Saradha: Sebi, government should take over chit funds

There are thousands of chit funds all across the country which promise unbelievable returns, cheat investors and run away, and these need to be regulated

While Mamata Banerjee’s Trinamool Congress (TMC) and the Left slug it out about who is responsible for the Saradha scam, let’s get one thing clear: there are thousands of chit funds all across the country which promise unbelievable returns, cheat investors and run away.

The lure of higher returns, sweet talk from agents and the uncle/aunt/neighbour who got rich in six months because of 100 per cent plus returns annually, ensure that there are enough investors who are ready to part with their life’s savings. 
In the south, there were emu schemes – birds which are in demand for their meat and eggs – that offered to triple the money in five years. And plantation schemes, cattle schemes and chit funds have existed for decades.

While the Securities and Exchange Board of India (Sebi) has started a cracking down on collective investment schemes, things in many cases, have already blown out of hand. If the market regulator would stop these entities from raising anymore money, they will start defaulting.

The promoter and top management, as usual, will run away. The agents and investors will be left holding the can. There will be more suicides – something, no one wants. But if Sebi and the various state governments wait for complaints, more people will be duped. Anyway, these schemes will be exposed sooner or later.

In such circumstances, Sebi in association with the respective state governments have to play it carefully. A few suggestions for whatever they are worth:

• First, the respective governments should step in and take over these companies immediately, irrespective of the fact whether there are complaints or not.
• Freeze the promoter and top management’s accounts, offices, and properties. Sell them and create a corpus.
• Tell investors that they will be paid their principle amounts plus an ‘X’ rate of interest after three- five years.
• Get good investment managers to manage this money through 80 per cent debt and 20 per cent equity schemes.
• Sebi should set up a division that will supervise the corpus of these schemes and a monthly/quarter report should be maintained. 
• Declare the NAVs of the scheme in leading papers every month.
• Agents of these schemes should be banned from selling any investment product forever. They should also be sued and if found guilty, jailed.

Yes, if the promoters or the entire senior management have fled with the money and there are no assets either, the market regulator and government can do little about it. But even in such cases, the market regulator/state governments should take penal action against the management and agents. As far as returning the money goes, they can do little except trying to recover whatever they can from the promoters.

In the past, the Centre was able to take this hard decision in case of US-64 (though it was not a chit fund neither did it cheat customers, but the high returns it promised became impossible to pay) and investors were able to get back their principal with reasonable returns after a decade.

It’s time state governments took active interest in eradicating chit funds. And, stern action is required towards politicians engaging in such activities.