Letter to Editor, Times of India

The Editor,

The Times of India,

New Delhi.

Sir,

This refers to the write-up published in the Times of India, Delhi Edition dated June 25, 2013 under the heading “Chit Funds offer Quick Loans but come with Risks”.
On a reading of the said article, we find that though the comparison between chit funds, Bank FDs & MFs have been done with reasonable fairness, but it is not free of malicious reporting. To back our contention, we would draw your attention to the following.

1.       The presentation of chit fund as ’risky’ in the headline itself smells mischievous. Though on reading the entire story, the reader will find that registered chit funds are a good option but the headline makes a negative imprint on those who don’t read beyond the headline. For example, in the sub-heading why don’t you say “If you require money anytime soon, chit fund is the best option”. This also could have gone well with your story. What we are saying his PLEASE DON’T MANIPULATE FACTS TO MAKE IT JUICY FOR THE STORY.’

2.       The first paragraph refers to the ‘recent scam’ as a ‘collapse of the largest chit fund in West Bengal’ scam. This reference, to say the least, is preposterous. The recent collapse was of ‘Saradha’ group which had floated around 160 odd companies in areas like Real estate, Media, agro, exports etc but however, none of them were neither floated as a chit fund company nor working in such manner. So how come their failure is attributed to our industry.

Did the writer, Mr. Partha Sinha or for that matter anyone from TOI involved in this write up bother to find out what actually a chit fund means? Did they ascertain the facts with the Registrar of chit Funds, West Bengal? What is shocking is a newspaper like TOI that boasts of high ethical standards could publish such unfounded stories!

The fact is that failure of individual or a Residuary NBFC or Deposit accepting companies and Multi-level Marketing/Ponzi scheme companies are constantly being reported by the media as failure of a chit fund company, and the writer in the present instance followed suit, without bothering to do his homework!

To present our case, we start with the legal definition of ‘Chit Fund’.

Section 2 (b) of THE CHIT FUNDS ACT 1982 is reproduced below

“Chit” means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount;

Explanation – A transaction is not a chit within the meaning of this clause, if in such transaction,-

i.Some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscription; or

ii.all the subscribers get the chit amount by turns with a liability to pay future subscriptions;

Some basic features of Chit Funds that distinguishes it from MLM/Ponzi companies are as follows.

1.       Reserve Bank of India is the Principal Regulator for Chit funds, and has an advisory role, as provided u/s 73 of The Chit Fund Act, 1982 (Act No. 40 of 1982).

2.       Chit Funds are defined under Sec. 45 I(c) of the RBI Act.  RBI Notification No.DNBC.39/DG(H)-77 dated 20th June  1977 categorizes it as Miscellaneous Non-Banking company (MNBC)

3.       Since the subject is in the concurrent list (Entry 7 of List III) of the Constitution, administration of the Rules is with the respective State Governments. The company should be registered with the Registrar of Chit Fund of the State of their operation

4.       Chit fund company means a company managing, conducting or supervising, as foremen, agent or in any other capacity, chits as defined in Section 2 (b) of ‘The Chit Funds Act, 1982’

5.       Any company carrying on the operation of ‘Chit Fund’ should have the words ‘Chit’, ‘Chitty’ or ‘Kuri’ as part of their company name.

6.       Chit Fund companies are not allowed to accept deposits from the Public, Trade in Stock, Equity or other cash management.

7.       Chit Funds, as of now, are not allowed to carry on other businesses without the permission of the Registrar/State Governments.

The above clarification, we are sure you will see makes it amply clear that in the referred collapse in West Bengal, the writer erred in calling it a ‘Chit Fund’ collapse as the said group(s) doesn’t fulfill even one of the parameters of chit fund.

Our sincere request is that before filing their report/stories, the reporter should find out the nature of the company, the laws governing their operation and should desist from loosely worded reports, a procedure given a bypass in this case. In fact, the office of Registrar of Chit Funds in Kolkata is at the ‘Writer’s building’ and is open to one and all. A mere telephone call would have served the purpose of justice! Another glaring issue, though it may be a sheer coincidence, is that UTI Mutual Funds is sponsoring this investor education initiative and write-ups are recommending MFs! As this ‘Swatantara’ column is being brought out in association with Ministry of Corporate Affairs, Government of India, this communication is being copied to them for their information and necessary action.

Attributing such events/incidents and failure of individual or a Residuary NBFC or Deposit accepting companies, as failure of Chit Fund Companies, you will agree, is Erroneous, Unauthenticated and Malicious, and will create a run-in situation for the various Chit Fund Companies working for last several years in various parts of India. In fact some companies are more than 100 years old and have been carrying on their activities in impeccable manner.

As the reputation of the members of our Association is gravely hurt by your malicious report, you are hereby requested to issue a clarification article of similar size and prominence in your newspaper, acknowledging the mistake and clarifying the correct facts along with an unconditional apology within 3 days and oblige.

In case we do not hear from you, we will be compelled to initiate necessary legal action without any further reference to you.

Thanking you,

Sincerely,

T.S. Sivaramakrishnan

General Secretary

All India Association of Chit Funds (Regd.)

Letter to Secretary, Economic Affairs Dated 26-Sep-2012

September 26, 2012

Dr. Arvind Mayaram,
Secretary,
Economic Affairs,
Ministry of Finance North Block,
New Delhi.

Respected Sir,

Memorandum from Chit Fund Industry

To introduce us, All India Association of Chit Funds is the sole body representing more than 30, 000 registered chit operators
across India through their respective State and District Associations. The major challenge that our Association confronts
is unfortunately from within our own industry, which is the unregistered sector, their estimate being almost 100 times
that of registered ones. And their emergence and unprecedented growth is mainly on account of over-regulation. The only
subsidy the Chit Industry has received from the Government perhaps is the Legislative sanction. Though the concept of
Chit fund is prevalent in South Asian countries, West Africa, Cambodia, Korea, Indonesia known as ROSCAS and other names,
India is the only country where this activity is regulated by an enactment. The precise problem is, The Chit Funds Act
1982, a Central legislation in force is obsolete, since it is almost a replication Cochin Kuries Act, 1932. i.e. outdated
by more than 80 years! The legislation not being in tune with the ongoing liberalization policy has driven many a chit
operators under ground.

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strong>Utility of Chit Fund

In many parts of India, Chit Funds address gaps left by the traditional banking sector. They mobilize huge amounts
of small savings, and in return allow members to have access to lump sum amount of money that they would often
not be able to get from traditional banks. Easy accessibility and flexibility are important aspects of this form
of financing. Compared to banks, Chit Funds require less documentation, are more flexible about collateral, and
allows to determine own interest rate (within the constraints of a given chit scheme). Furthermore, there is no need to determine upfront whether funds are used for saving or borrowing. This is a salient feature of chit funds as it not only puts in place a disciplined saving mechanism, but it also allows access to cash when needed. In addition, as Chit Funds use the funds of the participants there is much less capital requirements for the institution (unlike banks). Though the banking sector has come up with No-Frill account, Mobile Banking, Banking Correspondent Model etc, these do not help the un-served population to get funds for their income generation activity. As regards MFIs, multiple lending, high cost of borrowing etc has affected their agenda;

mainly because they are focused on redistribution of wealth while what is required is inclusion in the Creation of wealth. All said and done, debt distribution to the poor as done by MFIs by itself does not grow economies! Chit Funds on the contrary, as against air dropping the finance, make sure that the entire cycle from distribution to collection is complete effectively, that too with out any Government subsidy, thereby playing the crucial role in Financial Inclusion.

The tie –up with Bill and Melinda Gates Foundation

While the “Financial Inclusion Program” is of recent origin, Chit Funds and other informal Financial Institutions
are already implementing this, for the last several decades, catering to those cross sections, which are beyond
the reach of Banking and other Financial Intermediaries.  The Bill and Melinda Gates Foundation knowing the standing of this Industry has tied up with the All India Association of Chit Funds, to reach the
economically weaker section of the society through Chit Fund companies; under their ‘Poverty Alleviation Program’.
The maiden survey conducted on the working of Chit Funds by the Institute of Financial Management and Research, Chennai under the Aegis of the Gates Foundation is an eye opener unraveling the inherent potential of this industry and
suggesting ways and means to enhance its services to the deserving lot, in context of the current economic policies.
The potential of this Industry to cater to the Lower and Middle Income Households is quite substantial, which
can be optimized only with the legislative and Administrative support. The complete research material can be
submitted as and when required.

The issues we are up against are as follows.

The Chit Funds Act, 1982

As it is not the mere formulation of an Act, but its effective implementation that matters, the Chit Fund Act need
to be amended immediately. The amendment exercise which was being carried out for more than 4 years finally picked
momentum, thanks to the formation of a  Key Advisory Group on Chit Fund / Nidhi Companies with a view to Review
the existing legal/regulatory / institutional framework for Chit Fund/Nidhi Companies and its efficacy; to decide
the Action plan including policy initiatives for orderly growth of the Sector; and to recommend the legal / institutional
/ regulatory initiatives related measures required for orderly growth of the Sector. The recommendations of the
KAG, in principle, have been accepted by the DFS, but are yet to be introduced in the parliament.

Apart from the Amendment to “The Chit Funds Act, 1982”, elucidation to the following issues will allow us to position this Industry at par with other financial intermediaries.

Insurance coverage

The Act rightly provides Penal provisions for various defaults on the part of the foreman but the subscribers’ main
concern is safety and security of their money in the hands of the foreman and not the punitive provisions of
the Act as such. So, extending Insurance coverage to the Subscribers money in the hands of the Forman may be
a prudent initiative. Extending insurance coverage, apart from safe-guarding the hard earned money of the subscribing
public, will make good business sense for the Insurance companies.

Securitization facility

RBI rightly has prohibited Chit companies from accepting any deposit from the public but at the same time there
should be some options for arranging liquidity, in order to enable the foreman to honor their commitments
to the chit subscribers. Securitization can be a right step in this direction. Chit companies may also be
permitted to raise funds within the framework of its functioning.  We are aware that this may bring to the
fore the bigger policy issues such as if the ARC can securitize good loans of miscellaneous non-banking financial
companies at all but a beginning may have to be made at some point of time!

Value addition to the Chit Industry

Allowing Chit companies to undertake fee based activity like selling insurance policies and other financial
products like educational, housing loans etc should be considered favorably. The availability of Credit
history is essential in the context of selling these products from the banks and other deposit taking
institutions. The data bank that we have on this information qualifies us to undertake procurement, processing
and disbursement of such products very effectively in view of our skill on intrinsic evaluation, cost
effectiveness, market intelligence and the quality of ownership. This will also benefit those cross sections
that are beyond the reach of banking and other financial intermediaries.

Grievance redressal cell

Chit Fund Association/Promoters should take the primary responsibility of addressing the subscribers’
grievances. The grievance redressal cell, which can consist of a representative of the Registrar
of Chit Funds, a representative of the Chit Funds Association and representative of the subscribing
public/or experts in the field so that complaints, as and when occur, can be resolved in the elementary
stages. Such a cell has yielded result in States where it had been voluntarily set up.

Rating of chit fund companies

Chit funds traditionally operate on a small scale; foreman-participant as well as intra-participant
relations is based upon mutual trust and personal information. The smaller Chit Funds have higher
overheads and less capital cushioning but often provide more customized services and personalized
attention to their clients. The larger Chit Funds are regarded as financially more reliable.
To be successful and acceptable at an increased size and scale, chit funds need transparent processes,
risk identification and management strategies, a pool of useful products, professional management,
proper documentation, increased use of technology and financial strength to bear the risks.
Brand recognition comes with this type of professional management. Though some process certifications,
(such as ISO) exist, a holistic assessment of the quality of governance and strategies, strength
of risk management and operating systems, legal compliance and financial performance can be delivered
only by undergoing a detailed performance rating process. Hence it must be made mandatory to
obtain ‘Rating’ from agencies like  M-CRIL/CRISIL etc which will be beneficial both to the subscribing
public and also motivate the chit promoters to excel. Necessary enactment may kindly be initiated
in this regard.

Formation of SRO

It’s high time that Chit Funds constitute an SRO, which we understand has also been suggested
many times by RBI, as in the case of Bar Association of India, Institute of Chartered Accountants,
and Medical Council for Doctors etc. The said SRO will further increase the transparency
& ethical practices. This body can keep a tab on the chit promoters and can act as a
deterrent for the erring companies thereby reducing the burden on the administrators. This
forum may further help in

  • Advocacy of best practices
  • Corporate Governance
  • Best financial practices
  • Ethical behavior
  • Educational & awareness activities

As we are unable to form this body on our own, a hand holding approach on the part of the Government
will enable us in achieving this objective.

Requirement of a common Registrar

One major drawback we find is that activities of any company in one State are not made known
to the Registrar of another State. Creation of the post of a ‘Common Registrar’ for all the
States will enable the working status of companies in different States and look into the
complaints, if any, for the overall benefit of the subscribing public. The respective State
Registrar can keep posting computerized financial and other relevant reports on a periodical
basis. Easy availability of the computerized information to the public from the office of
the Common Registrar, based on a few points, and not the entire balance sheet, and some awareness
program to the extent that they should deal only with companies who are in the approved list
will be enough to maintain effective control. If any individual chooses to deal with an unregistered
company just for the sake of better returns, he should be doing at his own risk.  Risk taking
behavior is inherent in human nature and undue concern to protect the public who knowingly
lend themselves in the hands of unscrupulous elements is unwarranted. Over regulation can
only promote unhealthy practices and is also against the ongoing liberalization program.
In fact the activities of all the non-banking financial institutions can be monitored by
this common Registrar who can maintain the efficiency index based on one common index/Permanent
Account number.

Inclusion Chit Funds in the ‘Negative List’ for Service Tax:-

Imposing Service Tax on Chit Funds is akin to levying Service Tax on Micro Credit, Self Help
Groups, and Co-operative Societies etc. While the Government and R.B.I. are rightly thinking
in terms of using the Money Lender Channel for reaching the poor agriculturalists, artisans
etc in granting credits at low rates, encouraging our industry will only be just and apt.
Though Financial Inclusion has become buzzword only recently, Chit Funds have been addressing
the very objective since time immemorial.  Service tax on Chit Funds will act as a disincentive.
The Chit Fund companies do not manage any fund or cash as no money is left in their hand
to manage, neither they undertake any activity to maximize the return of its subscribers.
The companies do not do anything to “effectively cause movement of such cash to keep it working”.
More over, as the Service Tax collected may not even cover the cost of such collection, the
Government even on the merit of this may consider excluding Chit Funds from Service tax as
the exercise will be cost inefficient.

While we were hopeful of getting relief at least on this front, this recent levy has further aggravated the situation and will force more operators to enter the unregistered arena, which not only will harm us but also give a boost to the unregistered sector as the subscriber will also be enticed to join them.

TDS on Chit Dividend

This is another classic case not seeing in the right perspective. Even though the Law
is very clear, there seems to be some ambiguity causing us unnecessary anxiety, which
needs to be cleared.

Role of Chit Funds in the economy and National Financial Inclusion Program

Chit funds operate on the unique

principle of intrinsic evaluation.

It is a faith on the subscriber’s ability to repay and not the collaterals or its value,
thus easing the credit flow to lower/middle income group, small entrepreneurs etc
which are often wedged between the exorbitant cost of the moneylenders and the stringent
procedures of the bank. The chit is not seen as an investment but a plan to get lump-sum
finance for meeting the expenses such as

marriage, education, and housing etc.

at a future date. Our industry accounts for a lion’s share of credit to the rural masses
and provides direct and indirect employment to millions giving impetus to GDP growth.

Dr. Babatosh Dutta Committee, Dr. A.C. Shah committe

have lauded chit funds for the role in our economy. In the findings of

James Raj Committee

based on whose report the 1982 Act was enacted, Chapter 6 Para 13 “…. The rationale of
chit funds is that they bring the borrowing class directly in contact with the lending
class…” in other words, in the case of chit funds, the savers as well as the borrowers
are put together and they are allowed to save or borrow for a pre determined term,
the rates of interest being fixed on the principle of demand and supply of funds
in the same group. The Chit Funds are of a self-liquidating nature and par-take the
character of mutual benefit schemes.
” That is to say,  institutions like Chit Funds absolves the Government of their responsibility in reducing the interest rates, stabilizing the fiscal balance, reduction in the GDP etc in its own way. 

Prayer:

In view of the significant contribution of our industry to the society and the pivotal
role visualized therefore and to enable the chit operators to enhance their participation
in prestigious projects like ‘National Financial Inclusion Program’ etc., we appeal
to your good self to

  1. Help push the Amendment of the Chit Fund Act 1982.
  2. Relieve the chit industry from sword of ‘Service Tax’
  3. Clear the ambiguity on TDS, once for all.
  4. Give us a lead in the formation of (i) Advisory Committee (ii) Introduce

An Efficiency Index (iii) Appoint a Common Registrar (iv) Allow Securitization Facility, (v) Allow us the benefit of Insurance Coverage (vi) formation of SRO and Other benefits you deem fit in the light of the above.

Total support from the government alone will facilitate

our participation in the Micro economic reforms initiated by the present regime. Encouraging
chit funds, which has been a “Financial Inclusion” activist since its inception will
be in tune with the present Government policies, which we are sure you will agree.
In the light of above, we request you to make use of your good office and help bail
out our industry. Thanking you, Sincerely,

For All India Association of Chit Funds (Regd.)

T.S. Sivaramakrishnan

General Secretary

Mobile # +91 98100 24853

Letter to Chief Economic advisor Dated 07-Dec-2012

7-12-2012

Dr. Raghuram Rajan,
Chief Economic advisor,
Government of India,
New Delhi.

Sir,

We congratulate you on taking over as the Chief Economic Advisor, Government of India.

To introduce our self, ours is Sole All India forum representing more than 30000 chit operators in whole of India through their District State Associations having a turnover of nearly 30,000 crores per annum, but do not represent the unregistered sector, which is almost 100 times the size of our industry.

Though financial inclusion is a recent buzz word, traditional financial technology like ours had already been doing this from time immemorial even before the origin of banking concept. The fact that M/s Bill & Melinda Gates Foundation are supporting our activity under their ‘Poverty Alleviation Program’ speaks volumes in this regard. The initial research report of an ongoing survey conducted by IFMR, Chennai under the guidance Dr. Antoinette Schoar, MIT Sloan School of Management & Dr. Mudit Kapoor, Indian School of Business, Hyderabad, substantiates the same. (Copy of this Report for your reference is Annexure I). This is on account of the fact that Chit Fund is a unique product having several advantages like, a. Savings cum Borrowing instrument, b. Cost of borrowing is the lowest, c. The cost is determined by the participants themselves, d. It doesn’t require any subsidy from any external source as in Micro-Finance and other intermediaries.

We are very much confident of participating in the National Financial Inclusion Program in a massive way; however, we are getting suffocated as we are not at all included anywhere in the ongoing economic reforms agenda. Though the Department of Financial Services, Ministry of Finance has constituted a Key Advisory Group to bring in value addition in our working, the recommendations of the said group is yet to see the light of the day. Though a Memorandum has been submitted to      Dr. Arvind Mayaram on 28th September 2012, as directed by the Hon’ble Minister of Finance, as is our experience with any Government department, we are yet to know the outcome.

As our industry will not be able to move forward even a inch without any Administrative or legislative support, we will be greatly honoured if you can spare us some time to let us know your perception on the role of informal financial institutions like Chit Funds and the value additions that we have to bring to our working to complement banking and other financial intermediaries, with specific reference to financial services being offered to the urban and rural poor.

Meanwhile, you may make it convenient to put in a word to Department of Financial Services, and the Department of Economic Affairs to consider our representation to some logical end.
With you in the service of our Nation and thanking you

For AIACF(Regd)

Gen Secretary

The All India Association of Chit Funds ..

Publication:Yahoo India News

Date Of Publication:29-4-13

New Delhi, April 29 (IANS) The All India Association of Chit Funds Monday urged the government and the media not to associate  Saradha group of West Bengal with the chit fund sector, as the company was not registered as a chit fund and had business in various other sectors.

“We have verified with the office of ‘Registrars of Chit Funds’ in Kolkata that Saradha is not registered. The company had varied business interests and what is quite glaring is that they did not float any chit fund company. Yet, their failure is attributed to chit funds,” said T.S. Sivaramakrishnan, general secretary, All India Association of Chit Funds.

The association claimed that the chit fund sector was being made a “scapegoat” by the government, who are feeling the public pressure following the scam involving Saradha in West Bengal.

Sivaramakrishnan said chit fund companies, unlike Saradha, are not allowed to accept deposits or allowed to carry on any other businesses without permission of the registrar or from the state government, which as of now had not been given.

Stating that registered chit funds companies are being “irresponsibly” maligned by the media without having proper understanding of the sector, Sivaramakrishnan said this may create panic among the citizens who may have invested in the sector, and put a multi-crore-rupee industry at stake.

According to the association, there are as many as 10,000 registered chit fund companies across the country, with an annual turnover of Rs.30,000 crore.

“Chit funds are perfectly legal, governed by Chit Fund Act, 1982,” and administered by the state governments. Even the Bill and Melinda Gates Foundation have chosen this channel for their poverty alleviation programme in the country,” he said.Acknowledging that there are hundreds of fraudulent companies in the country, Sivaramakrishnan said the threat can only be countered by effective coordination between the investigative, law enforcement and regulatory authorities in the country.

The Association joint secretary Kamal Bhimani said chit funds are the “most over-regulated” sector in the country. “They are regulated at two levels; first by the Reserve Bank of India, the principal regulator, and by the state government.”

“We are not like bank. The margins on which we work and the latitudes we have is very small,” he added.

The association said that attributing the Saradha scam on the whole sector will only affect genuine chit funds that contribute to the economy.

corporate crime economic offence/ tax evasion…

Publication: The Hindu

Date Of Publication: 29-4-13

Objecting to the use of word ’Chit Fund’ in multi-crore Saradha Group financial fraud, industry body CFAI on Monday saidnone of the entities of the Kolkata-based Group was operating as a registered chit fund.

“The failure of some Multi-level Marketing (MLM) or a ponzi scheme is explained as failure of a Chit Fund company. This is totally unfair,” All India Association of Chit Funds General Secretary T S Sivaramakrishnan said.

Saradha Group have got about 160 registered activities including realty and resort but not even one activity was registered as Chit Fund in the State, he said, while addressing a press conference.

“Our grievance is on failure of some other activity, why is it branded as failure of Chit Fund?,” he added.

The association also demanded that the government come out and clear the air over Chit Funds.

There are about 10,000 Chit Funds registered in India with annual subscription of Rs 30,000 crore per annum.“We are governed by the Chit Fund Act 1982 and implementations by the respective states. This Act is notified in entire India,” he said. “The principal regulator is the Reserve Bank of India, Act is made by Central Government and rules are made by respective State Governments,” Mr. Sivaramakrishnan added.

The regulator of chit funds is the Registrar of Chits appointed by respective state governments under Section 61 of Chit Funds Act. Powers of adjudication vest in the Registrar and the state government concerned is the Appellate authority. In case of  failure of a chit fund business, the responsibility for winding up such a business also vests with the respective State Governments.

As per the law, a Chit Fund company is not allowed to accept deposit from the public and can only accept subscription amount from the members.

However, Saradha Group accepted deposits from investors and worked as Multi-Level Marketing. Meanwhile, the government has said several of its investigating wings like SEBI, RBI, IT department and Enforcement Directorate have begun crackdowns on Ponzi schemes and have initiated action against Saradha Group under various laws including the Prevention of Money Laundering Act (PMLA).

Keywords: West Bengal, Saradah Group scam, Sudipta Sen, Financial fraud, Chit Fund Association, SEBI

In 1919, Carlo Ponzi started the scheme…

Publication: Bhadas 4 Media

Date Of Publication: 02-5-13

New Delhi: In 1919, Carlo Ponzi started the scheme for which he became famous: he paid off early investors with money taken in by later investors by creating a consumer stampede with hype of phenomenal returns within a very short period of time.

Ponzi exploited the investor market by approaching people most likely to trust him — his family and friends, his Catholic priest, and some neighbors from whom he collected a total of about $1250. Ninety days later, he returned $750 in “interest”.

His ecstatic original investors unwittingly did his marketing for him — they told everyone they knew about this “bonanza,” and investments snowballed. The party did not last. Within a year, a suspicious Boston Post’s front page questioned the legitimacy of the enterprise. Investors panicked and demanded their money back. It’s a bit difficult to give it back once it’s spent! Without the false hype to induce new participants, Ponzi’s scheme folded. Most of his 40,000 investors lost everything they had invested.

Fast forward to 2013, the scene hasn’t changed much; only the operators, victims have new faces. Ponzi changed the name to MLM-Multi Level Marketing. Of course, the magnitude has undergone a sea-change, heading north. One of the most unsavory aspects of globalization and a growing economy is that this aspect of white-collar crime has gained wings. Fraudulent mass-marketers reach victims via all modes of communication—postal service, telephone, e-mail, Internet sites, television, radio, and even in person. Viable multi-level marketing fraud groups require a variety of resources to operate, including the means to target and communicate with prospective victims, obtain and launder illicit proceeds, and evade law enforcement detection and investigation. These include legitimate business services, communications tools, payment processors, fraudulent identification documents, and even counterfeit financial instruments.

As a whole, nowadays, fraudulent multi-level marketing operations are increasingly transnational, interconnected, and fluid, with groups shifting alliances according to the particular needs of a scheme. The results are unbearable, tragic. For some victims, the risks extend well beyond loss of personal savings or funds to include physical threats or risks, loss of their homes, depression, and even contemplated, attempted, or actual suicide.

Multi level marketing fraud has a substantial impact on economies and markets by undermining consumer trust and confidence in legitimate businesses. Operators of MLM fraud schemes are highly adaptive, rapidly changing their methods and techniques to reduce the risks of law
enforcement detection and investigation and to respond to consumer and business awareness of their current methods. But what all these scams, one after another, reveal is we haven’t learned any lesson from our previous outings. We make a huge hue & cry, play the blame game for a while, and very soon forget everything till the next attack! When the outrage is over ‘rape’ we blame the Police authorities who in turn fortify the roads for a few days, force shut the shops early and relax thereafter, till the next victim surfaces.

When it a financial scam, whoever pulls it, the easy way out is ‘blame it on Chit Fund’, with an attitude of who cares what is a chit fund?.

The authorities, even those hand-in-gloves with the unscrupulous, Politicians, and more importantly the media who in their pursuit to garner more TRPs/Readership and outwit competition turn their backs to the facts and hurry to find a scapegoat, which can sensationalize the whole issue for a while, till the next ‘breaking news’ . Unfortunately, more often than not, it’s is a financial scam and the scapegoat; always is ‘Chit Funds’. In the case in question the ‘Saradha Group’ it could be seen that they had varied business interests with around hundred and odd companies which were in Realty, Construction, Tours & Travels, Exports, Agro, Livestock, Foods, Multipurpose, Ad agency and of course,
presence in media with their 24 hour ‘channel 10’ and also newspapers and magazines. However, what is quite glaring is that they did not float any ‘Chit Fund’ company, yet their scam/failure is attributed to Chit Funds!

While doing it, we simply forget that

1. Chit Funds are not allowed to accept deposits from the public.

2. Chit Funds are perfectly legal, governed by the “Chit Funds Act, 1982, and administered by the State Governments

3. There is an office of ‘Registrar of Chit Funds ‘in every state who monitors their operations, rather minutely. The Kokotta

Registrar is in 3rd floor, Writers building, 1, K.S. Road.

4. The regulations over chit funds are more stringent, even compared to deposit accepting companies. Utilisation and

appropriation of subscribers’ money is strictly prohibited, and provide for capital adequacy and other prudential norms

5. Chit Funds, as of now, are not allowed to carry on other businesses without the permission of the Registrar/State

Governments and as of date no permission has been given.

6. Chit Funds have been there from time-immemorial, even before the advent of banking.Many of the companies having been

around for more than 100 years! And have been carrying on their business in an impeccable manner.

7. Though the buzzword ‘Financial Inclusion’ is recent, Chit Funds have been doing it since inception, catering to the

un-served population in remote areas and are one of the most popular & trusted form of informal finance.

8. Even the Bill & Melinda Foundation have chosen the channel of ‘Chit Funds’ for their poverty alleviation program, in India

and are working closely with them in rural as well as urban India

The fact remains that the Chit Fund is a time-tested tool and shall always remain so. However, what we need to think is

 

1. Will passing the buck to chit funds or for that matter anybody, help stem the rot.

2. Is it fair on our part to defame any individual or institution for no fault of theirs? More so, when the culprit is of a different breed/variety.

3. Is it not more important to find out the root-cause and weed it out, lest it springs up again?

4. Is it not our moral duty, be it Administrators, Regulators, Politicians, or the ever important fourth estate, Media to rather find the actual culprit and then pass the verdict!

To counter the threat of multi-level marketing fraud effectively, investigative, law enforcement, and regulatory authorities will need to work in close coordination. Their focus should be

(1) Expansion of their capability to gather and share intelligence on all aspects of MLM, Residuary and other deposit taking institutions and their key participants; and acting thereupon to initiate remedial measures, if required.

(2)  Increase public awareness and education programs to help individuals and businesses to more readily recognize solicitations by fraudulent companies and take action to avoid or minimize losses to such schemes;

(4) Development of effective measures to more promptly identify and support victims of MLM/other ponzi schemes through public- and private-sector resources like introducing Deposit insurance, as prevention is better than cure; and

(5) Look into investor protection measures, to enhance the participation of informal finance in the National Financial Inclusion Program, as suggested by the Key Advisory Group on Chit Funds, formed by the Department of Financial Services, Ministry of Finance, Government of India, etc. etc..

For the investors, a thought to chew, ‘to err is human, greed is inherent in most of us, but should we blame others for our plight?’

Our Concern While the recent incidents are definitely scary & tragic, attributing it to chit funds, will only further aggravate the whole issue, as it may create a run even in the established in the chit fund companies, who are playing a major role in the National Economy.

While our representatives will be more than glad to offer a solution and remove shortcomings if any, our immediate request is set the records straight, i.e. stop misuse of the word ‘Chit Fund’ in such reporting. Issued in the Interest of all

T.S Sivaramakrishnan

General Secretary

All India Association of Chit Funds (Regd.)

The Tamil Nadu Chit Fund Companies..

Publication:Chennai Online

Date Of Publication:4-5-13

The Tamil Nadu Chit Fund Companies Association (TNCFCA) today appealed to the people not to confuse ‘Ponzi Schemes’, that offer unfeasible interest rates, cash prizes or gift articles for deposits, with Chit Funds which were traditional and highly regulated miscellaneous Non-Banking Financial Companies.

Registered chit funds could not accept deposits nor offer any other financial products or services, the TNCFCA said, adding, the companies that organize chits should have ‘chits’ in its name. “There are over 2,000 registered Chit Fund companies with annual turnover in the range of Rs 4000 Crores in Tamil Nadu.

However, the misconception that equates deposit schemes with chit funds is lowering subscriber’s confidence”, All India Association of Chit Funds General Secretary T S Sivaramakrishnan told reporters here. There were about 10,000 registered Chit Funds across India with an annual turnover in the range of Rs 30,000 crores. In Kerala, a chit fund was run by the State Government itself.

Mr.Sivaramakrishnan said in the wake of volatile market conditions, chit fund proves to be the best saving/borrowing option that offers standard returns, low-cost loans, and personalized service. Chit funds are community-driven and regulated both by the Central and State Governments.

As chit funds offer personalized, hassle-free service, among others, the industry is growing at a rate of 15-20 per cent a year”, he added. He said in the wake of recent scams involving deposit schemes getting misreported as chit fund scams, it has been becoming increasingly difficult for the industry to convince people to join chits.

TNCFCA President Y S Mathivanan said the chit funds sector has produced many large companies and small AND medium enterprises in Tamil Nadu, thus contributing to the growth of the industry, entrepreneurship and employment generation.

-Agencies.

Chennai.