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Amendments to Unregulated Deposit Bill: A frontal Attack on Chit Fund Scams

chit fund scams

The Cabinet approval for bringing amendments to the Banning of Unregulated Deposit Schemes Bill, 2018 has once again highlighted Modi government’s sincere attempts at curbing the menace of rampant spread of unregulated deposit schemes which have for years impacted small savers particularly. The recent news of a faceoff between Mamata Banerjee and the CBI in the backdrop of chit fund scams in West Bengal makes these amendments timely and crucial.

What do the amendments mean?
  • The Bill contains a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme.
  • In principle, the Bill would ban unregulated deposit taking activities altogether, by making them an offence ex-ante instead of awaiting the existing legislative-cum-regulatory framework to work out the modalities over time.
  • Being comprehensive in scope, it covers three different types of offences, running of Unregulated Deposit Schemes, fraudulent default in Regulated Deposit Schemes, and wrongful inducement in relation to Unregulated Deposit Schemes.
  • The clear listing of Regulated Deposit Schemes in the Bill, with a clause enabling the Central Government to expand or prune the list, leaves little room for ambiguity.
  • Clear-cut time lines have been provided for attachment of property and restitution to depositors.
The scale and the spread of the problem
  • As per the RBI, during the period between July, 2014 and May, 2018, 978 cases of unauthorized schemes were discussed in State Level Coordination Committee (SLCC) meetings in various States/UTs and were given to the respective regulators/law enforcement agencies in the states.
  • Notably, a large number of such instances have been reported from the eastern part of the country.
  • In pure numbers, according to a media report, a staggering six crore people have been duped by chit fund companies across the country
Who are impacted?

Typically, the worst victims of these schemes are the poor and the financially illiterate, and the operations of such schemes are often spread over many states. Even among the so-called educated people, given that the country at large is not financially literate, the middle-class people too get taken for a ride by the scamsters who often operate in collusion with the administration, the police and some politicians. Lured by the inducement of fantastically, albeit unrealistically huge returns in a short span of time, the common people fall prey to them easily.

Therefore, the amendments are an endeavour to not only protect the small savers but also to restore the public faith in the management of public finances in the country.