Chit Funds or Cheat Funds – the Recent Saga of India’s Investors

The recent Chit Fund fiasco in West Bengal has not only pushed the panic button for the Indian Investors, but also opened the Pandora’s box of our corrupt system and the state of awareness of the aamjunta. This is a case in which all the three parties are to be blamed equally – the Investors, the System or the Government and the investment Agencies. Though the issue of cheating and fraud came to light because of Saradha fiasco in West Bengal, Odisha is not far behind in any sense. More than 85 companies are operating in Odisha with a turnover of roughly Rs. 20,000 crore, and there are more than 100 Chit Fund companies (mostly Ponzi Schemes) operating in West Bengal alone with a turnover of roughly Rs. 75,000 crore.

With CB-CID investigations, the list and the amount of fraud and cheating is bound to increase in both the states. Interestingly, some of the Schemes /Companies are old, operating in multiple states, run by well known politicians or their relatives, with a huge capital investment. Coming to Investors – most of them are poor rural people, unaware of the Ponzi Schemes, and are lured mostly by the young unemployed Agents. On the contrary and surprisingly, a good percentage of the Investors are also well-educated, well-aware about the recent happenings or uncertainties. They too could not resist the temptation of becoming rich or richer over-night… and lost their money in the process. In many places, there are numerous reports of suicides both by the Agents and the Investors.

The Chit Fund empire is so complex and so big that it has forced the Government to consider scrapping the Chit Fund Act of 1962 in entirety. Though the pressure is mounting on the Government to order a CBI inquiry of the entire process, in my opinion, CBI inquiry may not be useful as the CBI’s reputation is also at stake in the wake of recent developments; some of their own Officers have been accused and sent to CBI custody for allegedly taking a bribe from a businessman regarding settlement of a land dispute case. In fact, one of these Officers was heading the Coalgate scam probe !

Moreover, why do we have the “reactive” mentality to each and every problem ? Can’t we adapt the “proactive” mentality ? Let’s check where exactly the problem is ? Is there any remedy for these in future ?

As pointed out before, there are three broad parties associated in any kind of investment. They are:

1. The Investment Agency

As per the law of the land, the investment Agencies are supposed to be operating under RBI’s guidelines and State /Centre’s special Acts or Amendments. But in most of the cases, the Agencies are not even registered to offer the Schemes, which they simply roll out in the market. Apart from this, most of the Agencies are either owned by a family or a group of relatives or politicians. Sometimes the companies are created to transform the black money into white, without paying any heed to national economy or security. The investment Agencies select their Directors in such a way, that it becomes easy for them to hide the crucial facts to the people; most of the time the Directors of such Agencies are none other than their drivers, cooks, house-maids, and the like, even without their knowledge !

While India is struggling with unemployment, getting Agents at a low salary is not difficult. Hiring Agents is also tricky; first enrol them as Investors and then lure them with perks, AC train-tickets, gifts and sometimes air-tickets for holiday trips to work as Agents set with achieving a certain amount of “target” i.e., number of Investors and Investment.

I remember, some of my friends who were hired by a similar Agency in 2009 were taken to Malaysia and Singapore (with their family) for a free holiday trip. Not just that; some Agents were gifted with Maruti-800 cars by their Chairman !! Tempting ! Seeing them  make good money in a short span of time, other Investors get attracted and deposit their savings with them, without casting any doubt.

In the initial days, the Agents never fail giving back the monthly interest to the Investors; the payments are always in time and sometimes, even in advance. The one in advance is mostly to give an impression (false) to the Investors that their business has been doing extremely well or performing above expectations ! Surprisingly, the interest rates are almost 24 – 36% per annum; whereas the Post Offices, Life Insurance Policies, and other well-known deposit Schemes give interests not more than 8-10% per annum.  The greed of easy money and becoming rich / richer overnight are the prime factors for both the category of Investors.

Other than giving direct interests to the Investors, companies like Hi-tech in Odisha and Rose Valley in West Bengal later started providing lands/plots in the prime localities of Bhubaneshwar, Cuttack, Kolkata, etc., based on small monthly instalments. The Schemes are so attractive and the Agents are so adept in opening heart-to-heart conversations with the Investors, that no one ever has an iota of doubt while investing. And that too, even in obtaining a plot in the capital cities at a cheaper rate. Surprisingly, in the last raid on Hi-tech in December-2012, it was found that in Bhagya Nagar (outskirts in the city of Bhubaneshwar, Odisha) alone, Hi-tech had promised to give plots of 484 hectares while they actually owned only 4 hectares of land. They are not the only ones doing such business in the market !!

Other well-known companies like Rich Mind, Saradha, Artha Tatwa, Seashore, Safex Infra, Ashore, and many others – almost 200+ odd Agencies have been active in the states of West Bengal and Odisha. Their main target is always the border districts of Odisha, West Bengal, Chattisgarh, Assam, Jharkhand and Andhra Pradesh. As it happened in Saradha’s case of quick closure and disappearance, most of the other companies also simply shut down their entire operation over-night and disappear with the entire money, leaving behind many Investors and Agents on the cross-roads to awfully suffer at various personal levels, to bear public wrath, face legal charges, police harassment, etc.

2. The Investors

It is obvious that the high rate of interests in the range of 24-36% per annum offered by the Agencies are tempting to invest in such Schemes. In addition, more than 95% of the Investors deposit their savings on the face value of the Agents working with those Companies, without checking a single document. ‘You know he is like my cousin… he has ensured the amount and promised me by the name of God that his Company is genuine, and they have their local branch here in my town, where my niece is a clerk. Where will they go ? We will get the money without any problem, and everybody is investing… so what is the big thing here to check ?’ – is the usual reaction, if you ask the Investors at the time of making their investments, whether they have checked the credentials of the Company or the Agent !

No one checks the credentials even though all the documents can be apparently verified by a couple of mouse-clicks in this age of Internet. What surprises more is the mode of transaction ! Most of the times, the entire transaction is by cash only, without any proper receipts or deposit certificates. As long as the Investors get their returns, no one bothers (including Media and the Regulator bodies) to check the validity of the Schemes, the mode of incomes, the mode of operations, etc. Rather, Investors bring in more Investors, hoping that the company will flourish and will give more and more returns, gifts, free tours to Singapore or Switzerland, etc.

Only when the problem starts and Investors complain, the Media becomes active with their ‘24/7 breaking news‘, demands of CBI investigation starts with public strikes, dharnas, attempts of suicides, etc. With such an ignorance, greed and attitude, do you think any fool-proof solution can at all be provided to the Investors ? I doubt…

3. The Regulators

India of course has many Rules, Articles, legal Sections, Court rulings in place to handle these kind of problems. However, the implementation of such Rules is the key. As per the Government, Chit Funds are a traditional business, strongly regulated by the State Governments and Central Government, Security and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). If that is so, then why have so many issues cropped up, whether out of the blue or not ? There are definitely many disorganised, unregulated Companies operating right under the nose of the Regulator bodies. They mostly operate Ponzi Schemes or Chain Investment Schemes, and take deposits promising unrealistic rates of return- double return in 2.5 years, prime land or flat in a posh locality at a cheap rate.

As per an RBI study, Co-operative banks are more suitable and bankable for the poor. If that is so, tailor made Schemes should be implemented in the rural areas under the supervision of RBI, not the Ponzi Schemes. There should be a blanket ban on Schemes promising unrealistic returns. This can be done by the Regulators, and the Investors should inform the Regulators without any delay or fear, when they are approached with Ponzi Schemes or the like.

The other important point RBI, SEBI and other Institutions of the State and Centre should consider is the amount of moveable and immoveable property of the Companies operating in rural areas. If these Companies are merely collecting money and promising lands/plots or flats on the Investment, then they should have enough assets to honour those promises. Government should ensure that this provision is satisfied at all the times. But that does not happen, and most of the claims made by Saradha, Seashore, Ashore, Hi-tech, Artha Tatwa, and many others are simply a sham without any real assets. They just create an illusion, which the finance watch-dogs should have sensed in time. And now, the poor aamjunta (Investors and Agents) is suffering and repenting to the core !

The most surprising post-reaction came from West Bengal on Saradha fiasco when the CM wanted to levy more tax on Cigarettes and distribute the extra money thus raised, among the Saradha Investors. I do not observe any logic in it at all… Instead of curbing the cheat Chit Funds / Ponzi Schemes and forcing all the associated Companies to return the money to the Investors, if the authority takes a short-cut perhaps for sake of retaining or reinforcing vote-banks, then no doubt aamjunta will again suffer eventually. Vote politics does not work all the time. If Investors money is compensated in this way, then in crude terms it just means- someone (a duped Investor) is going to be paid from his own pockets and other’s also who are not involved in any way !!!!

Aamjunta…what do you say ? Planning to invest ? I strongly suggest- say no to Chit Funds unless they are properly regulated through transparent policies. In general, regarding any Scheme, be very careful and keep your eyes and ears open all the time.

Jai Hind.

43 Responses

  1. chit funds have flourished under the regime of corrupt politics since ages .. The directors of such companies are the faces … but the real ones are all involved in politics …
    Awesome post !! a reminder and a summary of what chit fund is all about !

  2. Tile says it all. There are ‘n’ no. of new tactics played. Every fund is Genuine. Now people need to act and remain away from such funds.

  3. ‘Prevention is better than cure’ – is exactly what is needed. For every investment there is a risk involved, but at the end of the day the investor needs to take a call between the amount of risk he/she can take and amount of money he/she wants to invest. Another common sense is ‘do not put all your money in one basket’. Putting money in these chit funds is like playing an unfair gamble with on Mumbai underworlds; there is only loss, with a short-term initial profit without any escape route. I hope this post will help many readers to know the basics involved in chit funds. Thnx.

  4. One on side, there are pathetic situations… on the other, there is so much resentment, anger and frustration ! Its true that a present day CBI inquiry may not help much…now, see this-

    There needs to be substantial and quick action from the Government in accordance with the advice of Regulator and Legal bodies also. I believe the Chit Funds business must be stopped altogether… Till then, awareness generation seems to be the only word.

  5. Good article, quite informative, hope it reaches the millions of people out there fooled by scams like this. I have written a similar article on this subject do visit it

  6. I ask the government please to help the poor agent. Some people think the agent do there job for high commission but it’s wrong. They do the job because they have no job and also they do not know that they are doing job in a chit company. However if the government stop this type of company then the thousands of people lost there job and more of them will die. I think the government can given the permission to this type of company under a new law where they can never cheat the public money. please think about.

  7. Thanks My Say, Paresh, Pradipta, Ipsita, vvpvijay and Swapan for your comments.

    @ Swapan Tapan :
    If these Chit Fund companies are still left in the operating mode, then in all probability, more money will be siphoned off which may become completely untraceable !! So it is necessary to have those companies’ accounts locked at this moment to prevent further transactions.

    Significantly now, there is more need of strict monitoring or vigilance by the Regulator bodies, hot pursuit by the Law Enforcement departments, and strong or new Legislations, all quickly supported by the Central and State Governments. It is best that the Government agencies get at those fraud companies and owners /directors to return all the public money. After that, the Regulator bodies can start paying us (Investors and Agents) back after making the necessary verifications. This will also clean up things, give transparency and ensure accountability. The only thing we have to watch is how fast and how farther the nabbing process takes place. In this regard, there seems to be good hope as can be inferred from this link-

    Regarding employment, these companies are taking away more money than actually giving it to the Agents in commission. In addition, this is not a healthy practice; instead new modes of employment should be generated by the Government.

  8. Now didi wants to run TV channels owned by Sharadha Chit Fund Company from CM’s Fund. This is like, you loot, don’t worry, ham hai na, sob sambhal lega.

  9. Hi there, You have performed an incredible job. I will definitely digg it and in my opinion recommend to my friends.

  10. see this ‘Saradha petitions found by railway tracks’… its a terrible Ponzi mess for investors and agents !!

    At least the Odisha govt. (CM Mr.Naveen Patnaik) is trying hard and acting fast so as to nab & punish the real culprits.

  11. Good article.

  12. Right here is the perfect blog. Great stuff, just great!

  13. Excellent post. People should realize that chit funds are actually cheat companies. Else this problem will come over time and again.

  14. Excellent article. Keep writing such kind of information on your
    blog. Im really impressed by your site.

  15. Thanks for ones marvellous posting! I truly enjoyed reading it, you will be a great author.

    I want to encourage continue your great writing, have a nice weekend!

  16. good awareness article. but the main problem is after effect of the ghotolaas. every one is fearing now and no one is ready to deposit even in genuine schemes. RBI should act and bring back the confidence asap.

  17. Good one. May be the people will learn this time from these issues.

  18. Having read this I believed it was rather enlightening. I appreciate you finding the time and energy to put this information together. I once again find myself spending a significant amount of time both reading and commenting. But so what, it was still worthwhile!

  19. Thank you for the auspicious writeup.

  20. Sensible post and well thought one. God bless you.

  21. Cheating is a common phenomena. We should know how to survive from these attacks. Good post.

  22. Very well expressed. More than the govt., the people should know what to do.

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  31. You have done an impressive job through the posts and our entire community will be thankful to you. Jai Hind

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  42. here is an update for people in Odisha who have been similarly duped in a major land scam –

  43. True, we all are facing the problem. Lets hope for a better future.

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