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Initiative for preventing Ponzi schemes and chit fund scams
Irregular deposit, Ponzi chit fund schemes have been banned by the government from 21st February, 2019 through an Ordinance. In the past, this law was passed in the Lok Sabha, but could not get passed in the Rajya Sabha.

Under the new ordinance, those deposit schemes will be scrutinized, through which work is being done to defraud the poor, illiterate and non-aware people. This Ordinance will help in curbing the illegal schemes being run illegally without registration. According to the provisions of the Ordinance, it will make the poor financially aware. It seems that it will be helpful in preventing illegal business activities.

It is compulsory to get registered those bodies, which do business with the common man as per provisions of the new Ordinance. Since the new Ordinance has come into existence, the non-registered bodies have been banned from taking deposits. If a body violates the instructions contained in the Ordinance, then there is a provision in the Ordinance to take strict action against it. The provisions of the Ordinance also prohibit fraud by using an agent or advertisement. Now, the non-registered bodies will not be able to advertise in the newspapers or in the television for the promotion of their schemes or products.

Major provisions of Ordinance

Irregular deposit schemes have become completely illegal due to the implementation of the ordinance. There have been provisions for stringent punishment and heavy penalties for those who run erratic deposits schemes. There has also been provisions for recovering the fines earned dishonestly. The purpose of this ordinance is to deal with problems related to cheating with the help of fake schemes in the country.        

Generally, the companies running such schemes leverage the flaws available at the regulatory level. In the absence of stringent laws, those who invest in Chit fund or Ponzi schemes are being cheated. It has also been said in the ordinance to prepare an online data base related to irregular deposit schemes. If necessary, the provision for returning the money of the depositor by selling the property of the guilty person is also in this Ordinance. In the Ordinance, it has been said that strict action should be taken against the famous persons who have promoted such schemes.

Earlier attempts for making law

Irregular deposit scheme prohibiting bill was passed in the Lok Sabha last year, but it could not had passed in the Rajya Sabha. Owing to this, it could not converted into law. The purpose of this bill was to ban chit fund companies and Ponzi schemes.

History of chit fund scheme

Chit fund scheme was started as a savings scheme by a group of farmers in the Indian state of Kerala. This was systematically came into circulation during the years 1830 to 1835. This is an Indian concept, but today it is being operated in some other countries of the world. In China, it is known as the Chinese lottery. This system is also in circulation in Sri Lanka and Myanmar. There is also such a scheme in Portugal.

Method of making the scheme

Under the Chit Fund Act 1982, a settlement is made between the person belonging to the chit fund or the group of individuals in which a fixed amount or item is deposited in installments at a fixed time. Then it is given to a person through auction, which has the provision of return. The amount of profit is distributed among other members. According to the Chit Fund Act, this scheme is run between intermediaries or a person through an association or person, but also through this, the work of cheating is done. Many times this converted into Ponzi scheme.

Cheating by Chit fund scheme

Usually, chit fund companies lure investors into doubling the money in three to five years. However, the Reserve Bank and SEBI have taken actions against such companies many times, but they are again re-emerging. The empire of such companies has expanded across states like Chhattisgarh, Madhya Pradesh, Rajasthan, West Bengal, Jharkhand, Uttara khand, Bihar, Uttar Pradesh, Odisa etc. According to the SEBI and the Reserve Bank, there is no single chit fund company registered in Madhya Pradesh. Despite this, hundreds of fake companies are active there. The High Court has restricted chit fund companies in Madhya Pradesh. It has been seen that these companies mainly trap small and downtrodden people by luring doubling their investment.

Why not take action against chit fund companies

It has been observed that chit fund companies avoid the police action with the help of bribe and political pressure. However, when the matter becomes more serious, then the government has to be forced to take action. For example, between July 2014 and May 2018, there were 978 cases of fraud in these schemes, out of which 326 were related to the state of West Bengal alone. After the situation worsened, the government of West Bengal became a little bit tough. It is noteworthy that in West Bengal and Odisha, Rose Valley has cheated Rs.60,000 crore through the Ponzi schemes, while the Sharda Group of West Bengal has cheated 10 million people, in which more than Rs.10,000 crore was involved.

More than 1 million non-registered chit fund companies across the country

However, it is not possible to assess how many non-registered chit fund companies are active in the country, but according to an estimate of the All India Association of Chit Funds, more than 10 lakh such chit fund companies are active in the country. According to a report published in the Business Standard's January 20, 2013 issue, the size of the non-registered chit fund companies is more than Rs.30 lakh crore, whereas the size of registered chit fund companies is Rs.30,000 crore. According to the Ministry of Corporate Affairs, till October 31, 2014, a total of 5,000 chit fund companies were registered in India. 

What is a Ponzi scheme?

This scheme was named after the name of a person named Charles Ponzi, whose full name was Carlos Giannion Givovani Guglimle Tombaldo Ponzi. Ponzi took advantage of monetary and exchange disorder in Europe after the end of World War (I) and started a scheme called Ponzi in America. He cheated people by enticing more returns on an investment in countries like Italy, Canada, and America. Under this, he lured every investor to give 50 percent return in 45 days. Ponzi, later formed a company named "The Securities Exchange", in which huge crowds of people came to invest and thousands of investors invested in it. Later the money of the investors was lost. In the year 1964, the Oxford English Dictionary included the word "Ponzi". This shows that how much this scheme was infamous. 

Method of cheating 

Under the Ponzi scheme, people are cheated by tempting attractive returns on investment. Companies work vigilantly to execute the fraud by deposit schemes. For this, firstly the local person is selected, who is unemployed for a long time, but his image is good in the area. Usually, 85 percent of the people invest in such schemes due to trust or on the insistence of any member of the family or friends. These kind of cases of investing in such schemes have normally seen. Commonly, such deposits are promoted by the famous people of the society, which makes the trust of the common people unbounded on the scheme. In the beginning, investors are given a good return on investment. When people are completely confident about company's activities, then companies wind up their business.

Presently, the network of Ponzi schemes is spread to the far-flung areas of the country. Mostly, small and medium farmers and laborers come under the scanner of such schemes. Farmers of Andhra Pradesh, Tamil Nadu, Maharashtra, Goa, Uttarakhand and Punjab had lost their investment in large numbers in the name of Emu farming. In some states of the northeast, in the name of goat rearing scheme, common people were cheated. People are also being cheated in the name of giving ownership of tea gardens. For luring of investors, fraudulent companies are also offering free foreign tour to them.

How to identify Ponzi schemes

Identifying the Ponzi scheme is not easy, because there is no definite form of it. However, by using vigilance and discretion in such investment schemes, the fraud can be avoided. If any scheme is tempted to give more returns then there needs to be caution before investing. If a company is repeatedly claiming a scheme under government rules, then there may be scope for fraud. If a scheme is being promoted more or if it is claimed to pay more than 15 percent, then it may be bogus. In such a situation, it is necessary to invest only after thorough investigation.

Investor is also guilty

It is legally wrong to deposit money in companies that run Chit Fund or Ponzi scheme. This provision has been made in Section 3 of the Prize Chit and Money Circulation Schemes (Banning) Act, 1978. It is a crime to be a member of money circulation or chit fund companies. That's why people should stay away from such companies, because if anybody has filled the form of such company for investing money, then the police may consider it a criminal. Provision for punishment is same for those who invest the money or run such companies.

Most policemen do not know the law 

There is a provision to take action against companies running chit fund and Ponzi scheme for cheating investors under the Prize Chit and Money Circulation Schemes (Banning) Act, 1978.  If action is taken against chit fund companies under this act, then the possibility of come out from the clutches of laws will be reduced, but most of police do not do this in the absence of information.


At present, people are being cheated by chit fund companies, Ponzi schemes and other irregular schemes. By taking advantage of corporate governance deficiencies and regulatory shortcomings, such companies are executing fraudulent schemes. They are fooling people through fake schemes like investments in land, gold, goat rearing etc. True, it is a business of robbery, not by intimidation, but doing by get shown lovely dreams. Ultimately, the government has passed an ordinance on 21st February, 2019 to curb irregular deposits, Ponzi and chit fund schemes. It is believed that due to its stringent provisions, millions of people will be saved from being cheated. 

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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