The Ponzi Syndrome

Cheating by ‘Chits’
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West Bengal under Mamata Banerjee's Trinomul Congress (TMC) Party-led government is currently in a crisis situation due to revelation of a huge financial scam in which large number of poor and middle class families were cheated by Chit Funds, the foremost of them being "Saradha Group", whose CMD, Sudipta Sen and two other Directors, Debjani Mukherjee and Arvind Kr Chouhan were arrested recently from Jammu & Kashmir state while trying to flee in the face of their empire crashing down to dust by the weight of its colossal liability due to diabolical frauds of their own making. Prior to this episode, another scam involving "Sahara" Chit Fund Company of far greater dimension had been unearthed and brought to the notice of the Supreme Court of India. Nothing was done in the latter case because of alleged political pressure by the leader of one of the coalition parties in the UPA-2 government. In the wake of these scandals the Congress Party-led UPA-2 government in Delhi has issued a list of 100 such Chit Funds, 73 of them are operating from West Bengal and 26 of 73 in West Bengal were registered during the CPI(M)-led left front government. Yet in a recent meeting, the CPI (M) leader and former Chief Minister of West Bengal has bragged that his government did not allow Chit Funds to rub shoulder with them. Other three major Chit Funds in the news from West Bengal are: Rose Valley, Prayag and MPS groups.

The word 'chit' that has entered Oxford Dictionary is of Indian origin, it means a piece of paper on which a short cryptic note pertaining to a financial transaction is written. The note is usually written by a creditor who sends his representative to the debtor with the request to pay certain sum of money to the bearer of the note towards settlement of the debt. In village markets held once or twice a week known as "hat", use of "hath chit" or "hundi" is common. In interstate trade within India "hath chit" or "hundi", exchanged between traders, are honoured. The 'chit' is thus a private agreement, an article of faith, between two business entities. But a 'chit' is not transferable like a bill in the bill market. It is a private deal between the debtor and the creditor that has to be settled between the two parties only. This is a simple version of the 'chit' system prevailing in the business communities in India.

The second form of 'chit', which evolved later, is a signed document wherein an unspecified number of business people known to one another through caste and/or business relation(s) enter into an agreement to internally raise funds which are instantly lent out on interest to one of the participants in the fund at a time. A simple model of this second type of 'chit' is presented hereunder: Suppose there are 10 friends, f1...f10 who have agreed to deposit Rs 100000 (Rupees one lakh) each month for 10 months. The initial collection is Rs 10 lakh which is the available loan amount. Whoever bids for the highest rate of interest takes away the entire fund minus the interest part. Let us designate the first successful bidder as f1 who for the next 9 months will continue to deposit Rs 100000. In the second month Rs 10 lakh will be raised in similar fashion and distributed accordingly. The fund will continue for 10 months. At the end of the period the accumulated interest, set aside each month, will be distributed equally among 10 friends, f1 ...f10. In the third form of 'chit fund' a single lender or a committee of lenders organise the fund with the participation of some friends agreeing to accept loan to be advanced from the fund, raised as mentioned above, and according to rules and regulations framed by the committee. Once the friend agrees to abide by the rules he is included as an insider. Like the original form described in a previous paragraph, the second and third forms are also in the private domain.

In the absence of modern banking facilities the trading castes in India had recourse to this method of raising funds from ancient time. In these forms of 'chit fund' the rules governing the participants are stringent and the applications thereof are rigorous so that adequate safeguards are taken right from the stage of selecting the new entrants through the sieve of caste and/or long business associations, property, surety etc. in order to ensure that lenders' monies are protected and at the same time investors' businesses obtain circulating capital.

Never did the question of legality haunt the operators of 'chit' fund because the system is assumed to be a secret organisation and its modus operandi are transparent within the closed circle where the participants are known to one another and each participant is active. Each participant takes his own decision himself in accordance with his reading of his own business situation and owns responsibility for his action. He must be wakeful, not sleeping. The motives of two groups, lenders and investors, within the fund are clear to each other and honoured and the borrower-investor must not default in respect of fulfilling his commitment to instalments payable, which is his EMIs, towards the fund. The fund does not own any liability with regard to the manner of investment of the borrowed fund by the member. The fund is nothing but a medium of flow of money within the interest group, a sort of forum for distribution of funds internally raised and transferred to the borrower-participants. It must also be emphasised that both "hath chit" or "hundi" and "chit fund" belong to the informal sector of the money market.

In the absence of secure structure of law and its enforcement, that is to say, in the face of anarchy and uncertainty prevailing in the political superstructure prior to consolidation of the British rule in India, it is only the "chit funds" that could keep the economic infrastructure vibrant by facilitating circulation of merchants' and traders' capital through rigorously following its own self-imposed regulations. It never needed any outside regulator nor is there any scope for any outside regulator to intervene. The system is self-regulated. Even the British merchant capital did not touch this native means of raising funds internally, nor did the British government in India interfere. So 'chit' funds could remain beyond the purview of law throughout the British period into independent India until the 1970's when some unscrupulous operators among them started making forays into the wide, open illegal fields of trade and commerce laid bare by the government. Indian economy was in doldrums, economic planning was eyewash, the political rulers at each level were thieves, the surplus generated by blood and sweat of Indian labour was siphoned off overseas to unnamed accounts in Swiss banks, and inflation was galloping amidst massive unemployment, sickness and closure of factories and revolution betrayed. Lawlessness engulfed every nook and corner of the Indian economy. Looting of nation's wealth, gangsters intimidating and corrupt ruling political establishments sharing the spoils of theft in every sphere including foreign exchange - in this sociopolitical situation of corruption breeding more corruptions in new areas, some ‘cheats’ having knowledge of modus operandi of the system started organising an inverted, twisted and fake version of "chit funds" with political patronage in the wake of internal emergency and collapse of rule of law.

Now, when this Chit Fund system was allowed to break into the formal sector of the money market, that is to say, when the government sanctioned a chit fund to operate as a company in public domain, it ceases to be a chit fund in the strict sense of the term even if it is organised by the government as, for example, it is said to have happened in Kerala. However the government's seal of approval creates a misunderstanding among the investing public that the company, bearing a registered number in pursuance of the Companies Act, Govt. of India, is trustworthy. The governments both central and state, therefore, are the prime offenders in this matter and therefore cannot disown responsibility. On the basis of the government sponsored confusions some articles in newspapers are appearing to assert that these chit funds are not cheat funds in order to confound the public and leave some space for the cheat funds to continue. Chit funds in private domain are "chit funds per se" and, on the other hand, chit funds run by a company or a government in the public domain are not 'chit funds' proper and therefore the government or its regulatory bodies have the responsibility to keep them under watch and punish whenever they cross the limits of legality to save the investing public from fraudsters. Whenever a Chit Fund Company sells schemes, for instance, regarding sale of plots of land for residential or commercial purposes, or residential flats in proposed high rises etc. and employs agents to sell such schemes on commission it ceases the right to call itself a chit fund because a chit fund, by definition, cannot engage itself in any business of this kind outside fund management.

There lived in America a man named Charles Ponzi who used to collect savings deposits from Italian immigrants for Luigi Zarossi's local bank which later failed. Ponzi later started his own business of collecting deposits at gradually rising rates. Lured by higher and higher rates the poor immigrants gave deposits in ever greater quantities. From higher collections at the current period he would clear old debts. The more he could pay up old debts the more deposits he would amass. In this way his liabilities went on increasing. But his depositors did not know the mechanism and believed in him until his business suddenly crumbled like a house of cards. The late depositors who gave more in the hope of more returns lost their life's savings and became poorer and Ponzi fled but was caught in Brazil where he was sent to life imprisonment. In the Indian scenario the government sponsored Chit Fund Companies followed Ponzi's methods to lure and destroy public savings.

Frontier
Vol. 45, No. 46, May 26-June 1, 2013

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