EXPLAINED: How chit fund scams work

'Around 15 crore poor people have lost their money.'

The political stand-off between West Bengal Chief Minister Mamata Banerjee and the Narendra Damodardas Modi government after a Central Bureau of Investigation team tried to question Kolkata Police Commissioner Rajeev Kumar in connection with the Saradha and Rose valley chit fund scams, hogged prime time television last week.

What are chit funds? And how are Indians lured to invest in ponzi schemes?

"We have 300 people who have committed suicide after losing their money in chit funds," C B Yadav, national spokesperson, All Investors Safety Organisation, tells Rediff.com's Syed Firdaus Ashraf.

"It is estimated Rs 3 lakh crore has been lost (in chit fund scams)," Yadav, below, points out.

Why don't we read about investors getting their money back from any of the chit scams?

There are many scams.

If you go to the SEBI Web site, you will find out that 350 companies have shut down and all were involved in chit fund scams.

It is estimated that Rs 3 lakh crore has been lost (in the chit fund scams).

But don't call these people investors.

These are poor people who have lost their money in chit fund scams as they have no understanding of the banking system.

These chit fund companies work with poor people and make agents among them.

These agents go after poor people's savings and they in turn invest in these chit funds.

Around 15 crore poor people have lost their money (till now).

These are not middle class investors, but poor people.

How do chit fund companies function? How do they convince poor people to invest money in their companies?

These companies work in a network of multi-level marketing system.

One agent has 10 sub-agents under him and again these 10 sub-agents have 100 sub-agents reporting to him.

They make a pyramid of such agents.

All these agents are poor people who have some social standing in their community.

These agents collect money for chit fund companies.

So when these companies dupe poor people, then the person who had some social standing in the community is called a thief.

Poor people do not invest in chit fund companies, but they put their hard earned money into the hands of the man whom they believe in their community.

They know him and they only trust that man, not the company.

Take the example of the Pearl Agrotech Corporation Limited chit fund company, which had 70 lakh agents.

If you see all the chit fund companies in India, you will get 2 crore such agents.

Since when have these chit fund companies been running? Everywhere we see people are getting cheated by such outfits...

The Sahara chit fund scam case was of Rs 15,000 crore.

The Sardha case was of Rs 21,000 crore while the PACL case was of Rs 50,000 crore.

In the case of Sahara and Sardha, the CBI inquiry is going on.

Now a company like PACL was investing in real estate. So, the Supreme Court in February 2016 said PACL properties must be auctioned and the money must be returned back to the poor people.

There were around 5 crore investors and they should have got their money back by now.

PACL properties are worth four times the money they have to return to investors.

Recently, Law Minister Ravi Shankar Prasad said the government is going to bring a bill so that these investors get their money back.

Now what is the point of bringing such a bill when the Supreme Court has clearly said in the PACL case that they have to return the money back to the poor people?

It has been three years now (since the judgment came) and still the money has not been returned (to the investors).

Who is the right authority to look into this?

The R M Lodha committee was formed and SEBI was the authority. It comes under the finance ministry.

So it was the duty of the finance ministry to ensure that these poor people get their money back.

Therefore, I don't understand what bill Ravi Shankar Prasad was talking about. It is a big failure of the Modi government.

They did not return the chit fund money back to poor people in spite of the Supreme Court order.

Why do poor people invest their hard earned money in such chit funds?

You have to understand that it is largely poor women who are very concerned about their family's financial future security (who invest in these chit funds).

Now they do not know how to obtain those means.

It is here that one person among them becomes an agent as s/he is lured by these chit fund companies.

A company like PACL was established in 1996 under the Companies Act 1956.

They were giving regular returns on maturity and they then win the trust of the people.

It is just like we trust LIC (Life Insurance Corporation Ltd) as it is a government company.

Now, when these chit fund companies deliver 3% higher returns compared to banks, more and more trust is gained.

In greed, poor women who are illiterate invest their money in chit fund companies.

They also fear the banking system as they cannot read and write well to understand the system.

Therefore, when one among these poor women is more literate, she convinces others to save their money in chit fund companies.

To an extent there is nothing wrong in doing so.

Every now and then so many scams have come to light. So why do people still go for this route?

In every chit fund scam case they catch hold of one person and put him or her in jail.

He or she is happy to be in jail.

In the PACL scam, too, Nirmal Bhangoo is in jail.

But in reality he is staying in a 5-star hospital.

This is standard procedure.

By putting one man or woman in jail, justice is not done and the money is not being given back to the poor people.

Poor people become a little greedy.

It is here that they get trapped by chit fund companies.

These schemes are meant for poor people.

Another thing you will notice is that these chit fund companies organise big parties which big celebrities attend.

Like, they organise parties at district levels by creating an atmosphere among their agents that they are big and win their confidence.

Many times they have meetings for their field agents in big hotels and these are closed door meetings.

These agents then get their (poor people's) minds conditioned.

In a poor slum colony, these field agents catch hold of one man who is trustworthy.

They then start investing in the scheme.

How has the government failed to stop this?

If you see all the top heads of chit fund companies, you will find out that they are close relatives of some or the other top politicians.

The entire chit fund system runs on political patronage.

So till the time political will is not there to stop this, there is no solution.

These chit fund companies know very well that poor slum dwellers will not be able to fight against them.

One of the big problems with a poor person in our country is that if s/he gets poorer, then s/he blames his fate and not the chit fund company.

S/he feels that it was not in her/his destiny to become rich.

Poor people believe more in blind belief, and religion has more influence on her/his life.

They will say doob gaye toh doob gaye.

They will not struggle (to get their money back).

If people like me go and tell them that they have to fight against the chit fund company, they don't believe me.

They have a defeatist attitude and the chit fund companies know this fact.

Therefore, they have been fooling around poor people for the last 30 years.

How much does a poor family invest on an average in such chit fund companies?

Very less, in some case maybe Rs 10,000 to Rs 50,000.

But their population is huge, so chit fund companies earn huge money.

As I told you earlier, women mostly invest their money by hiding it from their families in these chit fund companies, so they lose more money.

When they lose money, they cannot come out in the open and tell their families that they have lost the money.

Despite all this, how come people don't understand that these scams have been going on for 30 years?

The scams that come out in the media don't reach poor people's homes.

It is only 6 per cent of India's population that discusses such scams.

In a decade, a new generation comes up who is not aware of the last scam that happened a decade ago.

Now this new generation is ready to fall into a trap of a new scam.

Don't poor people come out on the roads to protest against chit fund companies?

Four times we have come out with huge morchas to Jantar Mantar in Delhi.

Nearly 70,000 people came out each time.

People have gone on hunger strike in many districts of India.

We have 300 people who have committed suicide after losing their money in chit funds.

Local newspapers do report, but no big media organisation ever reports such incidents.

On February 2, I organised a huge event in New Delhi, but not a single media outlet wrote about this incident.

If the Indian middle class had come out with a candle march, then the entire media would have telecast the candle march.