In light of the rising incidents of unregulated collective investment schemes (CIS) going bust leading to huge losses to the public at large, the market watchdog Securities and Exchange Board of India (Sebi) has proposed a separate regulator to control chit funds and nidhis. In addition, the regulator has also sought more powers to check their growth till a single regulator is put in place.

The proposals were put forth by Sebi chairman U K Sinha during the three-day meet of the Asia-Pacific regional committee of the International Organization of Securities Commission (IOSCO) which concluded in Delhi this week.

Addressing media persons, the chairman had said, "There's a need for separate regulator for chit funds and nidhis..... We have asked the government to strengthen the Sebi Act in the interim through amendments."

In the present scenario, chit funds and nidhis do not come under the purview of Sebi, Sinha pointed out pitching for a separate regulator to manage them. Chit funds are governed by the Chit Fund Act 40/1982 and regulated by the respective state governments as it was felt that state authorities were competent to manage them. However, with the surge in the number of chit fund scams, the government is mulling over regulating all kinds of collective investment schemes, Sinha added. 

Chit funds are savings schemes under which a person enters into an agreement with a specified number of persons who agree to subscribe a certain sum of money over regular instalments for a certain period in return for interest and lends money to those wanting to purchase property, etc. On the other hand, nidhis are restricted to smaller groups and accept deposits and lend money only to member-borrowers.

However, market analysts don’t seem very pleased with the idea suggesting that another regulator would only lead to problems of coordination and mismanagement.

Speaking to Governance Now, Prithvi Haldea, chief managing director, Prime Database said, “Sebi definitely has a very good understanding of the financial markets and so it is a better option that all kinds of collective investment schemes including chit funds and nidhis be brought under its scanner instead of creating a new regulator altogether.”

Adding that people were finding loopholes within the present norms prescribing the limits of a private issue, Haldea suggested that any kind of scheme that requires raising funds from the public, irrespective of the number, should be approved and regulated by the regulator.

According to Rajen Shah, chief investment officer at Angel Broking, setting-up a new regulatory body to look after collective investment schemes will be a time-consuming process and instead extending the ambit of Sebi to regulate such schemes would solve the problem.

Highlighting the issue of regulatory arbitrage, Avinash Gupta, head of financial advisory services, Deloitte said, “At present, the country already has too many regulators and this could lead to the problem of regulatory arbitrage wherein certain cases may lie within the jurisdiction of several regulators. In order to avoid such a situation, it would be a wiser idea for Sebi to be given more powers and asked to control all kinds of collective investment schemes as well.”

Gupta further said that across the globe, several countries were following the trend of coordinated regulation and a similar approach should be followed in India as well so as to minimise chances of defaulters escaping due to regulatory arbitrage. “Creating a uniform regulatory framework would also enable smooth implementation of norms and curb the rising incidents of frauds,” he said.