Andhra chit-fund scam: How shady companies duped small investors to swindle crores

Amaravati: Several irregularities and malpractices were detected during raids on 35 companies in the multi-crore chit-fund scam.

When did it start?

The searches started on October 21 and concluded on November 15. Sleuths visited 35 chit-fund companies and questioned the officials. During searches, a huge scam was unearthed involving major companies including STR Chits & Finance Pvt Limited located in Bhimavaram, Margadarsi Chit Fund Pvt Limited, and others.

What are these chit-funds?

For 100 years, Chit funds were alternative to the banking system in places where formal financial facilities were not available. Today, most of the chit fund companies are synonymous with the biggest scams in India. The chit-fund scheme requires a very high level of trust, which was brilliantly executed by the masterminds of these companies, which nurtured the business by extracting billions of rupees from the public. Even financial experts are surprised at the prospect of running this business for decades.

Every month, crores of rupees are invested by chit fund companies through mutual funds or bank fixed deposits. Crores of rupees have been added to the companies' reserves through bank interest and mutual fund dividends. It is surprising how deviously the chit-fund system is executed. Where these bank interests and mutual funds profits are reaching?

A vicious circle of a finance scheme was created through one such chit fund company, Margadarsi chit funds Pvt Ltd.

To understand the gravity of the violations done by Margadarsi, as depicted in the table. For over 100 prized subscribers (who have paid surety), 6 Cr was announced as prize money. Out of the total, 90 people still need to receive the prize money as the company erased them from the list, citing concerns over the surety documents submitted.They delayed this process for 2-3 months. In the end, only ten people who were approved received the prize money of only 60 lakhs (which is being well advertised in the market), and the rest of the amount (mentioned in the table - Rs. 54o lakhs) is carried forward through a bank in the last three months. This way, the excess money will be left in the bank, where the chit foreman earns a lot of interest through fixed deposits.

During the annual inspection of the balance sheet, the officials found that the prize money under Margadarsi has been pending for nearly three months. Still, the bank's fixed deposits and mutual funds have exceeded thousands of crores. There needs to be clarity on how many people have paid and how much money the company owes to the people or the government. Not even once in the six decades of the Margadarsi Chit Fund's journey had surfaced details of their balance sheet to the chit registrar.

What does the Act 1982 say?

The Chit Fund Act 1982 states that every chit fund group must prepare a separate balance sheet for profit/loss account every year and submit it to the registrar. This was the provision for protection for both the investors and the company. If this is done, a deficit shall be revealed in every chit-fund group. However, these companies run thousands of chit-fund groups that do not maintain transparency in holding records, like the number of members subscribed, no payments done, and how many people are being cheated. This has resulted in the chit-fund companies getting away from high-scale violations.

According to an official from the department, there are allegations about several chit-fund companies, and major flaws are seen in Margadarsi. As of now, an FIR has been booked on STR Chits and Finance Pvt Limited, while the investigation into the reports of other chit fund companies is still ongoing.