Author: Davuluri Srihasa, Alliance School of Law, Bangalore
INTRODUCTION
An estimated 3.39 percent of family savings in India go towards chit funds (or Rs 5.88 crore), as opposed to the 4.92 percent invested in stocks and debt obligations. Small and medium-sized businesses (SMEs) make up more than 95% of chit fund companies, and they are significant sources of funding for SMEs operating in other industries. Investors have been drawn to large corporations. For instance, the largest chit fund company in the nation, the $1.3 billion (Rs 6,110 crore) Chennai-based Shriram Group, manages a corpus of Rs 3,200 crore per year.
In India, a chit maintained by a chit fund operator is deemed to be an unlawful chit fund if its value exceeds Rs. 10 and it is not registered. Each institutionalised and regulated chit fund is secure and provides the best support possible to its clients. Before comprehending the chit fund model, let’s familiarise ourselves with a few terms that are used only in the context of such schemes.
1. A Chit Agreement, which must be signed by the foreman and the investors, contains all the rules and restrictions.
2. A collection of investors known as a “Chit Group” is a registered chit fund group.
3. The amount paid by investors over a specified term is known as the chit amount.
4. A foreman is a person or organisation in charge of keeping records, collecting payments, and overseeing auctions.
5. The foreman receives 5% of the total chit fund amount as a commission. 6. Prize money equals the total of all periodic collections less the highest offer (the highest bid includes the foreman’s fee).
CHIT FUND SCAM IN INDIA
There has been a significant increase in fraudulent chit fund operations in recent years. By tempting them with promises of high interest rates and profits, they are infiltrating the lower and middle classes.
Despite the fact that many phoney corporations and scams have been discovered, people continue to fall for these businesses’ tricks. Beyond the loss of their personal resources or funds, some victims can face violent threats or risks, losses to their houses and jewellery, despondency, and even suicide.
By undermining consumer faith in honest companies, such frauds can have a significant negative influence on economies and markets. These businesses are clever and quick to change their operating procedures to lessen the possibility of being discovered and investigated by law enforcement as well as in response to customer and corporate awareness of their existing practises.
Before investing in such questionable businesses, people need to be more cautious and thoughtful. The Saradha Group Chit Fund scandal is the largest chit fund scandal reported in India. The newest swindle is thought to have set a new record by charging Mr. Sudipta Sen, chairman of the Saradha Group, with roughly 60 offences.
More than 10 million people have been taken advantage of by the investment plans of the Saradha Group, a grouping of more than 200 private businesses. Patiala Police have uncovered yet another Rs. 10 Cr chit fund scam case.
According to the company, the money of its investors would have doubled in value after 1.5 years. They were successful in luring and trapping over 10,000 people into making investments in this way. The business demonstrated to the depositors how their money had been invested in active forestry, paper mill, and real estate initiatives.
The Redamma Dasara Chit Fund Company was another business that primarily attracted women to invest in the schemes and join the chit fund group by promising them huge profits. It is said that housewives and part-time workers invested more than Rs. 3 crore of their hard-earned money in the company.
FACTS OF THE CASE
Innocent investors searching for alternative banking choices have been targeted by several Ponzi scams that have inundated India. Because they do not have access to conventional banks, low-income Indians frequently rely on informal banking. These “informal banks” are typically made up of money lenders who demand exorbitant interest rates. These informal banks were quickly superseded by more sophisticated ways to defraud individuals via cloaked Ponzi schemes.
Fundraising is done both lawfully through cooperative investment plans, non-convertible debentures, and preference shares, as well as illicitly through fictional businesses like construction and tourist operations. The fast growth of Ponzi schemes, particularly in North India, has a number of root factors, not the least of which are a lack of knowledge of banking regulations, gradually declining interest rates, a lack of enforcement of laws against such behaviour, and the safety of political patronage.
The Saradha chit fund scandal was one of the biggest financial frauds in India’s history. It involved a Ponzi scheme that was operated by the Saradha Group, a consortium of over 200 private companies that were primarily involved in real estate, media, and hospitality. Chit fun ds are a type of savings scheme popular in India, where a group of people pool their money together and take turns receiving a lump sum payout. The scam was orchestrated by Sudipta Sen, the chairman of the group, who promised high returns to investors in exchange for their money. Saradha Group was founded by Sudipta Sen in 2006.
However, the Saradha Group was not registered with the Securities and Exchange Board of India(SEBI), which regulates investments schemes in India. Moreover, the group did not have any assets to back up its claims of high returns. Instead, it used new deposits to pay off existing investors, which is a classic hallmark of a Ponzi scheme.
The Saradha Group was initially challenged by SEBI in 2009 after the group formed more than 300 businesses solely for the purpose of defrauding the Board and consumers by cross-holding shares here and there in an effort to confound all the watchful market participants and complicate the company’s structure. In spite of this, the Group first disregarded these cautions and expanded its operations in Collective Investment Schemes (CIS) in the hotel, manufacturing, and other sectors. To circumvent SEBI regulation because chit funds are an exemption to the Act, investments were offered falsely as chit funds. Large amounts of shares of several publicly traded firms were bought and sold by the corporation, and the profits of the sales were siphoned off into unidentified accounts.Up until its collapse in 2013, the Saradha Group disregarded all subsequent warnings and carried on with its operations, incurring an estimated loss of $200–$300 billion to more than 1.7 million depositories.
The scam came to light in April 2013 when the group collapsed, leaving thousands of investors penniless. The total amount involved in the scam is estimated to be around Rs. 4,000 crore (approx. $550 million). The scam affected people from all walks of life, including small-time investors, pensioners, and even politicians.
In 2013, the Securities and Exchange Board of India (SEBI) issued an order against the Saradha Group for violating securities laws.
The modus operandi of the Saradha chit fund scam was simple yet effective. The group lured investors with promises of high returns on their investment. They also used celebrity endorsements and other marketing tactics to attract more investors. Once they had collected a significant amount of money, they stopped paying returns to investors and diverted the funds to other businesses or personal accounts.
The scandal led to widespread protests and riots in West Bengal, as many of the investors were poor and had invested their life savings in the company.
The scandal led to the formation of a Special Investigation Team (SIT) by the West Bengal government to investigate the fraud. The SIT was headed by Rajeev Kumar, who later became embroiled in controversy for his alleged involvement in the case.
In 2014, the Supreme Court of India ordered a court-monitored investigation into the Saradha chit fund scandal. The Central Bureau of Investigation (CBI) also took over the investigation into the Saradha scam in 2014. The CBI investigation revealed that the scam had links to other chit fund companies in the region and had also involved money laundering and other financial crimes.
The Saradha Group also created a network of agents who were responsible for collecting money from investors. These agents were promised high commissions for every investor they brought in. The agents were also given incentives to bring in more investors, which led to a chain reaction of people investing their money in the scheme.
The group also used multi-level marketing tactics to lure in more investors.
The Saradha chit fund scam had far-reaching consequences. It not only affected the investors but also had political implications. Many politicians were found to have links with the Saradha Group and were accused of accepting bribes in exchange for protecting the group’s interests.
Several high-profile individuals were arrested in connection with the scam, including Sudipta Sen, his close aides Debjani Mukherjee and Arvind Singh Chauhan, and several politicians from West Bengal and Assam. The investigation also revealed links between the Saradha Group and other chit fund companies operating in India.
In response to the protests and outrage from the public over such a massive fraud, the government of West Bengal established a commission of inquiry, which is now looking into the issues detailed in a notification dated April 24, 2013, issued in that regard. The commission is being led by retired chief justice of the Allahabad High Court, Mr. Justice Shyamal Kumar Sen, along with four other people the government will nominate. Similar to the Sen panel, the Patra panel was established by the government of Odisha and operates in a similar manner.
The scandal led to widespread protests and unrest in West Bengal, where many investors had lost their life savings. The investigation is ongoing, and several people have been arrested and charged in connection with this scandal.
In conclusion, the Saradha chit fund scam was a massive financial fraud that affected thousands of people in India. It exposed the loopholes in India’s financial regulatory system and highlighted the need for stricter regulations to protect investors.
IS SHARADHA A CHIT FUND
The Saradha Group, a collection of more than 200 private businesses led by Sudipto Sen, was rumoured to be operating collective investment schemes—commonly but wrongly known as chit funds.
As is well known, chit funds cannot predict the anticipated return an individual will receive in advance. But Saradha Chit Fund guaranteed rewards.
They provided monthly income plans, recurring deposits, and fixed deposits. The promised returns were significant. Foreign vacations were also promised to high-value depositors.
It is obvious that this was not a chit fund because a rate of return was guaranteed in advance, as well as a 4 times return on the principal.
SO WHAT IS SHARADHA THEN
It falls under the category of what SEBI refers to as a “collective investment scheme” (CIS), which is defined as “any scheme or arrangement made or offered by any company under which the contributions made by the investors are pooled and used with a view to receiving profits, income, or property, and is managed on behalf of the investors.” Investors have no direct influence over how this scheme or arrangement is run on a daily basis.
Saradha pledged to give out land or apartments in exchange for the money gathered.At maturity, the investors also had the choice of receiving both their investment and the guaranteed interest.
The money, land, or flat only became available to investors upon maturity; they had no day-to-day influence over the scheme, the flat, or the property, for that matter. Due to these factors, Saradha was a CIS.
IRREGULARITIES IN THE SCAM
There are various irregularities in this scam. They are mentioned as following:
One of the primary irregularities in the Saradha chit fund scam was that the company was not authorized to collect deposits from the public. The Securities and Exchange Board of India (SEBI) had issued a warning to Saradha Group in 2010, stating that its business model of collecting deposits without proper authorization was illegal. Despite this warning, the company continued to collect deposits from investors.
Another irregularity was that the Saradha Group used a network of agents and brokers to collect deposits from investors, many of whom were not registered with SEBI or any other regulatory authority. This made it difficult for regulators to monitor or regulate the flow of funds.
The Saradha Group also used a complex web of shell companies and subsidiaries to siphon off funds collected from investors. Many of these companies were based in tax havens like Mauritius and Singapore, making it difficult for Indian authorities to track down the money.
In addition, there were allegations of political involvement in the scam, with several high-profile politicians being accused of receiving bribes or other benefits from the Saradha Group in exchange for protection or favors. This led to a political uproar and further complicated efforts to investigate and prosecute those responsible for the scam.
Another irregularity inSaradhagroup was accused of misusing investor funds for personal gain, rather than investing them in legitimate business ventures as promised.The company’s founder Sudipto Sen was found to have siphoned off millions of rupees from the company’s accounts for his own use.
Additionally, there were allegations of money laundering and tax evasion by the Saradha Group. The company was accused of using its network of chit funds to launder large amounts of black money, which is unaccounted-for cash that is often generated through illegal activities such as corruption or drug trafficking. It was also alleged that the company had evaded taxes by underreporting its income and inflating expenses.
Another irregularity in this scam is lack of regulation in the chit fund industry meant that there was no clear mechanism for holding the Saradha Group accountable for its actions, i.e., lack of accountability.
The impact of the Saradha chit fund scandal was devastating for many investors who had put their life savings into the scheme. When the company collapsed, they lost everything, and many were left in financial ruin. The scandal also had wider implications for the Indian economy, as it highlighted the need for stronger regulation and oversight of financial markets.
The group’s advertisements promised high returns, but did not disclose the risks involved or the fact that the schemes were not registered with SEBI. It is considered as a Misleading advertisements.
The Saradha Group dis not disclose its financial statements or other important information to its investors, making it difficult for them to make informed decisions about their investments. i.e., lack of transparency in the company.
It was suggested that the Saradha could have suffered some of the outcomes, as it did at the end of the collapse:
The promoters could have run away with the remaining money.
The scheme would have collapsed under its own weight, creating a run-on-the bank situation;
The investment promoters turn themselves in and confess.
In either of the situations the investors were the net losers with no redressal in insight.
As per the facts, Saradha has suffered all the three outcomes on a partial basis, a lot of money has been siphoned off through various banks, the company has collapsed due to the run on the bank situation, and the main promoters Mr. Sudipto Sen has turned himself in and requested the court in a sworn affidavit to dispose all of his properties to pay of the investors.
The company was operating in multiple states without proper registration or licenses.
Irregularity is the alleged bias and corruption within the judiciary itself. Many lawyers and judges involved in the case have been accused of taking bribes or other favors from the accused persons or their associates. This has led to doubts about whether justice will be served in the case and whether any convictions will stand up to appeal.
In conclusion, the Saradha chit fund scandal was a major financial fraud that involved several irregularities and illegal activities committed by the Saradha Group and its associates. It highlighted the need for stricter regulations in the financial sector and raised questions about the involvement of political parties in such scams.
AMENDEMENT AFTERMATH OF SHARADHA CHIT FUND SCAM
The Finance Ministry amend the Chit Funds Act to insulate small savers from Ponzi schemes floated by firms such as Saradha and Rose Valley.
The Chit Funds (Amendment) Bill, 2019, was approved by Parliament in 2019. With the intention of protecting investors, who are predominantly from economically disadvantaged groups of society, it streamlined the operations of collective investment schemes or chit funds.
THE EXISTING REGULATION:
At present chit funds are governed by Chit Funds Act of 1962, Reserve Bank of India (RBI) Act of 1934, and Securities & Exchange Bond of India (SEBI) Act of 1992 etc.
Under the Chit Fund Act of 1962, businesses can be registered and regulated only by the respective State Governments.
Regulator of chit funds is the Registrar of Chits appointed by respective state governments under Section 61 of Chit Funds Act.
Functionally, Chit funds are included in the definition of Non-Banking Financial Companies (NBFCs) by RBI under the sub-head Miscellaneous Non-Banking Company (MNBC).
RBI, however, has not laid out any separate regulatory framework for them.
AMENDMENTS MADE:
Chits are being replaced with “fraternity fund” and tighter definitions of the Act are being implemented.
The new term “fraternity fund” will set it apart from marketing or prize chit programmes that are prohibited by the Prize Chits and Money Circulation programmes (Banning) Act.
This will indicate that it is a borrowing and saving plan by nature rather than a deposit-only plan.
Technology – The act now stipulates that two subscribers must physically attend the auction.
The law suggests allowing “duly recorded video presence” for the two minimum subscribers at any chit auction.
It also modifies the 1982 statute to permit chit fund e-auctions.
State governments are permitted to enact their own laws because chit funds are on the Concurrent List.
Currently, the state government is mostly in charge of enforcement. The proposed Bill offers them additional latitude to control such monies.
Currently, the Act’s restrictions and penalties do not apply to any chits having an aggregate value of less than Rs 100.
The bill gives state governments the authority to set this limit and periodically raise it.
A new provision that would provide the promoter access to the borrower’s goods, stocks, or other assets until the debt is repaid is being proposed to protect businesses or people that manage chit funds.
The Bill, however, does not address a crucial issue brought up by the Key Advisory Group in September 2013, namely the need to provide insurance coverage in case the foreman defaults so that the interests of the investors are protected.
NEED FOR STRICTER REGULATIONS:-
Fraudulent Businesses: Illegal deposit taking operations like the Saradha Chit Fund Scam and the Rose Valley Scam are increasingly being used to deceive people across the nation.
Financial illiteracy: People who lack financial literacy are more likely to be taken advantage of since they are promised a large return on their investment that will not materialise.
Despite the existence of strict regulations against chit fund frauds, many of these funds operate Ponzi schemes and steal a lot of people’s money.
Ponzi schemes are investment businesses that pay returns to previous investors from funds obtained fro
Financial illiteracy: People who lack financial literacy are more likely to be taken advantage of since they are promised a large return on their investment that will not materialise.
Despite the existence of strict regulations against chit fund frauds, many of these funds operate Ponzi schemes and steal a lot of people’s money.
Ponzi schemes are investment businesses that pay returns to previous investors from funds obtained from new investors.
Chit funds, particularly those that serve a large number of members, are opaque in both their functioning and how they solicit bids.
Administrative loopholes: Businesses using these schemes take advantage of current regulatory gaps and lax administrative enforcement to defraud the poor and credulous of their hard-earned cash.
Lack of Accountability: Investors’ deposits are not insured. Investors cannot receive assistance from the government or the RBI in the event that a registered chit fund company declares bankruptcy.
There are currently about 30,000 chit fund companies registered in India.
It is estimated that non-registered chit funds are 100 times larger than registered ones.
Chit funds are prohibited by law from accepting deposits and from providing other financial products or services.
However, businesses have come under fire for attracting tiny savings from rural areas by posing as chit subscriptions. The Finance Ministry moved a Cabinet note to introduce the Chit Funds (Amendment) Bill in the wake of the arrests relating to the Rose Valley and Saradha scams.
THE FURTHER REGULATION NEED:
Along with other modifications, the proposed amendment will forbid unregulated deposit-taking and offer deterrent penalties for advertising or running such schemes.
The emphasis should be on upholding the law without political intervention and improving the judicial system, without which any change to the law will not be much of a benefit to the populace.
Changes to the proposed legislation won’t solve the fundamental issues of financial exclusion, imbalanced bank ratio in rural areas, etc.; they would merely protect depositor interests.
Better and more easily available banking options will stop the unfair exploitation of the poor and plug economic leaks.
JUDGEMENT
CALCUTTA HIGH COURT:
After taking these arguments into account, the court ordered that the issue be handled by a one-man committee led by Mr. Justice S.P. Talukdar (retired). The aforementioned authorities must deposit all corporate funds with the one-man council or in any institution according to their instructions after deducting all costs and fees, etc.
The SEBI will follow its standard procedure to undertake the sale of the company’s properties that are the subject of the applications. Additionally, the candidates in these applications are free to submit their own offers. The SEBI will be free to accept the best price after receiving all of the bids or to hold an auction to get a greater offer.
The authority will then create a report and provide it to the one-man committee. The transaction will need this committee’s approval, the bench said in dismissing the petition. If the situation calls for it, the committee may instruct SEBI or any other institution to conduct a new advertising or auction. The offer that was approved by the council will be presented to this court for approval before becoming final.
SUPREME COURT
PILs calling for a CBI inquiry against the Saradha Group as well as other chit fund businesses were filed by Akhil Gogoi, an RTI activist, in the Guwahati High Court and by Adv. Basabi Roy in the Calcutta High Court.
A division bench of the Calcutta High Court stated that “a central authority would also do justice to the probe” since “the implications of the fraud included other states.” In order to determine if the inquiry was being handled fairly, the Hon’ble Court ordered the state legislature a week to deliver its investigative report. Petitioners challenged the decision to the Supreme Court via a Special Leave Petition after being unhappy with it (SLP).
The state and local governments of Orissa, Jharkhand, and Tripura, who are the case’s respondents, asked the SC to order a CBI investigation into all money collection organizations in India. On May 9, 2014, the Supreme Court’s divisional bench ordered the CBI to look into all Ponzi schemes in Eastern India, including Saradha.
The court also ordered thesuspicious Ponzi companies to pay back depositors after the conclusion of any judicial proceedings started by the Enforcement Directorate, which is permitted to do so under federal law, and various state agencies, which are permitted to do so under state law. All that we need to bring out is that examination into the fraud is not limited to those closely involved in the operation of enterprises but may extend to numerous others who must be questioned regarding their involvement in the series and developing, the Supreme Court said in the Subrata Chattaraj appealall incidents that have had an impact on several fronts.
The Supreme Court said that uncovering the truth also requires looking into the bigger conspiracy theory. In the current instance, three different petitions were submitted. The Honorable Supreme Court has ruled that clubbing petitions must go before the Lower Court as a “Specially Assigned Matter” and be temporarily removed off the list. Debabrata Sarkar, among the defendants in the aforementioned fraud, recently submitted a bail application under Section 439 of the Criminal Procedure Code, which was denied by the Honorable SC for reasons of public interest.
CONCLUSION
The majority of Indians work hard and are conscientious, but those in control of the system or in whose hands the power rests are what hinders advancement. Nevertheless, a taxpayer genuinely feels the anguish of being defrauded when his valuable financial contribution to growth is used to cover the loss caused by multi-crore schemes. There were many scams in India, but none larger than the Rs 2000 crore fraud, for which 25 lakh trusting investors lost their hard-earned money. SHARADA Scam is an additional feather in the Indian political and financial scandal list. Every scam has a certain element that allows people to profit from it dishonestly, but the Saradha fraud also included all of the drama and suspense it required to grow and be exposed.
Declaring TMC/Mamata Banerjee criminals while the case is still open would be unjust. However, granting bail still isn’t recommended given that thousands of individuals had their hard-earned money stolen. Being a strong group, they would endeavor to distribute the proceeds from the crime to avoid being sued for breaking the law while interacting with the public. At this point, the investigating process would be hindered if they were released on bond. There is concern that the participants in the swindle, who are intimately linked to a reputable club in the nation, would use their influence on thwart judicial action. The public interest outweighs the interests of the person in this instance; thus the Hon’ble Court must adopt a different strategy and guarantee an unbiased, impartial, and free inquiry in line with justice and equity.
SUGGESTIONS
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.
Sources say the Chit Funds Act is obsolete and implementation has been a sore point with many other Acts governing Ponzi schemes. For example, it is mandatory for chit fund companies to mention the two words as part of all their schemes. However, because of poor implementation, this is not followed, making it easy for companies to bypass registration.
At present, action against chit funds is taken only in cases of frauds and since they are also guided by Companies Act and Indian Penal Code, there are overlaps and they fall between the gaps… this needs to be addressed as protection of investors, many of whom are poor.
REFERENCES:
BOOK: A CHIT FUND IN INDIA –An Analysis of Regulatory Framework by Ankeeta Gupta – Alpha Editions New Delhi
