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Govt plans to catch chit funds under Rs 100 cr that escape Sebi net

A recent amendment in Sebi Act gives the market regulator powers to monitor all money-pooling schemes involving Rs 100 crore or more.

Written by Amitav Ranjan | New Delhi |
October 15, 2014 3:56:50 am

Aiming to tighten the noose on chit funds that have duped millions, the Centre proposes to crack down on all money collection schemes that would otherwise escape the market watchdog Sebi.

The Cabinet proposal plans to expand the definition of “money circulation scheme” in Prize Chits & Money Circulations Schemes (Banning) Act to include “unauthorised and unregulated collection schemes of corpus less than Rs 100 crore, which are excluded from the definition of ‘deemed collective investment scheme’ under Sebi Act”.

A recent amendment in Sebi Act gives the market regulator powers to monitor all money-pooling schemes involving Rs 100 crore or more and act against illegal ones through search and seizure, attachment orders and recovery proceedings. However, the high threshold would have meant that several small schemes slipped through the net.

Ponzi scheme — a fraudulent investment operation where an individual or organization pays returns to its investors from capital from new investors, rather than from profit earned on existing investments — have been bursting on the national scene with great regularity. Rough estimates reveal that consumers have lost a staggering Rs 3 lakh crore by “investing” in or “buying products” from schemes floated by firms such as Saradha, Pearls Agrotech and Speak Asia.

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Experts say over 30,000 registered chit funds in the country are regulated by state registrars under the 1982 Chit Funds Act. But the Intelligence Bureau reported in 2012 that “fresh” illegal financial activities of chit fund companies were cheating lower middle class and poor people, especially in rural and semi urban areas.

The proposed changes, prepared by Department of Financial Services (DFS), also drags in “pyramid marketing schemes” within the act with some safeguards to exclude selling of goods and services, but not those sales where there is no economic activity or addition of economic value save for creating a chain of new participants and distribution of economic benefits to the existing ones. The department has also turned down request of Indian Direct Selling Association (IDSA) – comprising biggies like Amway, Tupperware and Hindustan Unilever Network – to include direct selling schemes as an exempted category under Section 11 of the Act.

“Even when an exception clause is to be added to the Act to exclude the activities of certain direct selling companies, such provision is not desirable or acceptable, unless a very strong legal framework or registration, regulation and scheme of penalties for violation of the law on direct selling, is put in place,” says the Cabinet proposal.

“Therefore, till the time a law on direct selling is enacted and unless there is specific reference in that law on prohibition of money circulation and pyramid marketing, no exception may be created in the PCMCSB Act to exclude the direct selling activities,” says the DFS proposal.

However, it passes the onus of framing that law to the Ministry of Consumer Affairs. It suggests that the ministry examine the case for creating a new law on direct selling in consultation with other relevant ministries. Consumer Affairs, earlier this year, had asked DFS to “provide clarity on direct selling/multi-level marketing and amend the PCMCSB Act”.

The DFS has also turned down IDSA’s request for a modification in the definition of ‘Money Circulation Scheme’ saying that the Indian definition was consistent with the international practice where the money made on the direct sales to public is considered as legitimate multi-level marketing activity.

“However, when the money is made on the basis of number of people recruited and sales to the recruited people, it is a pyramid scheme,” it says. “Therefore, what is required is not the change in the definition but changes in the business model and practices and the compensation structure of the members and upline and downline distributors of the multi-level marketing companies and the direct selling companies.”

The other amendments are:

1. Creating an offence of knowingly and deceptively inducing persons to subscribe or participate in such schemes
2. Increasing the imprisonment and fine under the Act
3. Making certain offences under the Act as “scheduled offences” under the Prevention of Money Laundering Act
4. Reporting about such offences or fraudulent inducement in such schemes to a Central agency for better coordination and investigation

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