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If you drive down from Chennai to Pondicherry, it is not unusual to see a furry, beaked head poking out over a high wall, looking quizzically at the world go by the yard in which it lives. The six-feet bird came as an import from Australia and, unknowingly, became a part of a multi-crore scam in Tamil Nadu that defrauded hundreds of thousands of people. Emu farming promised super normal returns – invest in emu chicks, they get fat on your money and are then sold for their meat and oil, doubling or tripling your initial money. Sounds far-fetched? It may to you, but some 500 crore of real retail money bought the scheme. It isn’t as if people only in the south are gullible; 1,600 kms north of Chennai, in West Bengal, an even larger bunch of people at the bottom of the pyramid collected every rupee they could and invested in real estate deals, teak farms and in products as bizarre as potato bonds that offered to double money in a short time. And it isn’t as if it is the rural poor that are gullible, Indians in urban areas have got burnt taking online surveys or trusting their money to a stock guru for multi-bagger rewards. One newspaper report (http://bit.ly/15TnxY8) puts the size of fraudulent deposit-taking schemes just in West Bengal at 70,000 crore. There is no estimate for the size of the problem across the country but we can conjecture that it will be in trillions and not billions.

For a problem that is so large, it is surprising how little we know about it. Our ignorance is so deep that we’re calling the scam by the wrong name! We’ve termed Saradha Group, at the centre of the scam in West Bengal, and others in the space ‘chit fund’ companies. They’re not. A registered chit fund is actually a regulated entity that according to an IFMR (Institute for Financial Management and Research) paper (http://bit.ly/ZYc4OI) by Preethi Rao, “is the Indian equivalent of the Rotating Savings and Credit Associations (ROSCA) that are famous throughout the world…It is considered one of the best instruments to cater to the needs of the poor." There are over 10,000 registered chit funds that come under the Chit Funds Act, 1982, administered by the state governments, managing assets of over 30,000 crore. These are legitimate bodies offering saving and borrowing solutions to individuals and small businesses that are outside the world view of banks. The risk in a chit fund is limited to one group failing. The contagion does not spread.

So if they are not chit funds, what are they? If we can answer this, we can fix who the regulatory body that should be overseeing the companies is and then affix responsibility. But nobody knows how to classify these companies. Are these deposits being raised by a company? No, because there is no interest being offered, but a return on investment, which may or may not be in cash – it could be a flat or an emu or a teak tree. Are these collective investment schemes (CIS)? A CIS is a scheme where money is pooled by investors with the intent of getting profits, income, produce or property, as defined by Section 11AA of the Sebi Act (http://www.sebi.gov.in/faq/cis_faq.html). No, these are not since this Section exempts chit funds, nidhis and deposits collected under Section 58A of the Companies Act from being called CIS.

So what is this creature that raises money that banks, mutual funds and insurance companies are unable to see at the bottom of the pyramid? Born in the dark spaces between regulatory definitions and turfs, lurking in the grey areas of the unorganised sector and protected by the local politicians (scratch a scam and you’ll find a politician lurking somewhere) these entities are called multi-level marketing (MLM) schemes, also known as ponzi schemes that rely on an increasing pyramid of ‘downlines’ to keep the game going. The money from fresh investors is rotated to pay off the initial investors and the game keeps going till fresh bakras can be found. It takes one event to pull the thread and the MLM firm collapses like a house of cards. Of course, by that time, the owner, his associates, the local politicians and authorities that turned a blind eye to the huge ads promising incredible returns, have covered their tracks.

Most regulators have worried about the MLM schemes but have not had the regulatory spirit of coordination or cooperation needed to sit together and weed them out. It takes a scam with many zeros to get the government moving. We’re finally near an ordinance that will give the Securities and Exchange Board of India the teeth needed to prosecute MLM firms. But that will be like putting a band-aid on a festering wound. We need a far deeper change. We need to get moving to implement the Indian Financial Code, as drafted by the Financial Sector Legislative Reforms Commission, that proposes a unified financial products regulator, a single consumer redressal forum and regulatory teeth.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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