Rose Valley Chit Fund Scam

Introduction

When you have a lot of money, all you want is a smart investing strategy. But how does he spot a good investment opportunity? A good investment programme is one that provides high returns while also allowing the investor to withdraw money whenever he wants it. Chit funds are an example of a plan that allows even low-income individuals to invest and receive interest on their deposits.

Chit Funds

Chit funds are defined in Section 2(B) of the Chit Fund Act 1982 as a revolving savings and credit organisation structure, which is a common practise in India. Financial institutions and unorganised money market enterprises, as well as friends, family, and neighbours, may establish chit fund schemes. Savings are set aside for a specific purpose in certain chit funds. It’s especially popular in places where individuals have limited access to banking services and prefer to put their money in a Chit fund instead.

A chit fund is a type of investment where a group of people pool their money with the promise that it would be doubled in a short period of time with a guaranteed return. A certain number of subscribers contribute in instalments over a set length of time under this sort of saving plan.

A chit fund works by bringing together a group of people known as subscribers. The group is brought together by an organiser, a corporation, or a trustworthy family or neighbour, who oversees the group’s operations. The organiser is rewarded either monthly or at withdrawal time for their services. In casual settings, the charge may be waived.

Consider an auction-style chit fund in which 50 subscribers each invest Rs. 100 each month. The monthly pool is Rs 5,000, which is auctioned off every month. The discount will be spread to the members based on the winning bid, say Rs. 1000. The winning bidder would then be paid Rs 4,000 (Rs 5,000 – 1,000), with the remaining subscribers receiving Rs 20 (1000/50).

Because the procedure is repeated throughout the life of the plan, the winners will not be allowed to participate in the auction again and will be required to pay the monthly subscription. Every month, the business in charge of managing the chit fund would take a fee from the prize money. A chit group is a collection of chit fund subscribers, and a chit fund firm may manage several such groups.

Characteristics of Chit Funds

The following are characteristics of chit funds:

1. They have a certain value and time limit.
2. They function similarly to microfinance institutions.
3. In a single system, they integrate both credits and savings.
4. They provide for the financial requirements of low-income families.
5. They let donors convert their contributions into a lump sum payment.

This is accomplished through three ways.

1. Safe Deposits: A person can put money in a safe deposit now and receive a lump amount afterwards.
2. Loans: A person can take out a loan now and make payments afterwards.
3. Insurance: Allows the depositor to take use of the lump sum in the event of a disaster.

Chit Fund Varieties

1. Organized Chit Funds: A typical form of chit fund in northern India is one in which tiny paper chits with each member’s name are gathered in a box. When all of the members assemble for a monthly meeting, the person in charge selects a chit from the box in front of all of the current members. The member who is chosen receives the day’s collection. The chit of that individual is then withdrawn from the box. The individual who was previously chosen attends the meetings and pays his or her fair share, but his or her name will not be chosen again.
2. Special Purpose Funds: Some chit funds are set up with a specific goal in mind. For instance, consider the Christmas presents fund, which has a very clear expiration date of around one week before Christmas. During the hectic festival season, such a fund can decrease costs and relieve members of unnecessary labour. Nowadays, special purpose chit funds are held by ladies wear shops, jewellers, and other businesses to advertise their wares.
3. Online Chit Funds: Chit funds are being established online as well, thanks to the rise of e-commerce. Contributors can make monthly payments and collect the reward using online transactions, such as electronic money transfer systems, with online chit funds. To handle and circulate chit money, each member receives their own online account.
4. Registered Chit Funds: Chit funds that are registered with the state government under the Chit Funds Act of 1982 are known as registered chit funds. In India, there are over 10,000 registered chit funds.
5. Unregistered Chit Funds: Unregistered funds are ones that have not been registered with the appropriate state government. As a result, they are not subject to any laws.

Rose Valley Chit Fund Scam

The Rose Valley financial scandal, also known as the Rose Valley Chit Fund Scam, was a huge financial scam and alleged political scandal in India that resulted from the failure of a Ponzi scheme conducted by Rose Valley Group.

The Rose Valley Scam was one of the worst financial scams to hit West Bengal in 2013. According to estimates from the Economic Development Board (EDB), Rs 17,520 crore was raised from investors across India. The sum was estimated at Rs 40,000 crore by the All India Small Depositors Association. Several sources put the figure at around Rs 60,000 crore.

West Bengal, Assam, Bihar, and Tripura were among the states affected by the fraud.

Only half of the 27 businesses that the Rose Valley gang reportedly created to handle the alleged chit fund operations were functioning. It is claimed that the business used “cross investments” in its numerous sibling companies to hide its investor responsibilities.

According to the ED, a portion of the money was also used to bribe lawmakers in order for the scheme to function successfully. The ED has frozen 2,500 accounts belonging to the Rose Valley organisation, and it believes there are many more to be tracked and frozen.

Gautam Kundu, the chairman of Rose Valley, was detained in a money laundering case in 2015, and the CBI and ED investigated him. During the inquiry, the authorities froze all of the Rose Valley Group’s 2,600 bank accounts, which held between Rs 800 and 1,000 crore.

Because he was the company’s director, the name of AITC MP, Actor Tapas Paul, came up throughout the inquiry.

The CBI detained Bengali film producer Srikant Mohta on January 25, 2019, for defrauding Rose Valley Group of Rs 25 crore. Chokher bali, Memories in March, Autograph, Raincoat, and Iti Mrinalini are among the numerous award-winning films produced by Mohta’s business Shree Venkatesh Films.

Then why is it significant?

In India, ponzi scams come in many forms and sizes. There have been a number of get-rich-quick schemes that contradict the traditional criteria of a financial instrument, such as Sahara’s optionally fully convertible bonds (OFCDs) and Saradha’s unregistered chit fund. Ponzi schemes taking payments from investors for the acquisition of agricultural land, goat raising, emu farming, teak orchards, holiday time-shares, and potato farming have been discovered by SEBI. Many of them have amassed large sums of money from unsuspecting investors.

Because none of the current financial market authorities have jurisdiction over such “innovative” asset classes, SEBI has drafted an omnibus CIS rule that provides it broad authority to regulate any schemes that pool client funds. However, while the intention is admirable, none of these unscrupulous operators want to register as CIS.

If SEBI prevails in its struggle with big CIS operators like Rose Valley, it is hoped that additional such schemes would be brought under its regulatory umbrella.

Conclusion

Chit funds are untrustworthy unless they are provided by a personal group of friends and family in whom you have a high level of confidence. I do not believe that one should invest in chit funds that are not part of one’s social circle. It makes sense for people in smaller towns to look up to them. Finally, these chit funds are not investment vehicles where you can deposit your hard-earned money, so avoid them unless you are willing to accept that type of risk. Chit Funds are a unique approach to save money because the tenure/maturity time is short and the subscription cost is modest, making them easily affordable in rural and middle/poor income areas.It may be structured in a very casual fashion and adapted according to one’s requirements because there are no hard and fast rules to control it. Regardless of these factors, one must be cautious about the type of chit fund to which they subscribe or participate, as well as the organisation that is in charge of it. The Hon’ble Supreme Court has issued a number of rules to control and oversee the operation of chit funds in the wake of the recent Saradha Group chit fund scandal.