Chit fund companies have come under the scanner, with the Corporate Affairs Ministry ordering a probe of their books. The Ministry has asked the Registrar of Companies (RoC) to probe the accounts of chit funds companies and certain multi-level marketing firms.
The move comes in the wake of the Ministry receiving complaints from investors about being cheated through multi-level marketing /money circulation schemes. The RoC has been asked to make available its report to the Ministry within two weeks.
The Corporate Affairs Ministry had recently held a meeting with representatives of the Department of Financial Services and the RBI and it was agreed that as both the Chit Funds Act 1982 and the Prize Chits and Money Circulation Schemes (Banning) Act 1978 are regulated by the Finance Ministry, it would not be tenable for the MCA or any other Ministry to go into issues arising out of the two Acts, sources said.
The modalities
However, with regard to the enactment of legislation regarding the direct selling of products and multi-level marketing, it was first essential to understand the modalities and intricacies of the working of multi-level marketing companies.
“The Ministry, therefore, decided that the Registrar of Companies will conduct an inspection into the affairs of chit fund companies and select multi-level marketing companies to examine their modus operandi ,” they added.
Similarly, the Department of Financial Services and the RBI will independently carry out studies on multi-level marketing /direct selling companies.
“As the issues of multi-level marketing schemes relate to the common man, the Consumer Affairs Ministry has also decided to constitute a inter-ministerial committee with members from the Ministry of Finance, Department of Financial Services, Department of Revenue and the Ministry of Corporate Affairs to deliberate upon the issue and also giving suitable recommendations”, sources note.
The Indian Direct Selling Industry had also sent a representation to the Ministry of Consumer Affairs for enactment of a separate legislation to cover direct selling and multi-level marketing companies.
Currently, the activities of the direct selling industries are currently being covered under the PCMC Act 1978.
Separate legislation
When contacted, the Indian Direct Selling Association (IDSA) Secretary-General, Chavi Hemanth, said: “We have sought inclusion of direct selling nomenclature to differentiate ourselves from other pyramid schemes”.
Earlier, the Serious Fraud Investigation Office (SFIO) had also recommended the setting up of an institution under the Central government to check fraud through chit funds and multi-level marketing schemes.
A report prepared by the SFIO says the Centre should monitor all multi-level marketing (MLM) schemes through the enforcement directorate and the intelligence bureau to help oversee implementation of laws across States.
Chit funds and MLMs are forms of informal credit schemes that usually function as a cooperative. Members make monthly deposits and, at the end of each month, bid to acquire the collected sum.
There have been instances of chit funds and MLMs being misused by promoters, who often decamp with the collection.