The companies, which are under scanner after common investors complained of irregularities, are not chit funds at all, going by their filings with the registrar of companies (RoC), says a report in the Mint. All these firms, including Saradha, were registered with the RoC as commercial and industrial enterprises. So they are not essentially chit funds.

Had they been chit funds, they would have come under the state legislation. This is the bone of contention between the West Bengal government and the centre. Be that as it may, it is now clear that these funds are basically for cheating the investors and that is why the heading speaks of ‘cheat’ fund and not ‘chit’ fund.

Such companies are also called multi-level marketing (MLM) firms. An MLM firm works by promising huge returns on small investments: many of the 60 firms promised returns of up to 500%. Typically, an MLM firm floats a money-generating scheme and asks people to invest in it. These initial, or first-level, investors are repaid the original sum and given the promised returns from the money collected from the next batch of investors. The process is repeated as the levels increase. Initial investors are typically roped in to lure more people into the scheme by advertising the cheques they received from the firm. Once the firm collects a targeted amount, it shuts shop, the owners typically fleeing with the money of later-level investors.

The press is agog with reports of many poor urban and rural investors and agents having lost their hard-earned money in such investments. The specific cases cited in press and TV talk of urban investors with investments of more than Rs 1 lakh. Many applications have been received at a commission of more than Rs 5.5 lakhs. The first application received at the commission is albeit reportedly for Rs 28,000. Agents shown in an NDTV report talk of collecting amounts of more than Rs 1 crore. These agents have no doubt earned a tidy sum as commission although reportedly reinvested in the funds. Now the point is how many of these transactions are reflected in their income tax returns.

West Bengal’s growth rate is above the national average. It is unlikely that the growth is in the manufacturing sector given that there has not been any fresh investment here. Therefore, the growth happened in the services and agricultural sectors. Transactions here are mostly in cash and, in any case, rarely disclosed for payment of income tax. It is this liquid cash that has been invested in these ‘Cheat’ funds, which very conveniently, for all concerned do not follow KYC norms.

More regrettably, the moral fabric of the Bengali society has been torn apart in the garb of politicisation. Further, the spread of consumerism has enhanced greed in individuals. They therefore run after even the remotest possibility of earning such tax evadable income. Do they really deserve our sympathy and dole out of taxpayer’s fund?

After the Saradha debacle, the other ‘chit funds’ have come under pressure with more and more investors claiming refund of their deposits. Before absolute chaos sets in, the state government may need to, in public interest, take over or seize these other funds and arrange for orderly return of all the deposits. However, depending on the available funds, the refunds could be adjusted to an adequate proportion uniformly. It is, no doubt, a formidable task and the legalities would need to be thoroughly examined. Further, full cooperation of the centre and its agencies like Sebi and SFIO, which has not so far been forthcoming, will be very necessary.

The assembly had in a special session passed the West Bengal Protection of Interest of Depositors in Financial Establishment Bill, 2013. But it is yet to get the presidential assent. On May 8, chief minister Mamata Banerjee stated that West Bengal was actively considering setting up a government-backed small savings fund to encourage small depositors to invest in it rather than in Ponzi scams.

In March, union corporate affairs minister Sachin Pilot said in the Lok Sabha that his ministry had received complaints against West Bengal's Chakra Infrastructure, icore E-Service, MPS Group, Prayag Group, Rose Valley Group, Tower Infotech, Vibgyor Group, URO Group, Saradha Group and many others for their involvement in Ponzi or MLM schemes. However, no action was taken, it was only after the unraveling of the scam that a host of measures were announced. Then, the income tax department and corporate affairs ministry started separate investigation into the Saradha scam and other similar Ponzi funds masquerading as NBFCs or CIS. On the same day, the enforcement directorate (ED) registered a money laundering case, under the provisions of the Prevention of Money Laundering Act (PMLA), at its Guwahati office as the Assam police have registered an FIR against the Saradha group to probe the allegations of financial irregularities by numerous depositors against it. On May 1, commenting on the regulatory loopholes, the chairman of Sebi remarked that “there should be one single regulator for entire collective investment schemes”.

Subsequently, the union government set up an inter-ministerial group with members from corporate affairs ministry, Sebi, Reserve Bank of India and officers from the departmental of financial services. The group is supposed to unify the regulations of investment schemes by NBFCs, banks and companies, which at present are governed by different laws and regulations leading to regulatory loopholes etc.

Concerned over frauds perpetrated by money pooling chit fund, Ponzi-type schemes, the Institute of Cost Accountants has suggested a simple financial reporting format that will help the public to have a better understanding about companies. This simple format providing the aggregated revenue, cost and resulting profitability business vertical-wise, will be a key input for the public to get an insight into the activities carried out by a company.

It is true that politicians of all hues have helped these ‘chit funds’ increase their business and in turn exploited the funds to make some easy money. They need to be caught and exemplary punishment given. But real correction lies in educating common people to restrain their irrational greed and to rationally evaluate all earning opportunities.