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HomeColumnInitiative for preventing Chit Fund and Ponzi schemes — Part I

Initiative for preventing Chit Fund and Ponzi schemes — Part I

Irregular deposit, Ponzi and chit fund schemes have been banned by the government from February 21, 2019, through an Ordinance. In the past, this law was passed in the Lok Sabha, but could not get passed in the Rajya Sabha. Under the new Ordinance, those deposit schemes will be scrutinised, through which work is being done to defraud the poor, illiterate, and unaware people. This Ordinance will help in curbing the illegal schemes being run illegally without registration. According to the provisions of the Ordinance, it will make the poor financially aware. It seems that it will be helpful in preventing illegal business activities.

It is compulsory to get registered those bodies, which do business with the common man as per provisions of the new Ordinance. Since the new Ordinance has come into existence, the non-registered bodies have been banned from taking deposits. If a body violates the instructions contained in the Ordinance, then there is a provision in the Ordinance to take strict action against it. The provisions of the Ordinance also prohibit fraud by using an agent or advertisement. Now, the non-registered bodies will not be able to advertise in the newspapers or on the television for the promotion of their schemes or products.

Major provisions of Ordinance

Irregular deposit schemes have become completely illegal due to the implementation of the ordinance. There have been provisions for stringent punishment and heavy penalties for those who run erratic deposits schemes. There are also provisions for recovering the fines earned dishonestly. The purpose of this ordinance is to deal with problems related to cheating with the help of fake schemes in the country.

Generally, the companies running such schemes leverage the flaws available at the regulatory level. In the absence of stringent laws, those who invest in Chit fund or Ponzi schemes are being cheated. It has also been said in the ordinance to prepare an online database related to irregular deposit schemes. If necessary, the provision for returning the money of the depositor by selling the property of the guilty person is also in this Ordinance. In the Ordinance, it has been said that strict action should be taken against the famous persons who have promoted such schemes.

Earlier attempts for making law

Irregular deposit scheme prohibiting bill was passed in the Lok Sabha last year, but it could not get passed in the Rajya Sabha. Owing to this, it could not be converted into a law. The purpose of this bill was to ban chit fund companies and Ponzi schemes.

History of chit fund scheme

Chit fund scheme was started as a savings scheme by a group of farmers in the Indian state of Kerala. This systematically came into circulation during the years 1830 to 1835. This is an Indian concept, but today it is being operated in some other countries of the world. In China, it is known as the Chinese lottery. This system is also in circulation in Sri Lanka and Myanmar. There is also such a scheme in Portugal.

Method of making the scheme

Under the Chit Fund Act 1982, a settlement is made between the person belonging to the chit fund or the group of individuals in which a fixed amount or item is deposited in installments at a fixed time. Then it is given to a person through auction, which has the provision of return. The amount of profit is distributed among other members. According to the Chit Fund Act, this scheme is run between intermediaries or a person through an association or person, but also through this, the work of cheating is done. Many times this converted into Ponzi scheme.

Cheating by Chit fund scheme

Usually, chit fund companies lure investors into doubling the money in three to five years. However, the Reserve Bank and SEBI have taken actions against such companies many times, but they are again re-emerging. The empire of such companies has expanded across states like Chhattisgarh, Madhya Pradesh, Rajasthan, West Bengal, Jharkhand, Uttarakhand, Bihar, Uttar Pradesh, Odisha, etc. According to the SEBI and the Reserve Bank, there is no single chit fund company registered in Madhya Pradesh. Despite this, hundreds of fake companies are active there. The High Court has restricted chit fund companies in Madhya Pradesh. It has been seen that these companies mainly trap small and downtrodden people by luring doubling their investment.

Why not take action against chit fund companies

It has been observed that the chit fund companies avoid police action with the help of bribe and political pressure. However, when the matter becomes more serious, then the government has to be forced to take action. For example, between July 2014 and May 2018, there were 978 cases of fraud in these schemes, out of which 326 were related to the state of West Bengal alone. After the situation worsened, the government of West Bengal became a little bit tough. It is noteworthy that in West Bengal and Odisha, Rose Valley has cheated Rs 60,000 crore through the Ponzi schemes, while the Saradha Group of West Bengal has cheated 10 million people, in which more than Rs 10,000 crore was involved.

By Satish Singh

(Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of AFTERNOON VOICE and AFTERNOON VOICE does not assume any responsibility or liability for the same.)Help Parallel Media, Support Journalism, Free Press, Afternoon Voice


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