Oversight, transparency and accountability are terms unknown to most chit fund operators, who deal with the poor man’s hard-earned savings.

Recent developments in the Saradha group’s chit fund case in West Bengal have thrown up multiple governance challenges for both the state and the central government.

While a complete failure to govern has led to this large-scale mishandling of funds by Saradha, the state government has suggested a strange and confusing way forward: to spend taxpayers’ money to refund tens of crores lost due to its own inability and inefficiency.

The Centre’s stand is equally confounding: with corporate entities playing into the hands of chit funds in mishandling money without any governance practices in place, or any pre-audit of source of funds of any nature, it has swiftly ordered the serious fraud investigation office (SFIO) to probe 57 cases relating to chit funds.

Unfortunately, neither the Trinamool Congress government in Kolkata nor the UPA in New Delhi has attempted to touch the core issue of oversight, transparency and accountability issues over chit funds.

The menace of misuse of funds by promoters of chit funds is not new. The scale of this problem had led to the Centre making a law as long ago as 1982, adding to similar legislations made by various states, as under:

• Central government: Chit Funds Act, 1982 (with jurisdiction over all states barring Jammu and Kashmir)
• Andhra Pradesh: The Andhra Pradesh Chit Funds Act, 1971
• Goa, Daman and Diu: The Goa, Daman and Diu Chit Funds Act, 1973
• Karnataka: The Chit Funds (Karnataka) Rules, 1983
• Kerala: Kerala Chitties Act, 1975
• Maharashtra: Maharashtra Chit Fund Act, 1975
• New Delhi: The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007
• Puducherry: The Pondicherry Chit Funds Act, 1966
• Tamil Nadu: Tamil Nadu Chit Funds Act, 1961
• Uttar Pradesh: Uttar Pradesh Chit Funds Act, 1975

Govts unable to meet challenges

But these laws have clearly not been able to meet the challenges in ensuring proper management of chit funds and preventing misuse of funds by their promoters, leaving usually very poor investors/members high and dry.

Investors of other more regulated entities in the capital markets are covered by investor protections guidelines and investor protection and education fund regulations issued by SEBI.

Additionally, the corporate governance structures mandated under the Companies Act, 1956 is intended to provide transparency and oversight through independent directors on audit committees.

However, when it comes to an investor of a chit fund, or for that matter even a company dealing with chit fund money, these protections are non-existent.
So, should an investor in a chit fund be denied the same level of protection available to other investors of capital markets merely because the institutions of chit funds operate usually at very local levels, and among usually very low-income investors?

Does our constitution permit such a dichotomy in governance — in having different oversight standards governing use of funds for lower and higher income investors?

While several such questions are staring at the state and central governments in the wake of the Saradha chit fund scam, the need of the hour is:
to bring chit funds within the purview of corporate governance norms to ensure better oversight, transparency and accountability in their management and use of funds; and

to enhance the responsibility on the management of companies to follow more stringent audit procedures on sourcing funds from chit funds — by audit committees of these companies with the consent of independent directors.

The short-sighted and confusing actions of paying back the defrauded investors of Saradha from taxpayers’ money or a kneejerk reaction in starting SFIO probes are not going to prevent the menace of misuse of funds by errant promoters of chit funds reoccurring. Unless the legal framework is tightened on the oversight, transparency and accountability of the use of funds by these chit funds.