How to Prevent Chit Fund Scams
Chit fund scams continue to be a problem for regulatory authorities. We have come across cases such as the Saradha Chit Fund, Sahara Financial, Rose Valley, PACL, fake cops, unauthorised colleges and courses. High-profile illegal schemes have mopped up more than Rs1 lakh crore. 
 
Chit funds scams are an efficient evil. They lure unsuspecting people who are the most vulnerable economic class. The abilities of such people to pursue legal remedies to recover their investments are restricted by (a) cost in terms of time and expenses (b) stronger bargaining power of chit fund organisers v/s individual claimants (c) the size of the recovery amount itself (d) lack of collective mass action legal remedies.
 
 
While this is a laudable step, we would suggest a better framework as follows.
 
Inform-Verify-Regulate-Remedy Framework
For any financial scam, a solution can be constructed using the Inform-Verify-Regulate-Remedy (IVRR) principle. First, ensure that people are adequately informed of what schemes are approved, what are their rights, and what are their responsibilities. Second, provide a mechanism for people to verify that they have indeed subscribed to the correct scheme. 
 
Third, the government must provide such a regulatory framework that lawful schemes have ease of compliance while illegal operators find it difficult to comply. 
 
Finally, those found guilty need to be punished with jail and punitive damages. The Indian legal system tends to provide for inadequate compensatory damages which dissuade wronged persons from filing legal action.
 
The solution proposed by the Indian government addresses the last two Rs of the solution – first, they provide for regulations so as to define which schemes are approved and second, they provide the remedy. 
 
Previously the remedy would be penal – fines and jail for the perpetrators of the scams. But these remedies are incomplete as they do not help recover the money from the perpetrators. This government is trying to improve upon this part of the problem. 
However, we need to resolve the first two parts of the framework as well.
 
Improving the Inform-Verify Part of the Framework
Rajeev Singhal, ex-CQO at CRISIL (@rajeevsinghal) had proposed a solution for this. To inform the interested subscribers of a scheme, we should have a toll-free number. And each approved scheme should have a unique identification (ID) number. The caller will call the toll-free number and enter the scheme number. The system can then provide information on automated voice, short SMS stream or WhatsApp or any such medium as the caller chooses, based on his phone number. 
 
It will tell you the status of the scheme, whether it is approved or not, latest update, important terms of contract.  It will then provide a unique number. The caller can enter into the contract with that specific number. A copy of the verified contract can be uploaded to caller’s digital locker. The caller will be signed up for alert service - where she will receive all alerts about the scheme organisers’, government’s alerts on the scheme, and government’s alerts on the organiser.
 
In a future version, we may have a chit fund clearing house system which verifies the contract and scheme subscriber chooses, subscriber’s payments etc. and organisers details.
 
In Sum
Financial scams need to be addressed comprehensively. The solution cannot be restricted to regulation and remedy. Over-regulation simply increases costs for genuine firms while offering no protection against the unscrupulous operators.
 
I have no doubt the specific parts of the solution proposed above can be improved. However, the Inform-Verify-Regulate-Remedy framework provides preventive and remedial system and, thus, a comprehensive protection for customers.
 
The idea of this solution comes from Rajeev Singhal, former CQO, CRISIL, he can be reached at @rajeevsinghal on twitter. 
 
(Rahul Prakash Deodhar is an Advocate, Bombay High Court. He can be reached at [email protected], on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.)
 
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    COMMENTS

    branchm192

    2 months ago

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    Meenal Mamdani

    5 months ago

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    IL&FS: What Use Are Forensic Audits Without Fixing Accountability?
    UPDATED on 13 June 2020 at 9.10am to add response from IL&FS.
     
    In the past couple of weeks, two publications have published exclusive reports on the second forensic audit of ITNL (IL&FS Transportation Network Ltd). ITNL, like IFIN (IL&FS Financial Services), is one of the two big listed entities of the mammoth 347-company conglomerate that Ravi Parthasarathy built and destroyed before resigning in July 2018 on health grounds. 
     
    These reports don't add to what we already know from the first forensic audit of IFIN, except to provide more granular details about the lies, dubious dealings, lawlessness, collusion of auditors and law firms (who like to call themselves officers of the court), fixing of bids, relentless routing of money between firms to hide finances and handing lucrative contracts to those who colluded with the group irrespective of their work experience, ability to deliver or financial soundness. 
     
    All of this was hidden in a seemingly magical bubble of lavish salaries, perks, international travel, and expensive lifestyles for the charmed inner circle of executives who participated in the reckless expansion of this  ‘systemically important’ financial conglomerate. 
     
    Those in the financial sector may devour detail of these fraudulent deals, but the rest of us want to know what the government has done about it. Why has enforcement action flagged after the Enforcement Directorate (ED) and the Serious Frauds Investigation Office (SFIO) filed their initial charge sheets?
     
    It is almost two years since IL&FS began to default (as first reported by Moneylife) and the government sacked the board to hand over control to a bunch of retired babus with top banker Uday Kotak as chairman of the board.  
     
    The cost of the resolution effort is well over Rs100 crore paid out to five expensive legal and advisory firms. What do we have to show for it?
     
    Well, a couple of major divestments have been to partner entities but most of the road projects remain in limbo especially after the Covid lockdown. Orix Corp of Japan, which already held a 51% stake in a set of seven wind power companies, has acquired the balance 49% in April 2020 for just over Rs6 crore.  Orix holds a 23.54% stake in IL&FS, the holding company, but has been a silent witness to Mr Parthasarathy’s shenanigans for over two decades. 
     
    The controversial, Rs70,000 crore Gift City of Gujarat has finally been acquired by a Gujarat Government entity at the end of May by paying Rs32 crore for a 50% stake. This was another project where babus were wilfully blind. So glaring was the loot that an independent director and audit committee head, went to court with a public interest litigation just to force officials to protect public money. 
     
    Other than this, five senior executives (former vice chairman Hari Sankaran, IFIN chief Ramesh Bawa, full time directors Arun K Saha, Ramchand Karunakaran and Mukund Sapre, who were part of Mr Parthasarathy’s close cabal) remain in jail for almost a year, while the founder remains untouchable, ostensibly on health grounds. 
     
    Almost everybody agrees that the resolution process has been shockingly slow and mismanaged. Is this to protect Parthasarathy and his clique or the bureaucrats and lenders who colluded with him?  
     
    Let’s examine the actions of each of these stakeholders in the context of the ITNL forensic report having confirmed what the IFIN forensic audit by Grant Thornton had already revealed in its first interim report. 
     
    The Auditors: The Indian Express, which has accessed the GT forensic report says SRBC & Co., (an arm of Ernst and Young), as the auditor to ITNL, appear to have kept out concerns about its viability as a going concern after meetings with the management for 2017-18 (concerns were raised only in the June 2018 quarter report published on 13th August after Mr Parthasarathy had stepped down as chairman, says the paper). 
     
    This, it says, had happened even though chairman Parthasarathy himself had admitted in an email to his top management cabal, just five days before this meeting that “It may not be feasible to sustain ITNL cash flow requirements much longer”. 
     
    According to the article, Mr Parthasarathy’s email speaks of formulating a scheme to approach banks and “keeping the RBI advised”, but did not see ‘much point’ in seeking their approval as RBI had got rid of all its earlier ‘debt restructuring schemes’. 
     
    The regulator: We already know that the RBI has consistently ignored all attempts by whistle blowers and even IL&FS’s partners and investors like AIDQUA, to draw attention to its crooked functioning. 
     
    The SFIO has, for the first time, has questioned the role of RBI officers in failing to initiate timely action. But there were no names mentioned to indicate where the buck stopped. 
     
    The latest forensic audit, reported by Moneycontrol reveals that Ravi Parthasarathy had discussions with R Gandhi, then deputy governor on 19 March, 2016 for “formulating a new legislation to facilitate fund raising by the (IL&FS) holding companies”, which were already a financial mess. 
     
    Remember, this was 2016, but the RBI did nothing until IL&FS crumbled on its own in August 2018. For two full years, RBI raised no alarm, did not tighten supervision, force better disclosure or prevail on IL&FS to cut the flab, sell companies and streamline operations. In fact, government and the regulators and the government were even clueless about the exact number of companies in the group. 
     
    Two years later, Mr Gandhi has been the government’s chosen director on Yes Bank (when it was sinking rapidly and again after the bailout). So not only are there no consequences for silence and acquiescence but there is actually a reward. Remember, Mr Gandhi was also in charge of the messy demonetisation of currency in November 2016, which dealt the first big blow to our economy. Mr Gandhi did not respond to my whatsapp message about his and the RBI’s failure to act against IL&FS. 
     
    The executives: Now let’s look at how the top executives, other than those who are in custody has fared. As mentioned in my previous column, the new board of IL&FS felt the need to offer bonuses to some executives to ‘persuade’ them to say on. These were paid out between 31st march to 4th April and had caused a lot of outrage in the organisation. 
     
    When I brought this to the notice of RBI and chairman Uday Kotak, the payments were frozen on 7th April, after Rs4.48 crore out of a proposed payment of Rs11 crore had been paid out.  These are people who ought to be happy they have a job when so many were sacked, but the board of retired babus believed they needed a 10% incentive payment to get their support in a scam-ridden group for a recovery process that is moving at a snail’s pace.
     
    The recipients include Mr Dilip Bhatia, who has been promoted to CEO, despite a growing body of information about how he was part of Mr Parthasarathy’s favoured cabal, which destroyed the organisation. The others are S C Mittal (CEO, ITNL), M Wagle (CFO, ITNL), Sanjay Arora (HR chief), Sudakshina Bhattacharya (CHRO), Mr Krishna Kumar (CEO, IIML) who has resigned despite the persuasion bonus, Manoj Borkar (CFO, IIML), Mr Savio (IT Head), Anil Sharma (CEO Elsamex), which one of the most controversial group of global companies, that has escaped deep scrutiny for two years, Kazim Khan (CEO, IECCL), Naveen Agrawal (CFO, IECCL).
     
    Remember, IL&FS always paid very high salaries and all these executives continue to be paid very well even while the group companies report mammoth losses and ordinary people have their provident fund money stuck in the group!
     
    I have asked the official spokesperson of IL&FS about Mr Dilip Bhatia’s elevation despite forensic audits exposing his complicity in fraudulent dealings and mismanagement. I have also asked how the board could justify bonuses to heads of hugely loss making entities such as ITNL and others. I have also asked whether Cyril Amarchand Mangaldas continues to advise the group despite clear conflict of interest, since it had advised Mr Parthasarathy in the past about not approaching the bankruptcy court. The company declined to comment.
     
    Everybody from the regulators, to investors, lenders and partners, especially the bureaucracy were co-opted and induced to look the other way in the IL&FS scam. But none of them will pay the price. 
     
    Funnily, despite the slow progress of resolution and stalled action, the government is apparently sanguine about progress, even while pension payments are held up. In an interview to the PTI on 5th April, just after the Covid-19 related lockdown was announced, Mr Injeti Srinivas, Secretary, Ministry of Corporate Affairs claimed that a substantial portion of IL&FS’s Rs94,000 crore debt would be recovered. 
     
    A month later, all we see is some paltry recoveries from Gift City and the Wind Power companies, very little progress on getting various states such as Tamil Nadu to buy out IL&FS stakes in their joint ventures and a massive increase in losses. ITNL alone has reported a massive loss of Rs17,000.32 crore for fiscal year 2019-20 as against a standalone profit of Rs251.76 crore in 2018-19. 
     
    Yet, in the strangest assertion, Mr Srinivas claimed that “the elephant” had gone amock and “it was strange that nobody saw it, whether it was statutory auditors, independent directors, credit rating agencies or others”. This, as we have proved is absolutely false. Everybody from the regulators, to investors, lenders and partners, especially the bureaucracy were co-opted and induced to look the other way in the IL&FS scam. But none of them will pay the price. 
     
    UPDATE:
    IL&FS subsequently got back with a response to say: “Retention payout under key resource program (KRP) included people that were critical to see through the enormous resolution mandate across IL&FS group companies. Commitment and performance  formed important basis of this one time payout (from operational cost) and was paid on completion of performance and retention period. The list of eligible population was identified across companies for this payout after evaluating relevant aspects. Total payout till date is Rs4.48 crore. This was not a bonus, hence not linked to company performance”.
     

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    COMMENTS

    Sudhir Mankodi

    5 months ago

    All those on board of these companies must be arrested, their assets be attached and onus of proof should be on them to prove that they are innocent. Seeing them freely moving in public is shame on our investigating agency.

    doctordhanbpathi

    6 months ago

    https://www.moneylife.in/article/ilfs-what-use-are-forensic-audits-without-fixing-accountability/60626.html

    1. Now, Indian economy is with the PMO, under Modiji’s stewardship. In 7 decades+ of independent India, we never heard about forensic audit. Let us expect breathing time to set right the looted institutions, identify & punish the guilty.
    2. Modiji proposes to bring down interest rates of lending to be 4% PA on par with the US, New Zealand & Singapore, etc.
    3. Just in 2 months lockdown, there was a windfall from the PSBs’ kitty. By paying 5-7% interest to depositors, PSBs contributed Rs.20 trillion to RBI & are eligible to seek interest @3.75%. The Karma Yogi PM & UFM have done a good job by re-allocating major chunk to finance to MSMEs, Industries & Agriculture, etc., with liberal interest between 5-8%. By noting the virulent attack on fugitives, Vijay Mallya, Nirav Modi, Mehul Choksi, X-IBA Chairperson, ICICI Bank CEO, etc., PSB-CEOs stopped lending to protect their skin.
    4. The rates on deposits are bound to fall down further. Modiji got the entire decision power of UFM to PMO to study the juggernauts of FX, dollar-rupee parity, the amt. stagger-out by the then ruling party politicians, fugitives & PSB directors, etc.
    5. An amount of Rs.17000 trillion was looted. As a matter of fact BJP led NDA has an ambitious plan to mobilize US$.5 Trillion [INR.350 trillion] by issuing SOVEREIGN BONDS. 48TIMES MORE THAN SOVEREIGN BOND PROCEEDS was already looted.
    6. The stage is set to realize the dream of our Karma* Yogi PM Shri Narendra Modi S/o. Late Shri Damodardas Modi, with a revolutionary mindset. He was elected 1st time MLA to become Gujarath CM & 1st time MP to become Indian PM. He is an excellent visionary + dreamer. His life goal is to usher in ‘THE BRIGHT FUTURE FOR THE TEEMING MILLIONS OF THE TALENTED, QUALIFIED & INTELLIGENT YOUTH; SO THAT INVESTORS FROM ALL OVER THE GLOBE SHALL INVEST HERE”. REVOLUTIONARY CHANGE IS A MUST TO SAVE FUTURE GENERATIONS.
    7. https://www.youtube.com/watch?v=4Si8U02s8cQ.
    8. SATYAMAEVA JAYATHE!!!

    REPLY

    keshavkrocks.16

    In Reply to doctordhanbpathi 6 months ago

    All ilfs saga happens in same karma yogi Shri Narendra Damodardas Modi and things like these are going to happen when independent directors are not independent in reality. Do you know who is independent auditor of ONGC! A guy who do modi bhakti 24 hrs.

    doctordhanbpathi

    In Reply to keshavkrocks.16 6 months ago

    GE Keshav Ji! Maybe, the so-called Bhakt is inspired to look into ONGC transactions from the angle of identifying any frauds & the guilty.

    India Planning Complete Ban on Cryptocurrencies like Bitcoin Through Law: Report
    India is looking to introduce a law to ban cryptocurrencies, as the government sees a legal framework as being more effective than a circular from the Reserve Bank of India (RBI) in this regard, says a report.
     
    Quoting a senior government official, a report from the Economic Times says, "A note has been moved (by the finance ministry) for inter-ministerial consultations. The spur for the draft cabinet note was the 4 March 2020 decision of the Supreme Court to quash the April 2018 circular from the RBI that prevented banks from providing services in support of cryptocurrencies."
     
    According to the newspaper, in July 2019, a high-level government panel prepared a draft law providing for a ban on all forms of private cryptocurrencies. It had suggested a fine of up to Rs25 crore and imprisonment of up to 10 years for anyone dealing in them. 
     
    Earlier in March this year, while allowing traders in cryptocurrency access to banking, the Supreme Court had cancelled a circular issued by the RBI in 2018. In the 5 April 2018 circular, the central bank had barred all its regulated entities, including banks, from dealing in virtual currencies like bitcoins, following its earlier multiple warnings on their risks.
     
    A bench of justices Rohinton Nariman, Aniruddha Bose, and V Ramasubramanian held that the RBI's circular, which prevented regulated entities from providing banking services to those engaged in the trading or facilitating the trading in virtual currencies (VCs), was liable to be set aside on the ground of proportionality.
     
    "When the consistent stand of RBI is that they have not banned VCs and when the government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate", the apex court had stated.
     
    Many banking regulators from across the world are not comfortable with the idea of cryptocurrencies. Indian government, especially the RBI always have expressed reservations to allow cryptocurrencies in the country. In view of the risks and dangers associated with cryptocurrencies, the Indian government and RBI have been issuing advisories, press releases and circulars to the public.
     
    The RBI statement in April 2018 had said: "We have now decided to fence RBI-regulated entities from the risk of dealing with entities associated with virtual currencies. They are required to stop having a business relationship with entities dealing with virtual currencies forthwith, and unwind the existing relationship within three months. Virtual currencies, also variously referred to as cryptocurrencies and crypto assets, raise concerns of consumer protection, market integrity and money laundering, among others".
     
    This circular was challenged before the Supreme Court by Internet and Mobile Association of India (IAMAI) and few other stake holders. 
     
    Greed and risk-taking behaviour go hand-in-hand; so, despite this emphatic warning, and at least three previous warnings by the RBI, once in 2013 and twice in 2017, there are thousands of people queuing up every day to register with crypto exchanges.
     
    In 2017, the finance ministry set up a nine-member inter-disciplinary committee that included Niti Aayog to study the global situation and suggest measures for dealing with such currencies. The finance minister announced in November 2017, ‘The government’s position is clear, we don’t recognise this as legal currency as of now.’
     
    Then, on 29 December 2017, the finance ministry issued a formal press release warning people about ‘virtual currencies’ (VCs). It said, “VCs are not backed by government fiat” and they are also not legal tender or even currencies, in the real sense, although they are called ‘coins’. VCs don’t have “any intrinsic value and are not backed by any kind of assets,” their prices are “entirely a matter of mere speculation” and that there is a “real and heightened risk of investment bubble of the type seen in Ponzi schemes," says the release.  
     
    Equating crypto-currency to Ponzi schemes, the ministry had warned people to avoid getting trapped by them and to note that digital currencies are often used to carry out subversive activities such as drug and terror funding. 
     
    The finance ministry was also emphatic in stating that “VCs do not have any regulatory permission or protection in India” and people should deal with them at their own risk. This warning was issued after seeking public views on future of Bitcoins (in May 2017) on its portal MyGov.
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    COMMENTS

    adityag

    5 months ago

    The best way to approach this is with an open mind to the possibilities of using blockchains (of which cryptocurrency is just one of its forms) in a democratic set up. I feel that blockchains is a wonderful concept, but it needs to be explored, researched, and debated (especially at policy level) rather than come up with knee-jerk reactions to ban it completely. Of course, the safe way is to make a law and then repeal it later when benefits of blockchain is known. Laws are often more difficult to repeal than to create, so essentially, you're paying the price today if a law is created.

    Just my two cents.

    mywopy

    6 months ago

    In my opinion, virtual currencies should be banned completely in this country.

    If virtual currencies are encouraged, it will be difficult for the regulators to keep any tab of the inflow and outflow of foreign remittances in India.

    In India, where foreign remittances are high, the citizens will start using virtual currency wallets for money transfer rather than as a alternate fiat currency or an investment asset class.

    Lakhs or Crores transferred can be between virtual currency wallets instantly, the transfer charges are effectively less than 100 rupees payable to the exchanges.

    No more currency conversion charges or remittance service fee revenue for banks.

    They would loose trace of which country the money is coming in from or going out to.

    Once this becomes mainstream forget about trying to figure out the trade deficits and balance of payments.

    REPLY

    geekesk2017

    In Reply to mywopy 5 months ago

    Haha you poor boy,
    Why people want to send their hard earned money with higher charges to the bank when sufficient technology is available. People never choose sending posts over sending messages on WhatsApp. They know what's cheap and reliable. There is lot of advantages over disadvantage in cryptocurrency. India will never ban cryptocurrencies. Our Honorable PM never stop booming sector.

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