While there are enough provisions in existing Acts like the PCMCS Act, it has become difficult to curb dubious chit funds and MLM companies so far, thanks to multiple regulation and lack of coordination between authorities
The Standing Committee on Finance chaired by Yashwant Sinha is likely to recommend scrapping the Chit Fund Act, 1982, following the fallout of Saradha chit fund scam in West Bengal. If the Act is scrapped, then the government would be able to label all chit fund companies as 'illegal' and may initiate legal proceedings. The question, however, is not about this Act or any other act. What the government needs to do is use the existing Act for taking immediate action and prosecuting the culprits. But can the government show the necessary will at the Centre and the states?
Chit funds are often misused by its promoters and there are many instances of the founders running what is basically a chain-money scheme and absconding with the investors’ money. Almost all promoters of such schemes promise to “double-your-money” within a short period.
According to All Kerala Kuri Foremen's Association, the state has around 5,000 chit fund companies, with Thrissur district accounting for the maximum of 3,000. These chit companies provide employment to about 35,000 persons directly and an equal number indirectly. Much of this is legitimate business. What is dubious is chain-money schemes that have expanded rapidly in poorer states like West Bengal, Orissa and northeast India. In order to establish themselves as ‘authentic’ and legitimate business, these companies are found to be expanding into several other ventures, mostly real estate and plantation.
While people are demanding scrapping chit funds and MLMs, there are legal hurdles. While the Prize Chits and Money Circulation Schemes (Banning) Act or PCMCS Act, 1978, has provisions to control such schemes, it is administered by the Department of Financial Services under the ministry of finance, but is supposed to be implemented by the state governments.
“Section 3 of the PCMCS Act prohibits any entity from promoting, conducting any prize chit or money circulation scheme, enrolling any member of any such chit or scheme, or participating in it otherwise, or from receiving or remitting any money in pursuance of such chit or scheme. This is the provision we used to ban Japan Life, Amway and GoldQuest,” says a police officer.
Many of these MLM companies are not registered under the Companies Act. Even those registered evade regulation. Those booked regroup under different names and continue to cheat the people. There are several laws, central as well as state, which govern these operators. Kerala has its own Kerala Chitties Act 1975, then there is Tamil Nadu Chit Funds Act, 1961, the Chit Funds (Karnataka) Rules, 1983, The Andhra Pradesh Chit Funds Act, 1971, for Delhi, there are two, the Chit Funds Act, 1982 and Delhi Chit Funds Rules, 2007 while Maharashtra has its own Chit Fund Act, 1975.
The major hurdle in curbing the chit fund and MLM menace is multiple regulation and lack of coordination between the Union and state governments.
The Union government is also looking to revamp through amendments, the PCMCS Act. Interestingly, the PCMCS Act, 1978, was promulgated only after large-scale loot by these dubious companies and a report by the James Raj Committee (1974) called for a total ban on such schemes arguing that they were prejudicial to public interest. It is clear the Act has failed in the 35 years thereafter, barring sporadic action by exceptional officers like VC Sajjanar, the deputy inspector general (DIG) of Police in Andhra Pradesh.
In India, AP was the first state to enact a law to ban money circulation schemes in 1965. Both the Supreme Court and several high courts have passed landmark judgements against the operation of these schemes as they violate the law of the land and are detrimental to the interests of the public. There are ongoing cases against Speak Asia and Amway, to cite two examples.
The question, therefore, is will the governments show enough will power to stop the menace of chit funds and MLMs by using the existing Act and rules instead of spinning an argument about a new law and new regulator? Even if there is a new law what will ensure that governments actually act as per the law?