Amendment to the Chit Funds Act

Amendment to the Chit Funds Act:

Click here to read about Rose Valley Scam. And Click here for Saradha Scam.

Why in news?

The Finance Ministry is amending the Chit Funds Act to insulate small savers from ponzi schemes floated by firms such as Saradha and Rose Valley.

What is the need for the amendment?

• At present, there are around 30,000 registered chit fund businesses in India.
• Non-registered chit fund are estimated to be 100 times the size of those registered.
• Under the law, chit funds cannot accept deposits and cannot offer other financial products or services.
• But companies have come under the scanner for luring small savers from rural areas under the garb of chit subscriptions.
• Following the Rose Valley and Saradha scam related arrests the Finance Ministry moved a Cabinet note to introduce the Chit Funds (Amendment) Bill.

What are the amendments?

• Definitions of the Act are being tightened to replace chits with “fraternity fund”.
• The new “fraternity fund” nomenclature will distinguish its working from prize chits or marketing schemes that are barred under the Prize Chits and Money Circulation Schemes (Banning) Act.
• This will signify its inherent nature of being a borrowing and saving scheme, and not one that just takes deposits.
• Technology - Currently the act requires at least two subscribers to be physically present at the auction.
• The bill proposes to allow the two minimum required subscribers at any chit auction to join through “duly recorded video presence”.
• It is also changing the 1982 law to allow e-auction of chit funds.
• State Government - Chit funds fall in the Concurrent List and states are free to issue their own law.
• Currently enforcement remains the primary responsibility of the state government. The draft Bill gives them more freedom to regulate such funds.
• At present, all chits with aggregate amount Rs 100 and below are exempted from provisions and penalties of the Act.
• The bill allows state governments to prescribe this ceiling and to increase it from time to time.
• A new clause is being introduced to protect companies or individuals that act as foreman of the chit fund whereby the promoter would be allowed a right to goods, securities or any other assets of the borrower until the debt is repaid.
• The Bill, however, does not address a key concern raised by the Key Advisory Group in September 2013 i.e to provide insurance coverage in case of default by the foreman so that the interest of the investors is protected.

Category: Mains | GS - II | Government Policies

Source: The Indian Express