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.
On March 22, Bihar registered its first two cases of the new coronavirus disease (COVID-19), one of whom died the same day. Since then, the number of cases has increased steadily. As of April 19, Bihar has 86 confirmed cases of COVID-19, of which 47 are active cases and 37 have recovered. 33 new cases have been registered since last week. One more death has been registered since March 22.
Given the highly contagious nature of the disease, on March 22, the Government of Bihar announced a state-wide lockdown till March 31. This was followed by a nation-wide lockdown enforced by the central government between March 25 and April 14, now extended up to May 3. During the lockdown, severe restrictions have been placed on the movement of individuals. Establishments have remained closed, except those providing essential goods and services. Restrictions are likely to be relaxed in less-affected districts post-April 20.
In this blog, we look at key measures taken by the state government in response to COVID-19 so far.
Early-stage: screening of travellers, awareness on precautionary measures
The initial responses from the state government were aimed towards: (i) raising awareness about precautionary measures to be taken against the disease, and (ii) screening of international travellers. In this context, on February 25, the Bihar State Health Society issued advisories for: (i) measures to be taken in schools and colleges, and (ii) reporting of airline passengers and tourists with symptomatic cases to the district health administration. On March 11, 104 Call Centre was designated as the COVID-19 control room, to address public queries related to the disease.
Prior to lockdown: limiting mass gatherings, mobilisation of the public health system
Limiting mass gatherings
Between March 13 and March 18, the state government issued orders to shut down various premises until March 31. These include Anganwadi centres, educational institutions, and commercial establishments such as cinema halls, parks, and shopping malls. The government staff was directed to come to office on alternate days. Gathering of more than 50 persons at one place was prohibited including any mass family gathering (except marriages). The transport department was asked to restrict both public and private transport.
Healthcare measures
On March 13, the government issued directions to: (i) ensure availability of 100 extra ventilators in the government hospitals, (ii) arrange for testing of COVID-19 in AIIMS, Patna and PMCH, Patna hospitals, and (iii) cancel leaves of all employees of the Health Department, and (iv) strengthen screening of travellers entering through the Bihar-Nepal border.
On March 17, the Health Department issued The Bihar Epidemic Diseases, COVID-19 Regulation 2020 under The Epidemic Diseases Act, 1897. The Act provides for better prevention of the spread of dangerous epidemic diseases. These regulations specify the protocol to be followed in both private and government hospitals for screening and treatment of COVID-19 patients. It also empowers the district administration to take containment measures including sealing of specific areas and conducting surveillance for COVID-19 cases. It makes spreading of rumour or unauthenticated information with mala fide intent a punishable offence.
Welfare measures
On March 16, the Chief Minister announced that treatment costs for COVID-19 for residents of Bihar will be sponsored from the Chief Minister Medical Assistance Fund. Moreover, the state government will provide assistance of four lakh rupees to the family of a person dying due to COVID-19.
The government issued directions to provide direct cash transfer in place of the food provided under the Mid-Day Meal scheme in schools, and at Anganwadi centres.
Essential goods and services
On March 21, the Food and Consumer Protection Department directed the district administration to ensure implementation of the Bihar Essential Article (Display of Prices and Stocks) Order, 1977. The Order requires sellers of specified items to display stock and price for the public’s reference. The specified items include food items, edible oilseeds, and petroleum products. The Department also directed the district administration to send proposals for adding any new items to the list of specified items.
During lockdown: strengthening medical response, welfare measures
Upon announcement of the lockdown on March 22, state-level and district-level coordination committees were set up. During the lockdown, the state government’s measures have been aimed towards: (i) strengthening the medical response in the state, (ii) providing relief to various sections of society from issues being faced during the lockdown, and (iii) addressing difficulties with the supply of essential goods and services.
Healthcare measures
On March 25, the Health Department constituted the Bihar COVID-19 Emergency Response Team which is responsible for the control and coordination of all health-related response.
Protocols for containment and treatment: Directions have been issued to implement several guidelines related to containment and treatment measures. These include: (i) set up and operationalization of isolation centres and quarantine centres, (ii) containment plan to address local transmission and community transmission through cluster containment strategy, (iii) surveillance program for Influenza-like Illness (ILI) and Severe Acute Respiratory Illness (SARI), (iv) handling of waste generated during treatment/diagnosis/quarantine, and (v) sanitation of residence and nearby areas of a COVID-19 positive person.
Door-to-door screening campaign: On April 14, the Chief Minister issued directions to start door-to-door screening campaign for suspected cases in affected districts including Siwan, Begusarai, and Nalanda. Such screening campaign will also be run in districts in border-areas, and an area within 3 km radius of the residence of COVID-19 positive patients.
Increasing manpower: The government invited medical professionals including doctors, nurses, and paramedics to volunteer. It also directed the district administration to engage retired doctors, nurses, and paramedics from defence services for volunteer work. Leaves of all employees of the Health Department were cancelled until April 30. The Health Department deputed AYUSH practitioners to assist at isolation and quarantine centres.
Dedicated infrastructure for COVID-19: On April 5, certain government hospitals were designated as exclusive hospitals for treatment of COVID-19 patients. The Health Department also directed certain big private hospitals in Patna to stop OPD services.
Other health-related measures: On March 23, the state government announced payment of one-month basic salary as an incentive to all doctors and health workers. On April 13, the Health Department issued an order prohibiting spitting in public places by tobacco, cigarette, and Pan users. Further, the state government announced that it will procure test kits from the private sector.
Welfare measures
Relief package: On March 23, the state government announced a relief package for people affected due to lockdown. Key features of the relief package are:
ration of one-month to all ration cardholders for free,
one-time cash transfer of Rs 1,000 per family to ration cardholders,
payment of pensions for three months in advance to all pensioners including pension for old age persons, widows, and physically challenged, and
release of pending scholarships to all students.
Help for migrants: On March 26, Rs 100 crore was allocated from the Chief Minister Relief Fund to provide aid to the migrants from Bihar stuck in other parts of the country due to the lockdown. On April 2, the state government announced that a one-time cash transfer of Rs 1,000 will be provided to the migrants. On April 13, an additional Rs 50 crore was allocated from the Relief Fund for this purpose. State-wise nodal officers have been appointed for coordination of relief efforts for migrants. The state government is running 10 food centres in Delhi to help migrants from Bihar.
Relief camps: On March 28, the state government decided to start relief camps along the border (including Nepal border) offering food, shelter, and medical help to persons coming in the state. Community kitchens and relief camps have been started in government school campuses to provide food and shelter.
Electricity tariff: On April 8, the State Cabinet approved the proposals for: (i) reducing electricity tariff for domestic and agricultural consumers by 10 paise per unit and (ii) waiving the monthly meter fee.
Measures for businesses and agricultural activities
The state government provided certain relaxations to businesses in matters related to taxation. These include:
extension in the deadline for payment of GST from March 31 to June 30, no interest or penalty charges to be levied for late payment in certain cases,
three-month extension in the deadline for one-time settlement scheme for pre-GST tax disputes, and
cancellation of orders regarding attachment of bank accounts of certain tax defaulters.
On April 16, the Chief Minister issued directions to start procurement of wheat through the Primary Agriculture Credit Society (PACS).
Essential goods and services
Various departments issued guidelines to the district administration to facilitate operational continuity of essential goods and services including (i) food items, (ii) seeds, fertilisers, and other agriculture-related items, (iii) livestock fodder, and (iv) petroleum products.
On March 27, the Food and Consumer Protection Department brought certain new items under the purview of The Bihar Essential Article (Display of Prices and Stocks) Order, 1977. These include: (i) wheat and wheat products, (ii) masks and hand sanitisers, and (iii) potato and onion.
Other Measures
Education: On April 8, the cabinet approved the proposal to promote students of Class I to XI (except class X) without annual examination.
Legislature: Salaries of MLAs and MLCs have been reduced by 15% for one year. The amount will be donated to the state’s Corona relief fund.
Labour and employment: On April 16, the Chief Minister issued directions to resume public works under the Saat Nischay Programme, Jal Jeevan Hariyali Yojana, and MNREGA.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.
