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Legal Article

Chit Funds, Ponzi Schemes and Banning of Unregulated Deposit Schemes in West Bengal and Kolkata

Introduction:

Meaning:

Chit Fund is an important topic to be discussed here. A chit fund is a type of system which is practised around the country in India. These schemes are organised by companies or financial institutions or among relatives or friends or neighbours.

Chit Funds Act, 1982 defines the Following Provisions:

Section 2 of the Act Define the following Important Definitions—

 “(b) “chit” means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount;

(c) “chit agreement” means the document containing the articles of agreement between the foreman and the subscribers relating to the chit;”

(d) “chit amount” means the sum-total of the subscriptions payable by all the subscribers for any instalment of a chit without any deduction of discount or otherwise;”

(e) “chit business” means the business of conducting a chit;”

(f) “defaulting subscriber” means a subscriber who has defaulted in the payment of subscriptions due in accordance with the terms of the chit agreement;”

 “(j) “foreman” means the person who under the chit agreement is responsible for the conduct of the chit and includes any person discharging the functions of the foreman under section 39;”

 “(r) “subscriber” includes a person who holds a fraction of a ticket and also a transferee of a ticket or fraction thereof by assignment in writing or by operation of law;”

(s) “ticket”, means the share of a subscriber in a chit.”

The above-given provisions define the necessary sections such as chit, subscriber, chit business, and so on. The above provisions give overall knowledge on chit funds and anyone who wants to get the benefits of this scheme should know the above-mentioned provisions to deal with such type of schemes.

Working of Chit Fund:

The company announces a date on which the fund starts and continues for the number of months equal to the number of the subscriber. Every month the subscribers pay instalments into their pots and then an auction is conducted in which lowest amount is determined by a subscriber and this amount is withdrawn by him and the surplus amount is divided among the other subscribers. This system acts as saving as well as borrowing scheme.

Major Objects of Chit Funds for Companies:

  1. It should carry on the business of conducting chit daily, weekly, monthly or at any time decided by the company and this is also done according to the rules and regulations or act or notifications of the government.
  2. It should also advance money either on security or without it and on such conditions as the company thinks fit in a specific situation.
  3. Another object is that it should promote business in India.

Meaning of Ponzi Schemes:

A Ponzi scheme is a type of fraud scheme which lures the investors and provides profits to the earlier investors with funds from the more recent investors. The companies involved in these types of schemes make people believe that profits are coming from different products or other means but it is actually paying profits from other investors. These type of schemes run as long as the investors are unaware of the facts.

Red Flags:

Many Ponzi schemes should be “red flags” for investors. There are warning signs which are as follows:

  1. It specifies huge investment returns with no risk
  2. Overly consistent returns
  3. Unregistered
  4. Unlicensed sellers
  5. Secretive or complex strategies – Investments that don’t provide us with proper information.
  6. Issues with paperwork
  7. It is tough to receive payments

The Spread of Ponzi Schemes in West Bengal:

It is well said that social networks such as self-help groups are formed to secure microcredit from rural banks and these self-help groups are used to spread Ponzi schemes among other members in West Bengal.

How to Smell Ponzi Schemes:

Some of the points are discussed below.

  1. Fools run behind it: If anyone is pressuring you to invest money in any schemes then research on it before investing.
  2. Unrealistic returns: They make you believe that they will pay high returns.
  3. Devil is in the details: If you have already invested then check that they are providing you with proper information.

Meaning (Unregulated Deposit Schemes Act, 2019):

Unregulated Deposit Schemes:

Section 2(17) defines the expression ‘Unregulated deposit scheme’ as a scheme or arrangement under which deposits are accepted or solicited by any deposit taker by way of business and which is not a regulated deposit scheme.”

The above definition “the Unregulated deposit scheme” is given under the above mentioned act. There are other different provisions which are related to unregulated deposit scheme and those are discussed below.

Objective: The objectives of this Act as follows:
1) It provides a comprehensive method to ban unregulated deposit schemes.
2) It also protects the interest of the depositors and so on.
Deposit taker:
Section 2 sub-section 6 talks about deposit taker and it means any individual or group of individuals or partnership firm registered or not or an LLP or a company or association of persons and so on.
Banning of unregulated deposit schemes:
A prize Chit or money circulation scheme banned under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 shall be deemed to be an unregulated deposit scheme under this Act.
Section 3 of the above mentioned Act states that on and from the date of commencement of this Act, the unregulated deposits should be banned and no deposit taker can promote, operate, issue any advertisement obtaining the participation of people and cannot accepts deposits in pursuance of an unregulated deposit scheme. Fraudulent default:
Section 4 of this Act says that when a deposit taker accepts deposit he shall not commit any fraudulent default when he makes the repayment or return the deposit on maturity and also he should not commit any fraudulent default when rendering any specified service promised against such deposit.
Wrongful inducement:
Section 5 of this Act says that no person has right to make any statement or promise which is false or misleading in material facts or hide any material fact to induce any person to invest in or become a member of the unregulated deposit scheme.
Authorities:
The competent government appoints one or more officers not below the rank of secretary to the government by notification as the competent authority to look into these matters.
Designated Court:
Section 8 of the above act says that the appropriate government will create one or more courts as Designated Courts with the consent of the Chief Justice of the High Court and this court will be controlled by Judge appointed by the above mentioned authority.
Appeal to High Court:
Section 19 says that if any person is aggrieved by the order of the Designated Court then they can appeal to the High Court within 60 days from the date of such order.
Power of Supreme Court:
Section 20 of the above-mentioned act states that Supreme Court may, by order, can direct any particular case to be transferred from one Designated Court to another Designated Court and this can be done on an application filed by the competent authority or any other person with supporting affidavit.
CBI investigation:
CBI has the power to investigate these types of matters on receipt of the information received from the police office about the offence under this act.
Power of police officers:
A police officer subordinate to the Superintendent of police can take charge in these types of cases after getting written permission from the Superintendent of police. He orders to–
To enter any place and search any building between sunrise and sunset any object which violates this act
In case thereof resistance, they can break open the door or window is necessary for the search.  
Seize any record or property found as a result of the search in the building which violates the act.
To detain the said records into his custody and produce before the Designated Court
Freezing of accounts
If the records or properties are not possible to seize, the competent officer can freeze such records or properties.

Banning of Unregulated Deposit Schemes Rules, 2020 (“Rules”) under the provisions of the Banning of Unregulated Deposit Schemes Act, 2019 (“Act”):

The Ministry of Finance has issued the Banning of Unregulated Deposit Schemes Rules, 2020 in a Gazette Notification which is dated to 12th February 2020.

Some important rules are as follows:

          “The Rules state that the Competent Authority will consider the following information and particulars for provisionally attaching the property of the deposit taker:”

  1.     “any complaint against the promotion or operation of an Unregulated Deposit Scheme, and whether the complainant is a depositor in the said Unregulated Deposit Scheme or not.”
  2.    “any information received from the Central Government, or any State Governments or Union territory Administrations, or any law enforcement authority or agency or body under the charge of such Governments or Administrations, regarding the promotion or operation of an Unregulated Deposit Scheme.”
  3.   “ information of any advertisement, whether in print or electronic media or both, inducing any person to invest in, or become a member or participant of any Unregulated Deposit Scheme.”
  4.    “any other information that the Competent Authority has, that a deposit taker is soliciting or accepting deposits in contravention of the provisions of the Act.”
  5.  “ Impounding and retention of records:”

“ The person, from whose custody records are impounded under *sub-section (8) of section 7 of the Act, may make copies, or take extracts, in the presence of an officer authorised by the Competent Authority, at such place and time as the Competent Authority may appoint in this behalf.”

     “ However, if the person from whose custody records are impounded objects for any reason to the records being impounded, he can make an application to the Competent Authority stating the reasons of objection and requesting for the return of the records, and. The Competent Authority may, after giving the applicant an opportunity of being heard, pass such orders as he thinks fit.”

  • “The Rules mandate a central database containing information relating to deposit takers which will be made accessible to the public through a portal.”

The above body says that the Ministry of Finance has issued a notification dated 12th February 2020 under which the Ministry has mentioned few rules for banning of unregulated deposit schemes.

Case Analysis:

“Sri.Nagaraja vs Mysore Sales International … on 19 March, 2020 Bangalore District Court”

 The respondent here is the complainant and the appellant is the accused. The respondent had a company which was engaged in chit business. The accused was one of the subscribers of the company and he received prize amount under different dates but he was a defaulter in making monthly instalments. The respondent has urged him to pay the amount and the accused gave them a cheque which was bounced and then the company sent him a legal notice but the accused did not reply to it and then the respondent has filed a complaint in the above-mentioned court and the court gave judgement accordingly and the court after due process and procedure passed the order which convicts the accused for the alleged offence.

“Subrata Chattoraj vs Union Of India & Ors on 9 May, 1947 Supreme Court of India”

 “The investors lured to extraordinary returns is typically attributed to something that sounds impressive but is intentionally vague, such as hedge fund in land, resorts, tours and travel plans, high yield investment programs.”

“Typical to the Ponzi schemes the investors who are economically very poor have invested relatively small amounts such as Rs.100 and wait to see if the promised returns are paid. After one month the investor received maturity amounts, so the investor truly believes s/he has earned the promised return. What the investor doesn’t realize is that the Rs.100 was a RETURN OF THE INVESTMENT AND NOT A RETURN ON THE INVESTMENT. In other words, the Rs.100 return came from the Rs.100 principal initially invested or from a newly-recruited investor, rather than from any profits generated by the investment opportunity. After a second month yields another Rs.100 payment, the investor is ‘hooked’ and typically will invest larger amounts in the scheme and will enthusiastically inform friends and family members about this ‘fantastic’ investment opportunity.”

This case says that the company was involved in the chit fund scheme and it raised a large amount from the public at large and committed fraud with them. The SEBI directed to the company for winding up and also to return the amount to the subscribers. Hence, the Supreme Court of India gave its judgement accordingly.

Conclusion:

The above discussion explains chit funds, Ponzi schemes and unregulated deposit schemes along with case laws and other important information on these topics. There are many companies which offer such type of schemes. These type of companies promise to pay high returns but most of the time it is seen that these type of companies commit frauds with the public. So, our government has formulated laws to regulate these type of companies. One should be aware of the different provisions under which these type of cases can be dealt with.

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