
On March 13, the Maharashtra government constituted a high-level committee to formulate guidelines for mitigating of the spread of COVID-19 in the state. The responsibilities of the committee included: (i) taking a daily review of the status of COVID-19 in the state, and (ii) implementing the guidelines issued by the World Health Organisation and the Ministry of Health.
On March 17, the first casualty due to COVID-19 occurred in the state. On March 19, the government put restrictions on meetings in the government offices and issued safety guidelines to be followed in these meetings.
On March 20, considering the unmitigated spread of COVID-19 in Mumbai, Pune and Nagpur, the attendance in government offices was restricted to 25%. Subsequently, on March 23, the government limited the attendance in government offices to 5% across the state.
Measures taken post-lockdown
To further restrict the movement of individuals, in order to contain the spread of the disease, the state government enforced a state-wide lockdown on March 23. This lockdown, applicable till March 31, involved: (i) closing down of state borders, (ii) suspension of public transport services, and (iii) banning the congregation of more than five people at any public place. Entities engaged in the supply of essential goods and services were excluded from this lockdown. This was followed by a nation-wide lockdown enforced by the central government between March 25 and April 14, now extended till May 3. Before the extension announced by the central government, the state government extended the lockdown in the state till April 30.
On April 15, the Ministry of Home Affairs issued guidelines on the measures to be taken by state governments until May 3. As per these guidelines, select activities will be permitted in less-affected districts from April 20 onwards to reduce the hardships faced by people. Some of the permitted activities are (i) agriculture and related activities, (ii) MNERGA works, (iii) construction activities, (iv) industrial establishments, (v) health services, (vi) certain financial sector activities among others subject to certain conditions.
Welfare Measures
To address the hardship being faced by residents of the state due to lockdown, the state took several welfare measures summarised as follows:
On March 30, the School Education Department issued directions to all schools in the state to postpone the collection of school fees until the lockdown is over.
The Department of Tribal Development issued directions to provide food/dietary components at home to women beneficiaries and children under Bharat Ratna Dr A.P.J. Abdul Kalam Amrut Aahar Yojana.
The state government issued directives to the private establishments, industries and companies to pay full salaries and wages to their employees.
On April 7, the state Cabinet decided to provide wheat and rice at a subsidised price to all Above Poverty line ration card holders and Shiv Bhojan at Rs 5 for next three months in all Shiv Bhojan centres.
On April 17, the Housing Department notified that landlords/house owners should defer the rent collection for three months. No eviction will be allowed due to non-payment of rent during this period.
Administrative Measures
On March 29, the public works department issued directions suspending the collection of tolls at PWD and MSRDC toll plazas for goods transport until further direction.
MLA Local Development Program: Under MLALAD program, a one-time special exception to use the MLALAD funds was given to legislators for the purchase of medical equipment and materials for COVID-19 during the year 2020-21.
Analysing the impact on the economy of the state: On April 13, the government constituted an Expert Committee and a Cabinet Sub-Committee to analyse the implications of COVID-19 on the economy of the state. These committees will also suggest measures to revive the economy of the state.
Orders relating to Mumbai city
On April 8, the city administration made it compulsory for all people to wear masks in public places.
On April 10, the Commissioner of Police, Greater Mumbai issued an order prohibiting any kind of fake or distorted information on all social media and messaging applications. The order is valid until April 24.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.