Reserve Bank of India (RBI) governor D Subbarao on Friday faced tough questions from a Parliament panel over the busting of the Saradha Group, which left investors high and dry. He was asked why no action was taken against the company when it had been offering fancy rates of returns.
Members of Parliament's standing committee on finance asked Subbarao how so many chit fund companies were operating, as no further licence had been given since 1997, those in the know said.
Bharatiya Janata Party leader Ravi Shankar Prasad and the Communist Party of India MP Gurudas Dasgupta wanted to know why the regulatory framework to control chit fund companies was not working and why there was a proliferation of laws in this sphere.
The RBI Governor will have to answer to all these questions, they said.
The governor was told that there is no plan of action on monitoring these companies. Before coming out with some kind of law to monitor chit fund companies, there should first be a mechanism for that, he was told. The members also criticised the Centre and the West Bengal government for lack of coordination. It was not clear as to whose responsibility it was to monitor these companies, members said.
They said while small investors invested in these companies, they did not have any clue about who to approach with their grievances.
BJP leader and committee chairman Yashwant Sinha will write a letter to Finance Minister P Chidambaram to come out with a framework on chit fund companies, those in know of the development said.
Earlier, the department of financial services had proposed amending the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 to make inducement to persons for joining multi-level marketing, pyramid, ponzi or collective investment schemes an offence to plug loopholes in money churning activities of companies.
The department under the finance ministry proposed to insert a new section 3A in the Act through an amendment Bill for this purpose, those in the know told Business Standard.
The development assumes importance as Parliament's standing committee on finance is also expected to examine the Act.
Besides, the department wanted the Serious Fraud Investigation Office (SFIO) be entrusted with the powers of coordination and prosecution in schemes, which operate in many states in coordination with states. SFIO may be entrusted with the powers of collecting information and on fraudulent pyramid companies and issuing caution notices to state police authorities, the department suggested.
The proposals also sought to add a new section in the Act to make it punishable with imprisonment of persons launching a collective investment scheme without the approval of the market watchdog, Securities and Exchange Board of India (Sebi).
Besides Chits Act and Sebi Act, these schemes are currently covered under the RBI Act, 1934, the Companies Act, 1956, and state laws for protection of interest of depositors in the financial establishment.
The Chits Act covers prize chits and money circulation schemes, but there is no specific reference to multi-level marketing schemes for goods and services in the Act.