Law to regulate chit funds soon

The central government is preparing to bring a law to regulate chit fund schemes, a savings and investment instrument that has been used to cheat lakhs of poor people across the country since the 1980s. The proposed legislation is aimed at overhauling and strengthening existing rules to shield investors from fraudulent companies.

“SEBI is looking into the existing chit fund cases. There are state laws to deal with them in Bengal and Odisha. But what to do with those who run operations throughout the country? We are drafting a central law and very soon we will bring it before you,” finance minister Arun Jaitley told the Lok Sabha on Thursday.

Since the 1980 Sanchayita scam involving over a lakh investors in West Bengal hit the headlines, there have been scores of similar cases across the country, including the recent Saradha and Rose Valley scams, that exposed the alleged nexus between fraudulent companies and politicians. There are over 30,000 registered chit fund companies operating in the country but the number is “100 times more” for the unregistered ones, according to the All India Association of Chit Funds (AIACF) that put its estimated size at ~35,000 crore. The attraction of chit fund schemes for investors is the substantially higher interest rates offered.

Government sources say discussions on the proposed legislation have begun and the legal framework will ensure that only registered chit fund companies are allowed to operate. Much like the mutual fund industry, they would have to maintain transparency and chalk out disclosure guidelines.

Chit funds are registered under the Chit Funds Act, 1982 but the absence of a regulator and a nationwide framework of guidelines makes investors vulnerable.

Jaitley announced in the last budget that the government would amend the Multi-state Cooperative Act to protect the poor from dubious schemes.

THERE ARE OVER 30,000 REGISTERED CHIT FUND COMPANIES IN INDIA. THE NUMBER COULD BE 100 TIMES MORE FOR UNREGISTERED ONES