A REVIEW ARTICLE ON “SHARDA” CHIT (Cheat!

) FUND
FRAUD IN INDIA
Kanika Bhola1, Jai Parkash Negi2& Shalu 3
Rajan Kaundal4& Chander Mohan Gupta 5
1,2,3,4 Students of B. Com&5Assistant

Professor Shoolini University, Himachal

ABSTRACT
Non-banking financial companies are at all time high now days. Many such companies have
started offering lucrative schemes by promising high interest rates and borrowing schemes to
their investors. This review paper deals with the study of Ponzi Schemes which are popularly
known as Chit funds. It studies its origin and the modus operandi. It further analysed the
Saradha Scam of West Bengal that looted the hard-earned money of several innocent investors.
It highlights the financial operation of the scheme and the key players of the scheme. It also
highlights some key points for the safeguard of the investors. This review makes an attempt to
depicts the working principle of a recognized chit fund company/scheme, difference between
registered and unregistered chit Fund Company thereby enhancing the awareness among
people before making their choice and decision of choosing a chit fund scheme. This review
paper is based on the secondary data collected from government websites, interviews given by
government officials and other published records.

Keywords: - Chit fund, Ponzy Schemes, Old, Bank, Poor Man, Families, Money, Trust, Consumer, Saving,
Payment, Default Collective Investment Scheme (CIS), Multi-Level-Companies (MLMs).

1.INTRODUCTION
On April 16, 2013, the first complaint was received by the Government of West Bengal against the
working of Saradha Group. Within three days of complain the police came into action. In the first
week of May, 2013, the Kolkata High Court ordered the government of Kolkata to file an affidavit for
investigation by CBI of the chit fund scam involving crores of rupees. All the fourteen entities of
Saradha Group including Saradha Reality India, Saradha Agro Development, Saradha Construction
Co., Saradha Exports, and Saradha Garden Resorts and Hotels, etc. were under the process of
investigation. A report from the newspaper The Telegraph (a newspaper published in Kolkata) on
August 19, 2013, stated that a total of 17.39 lakh applicants made complains about the scam out of
which 83% of the applicants (approx. 14.43 lakhs) had deposited an amount equal to or less than Rs.
10,000. As per estimation, if the average deposit was Rs. 5,000 then the State Government would
require at least Rs. 720 crore and in case of Rs. 7000 as average deposit, the pay amount would rise to
Rs. 1,010 crore. Therefore, the value of the scam was approximately Rs. 3000 crore. In India, the chit
funds are the indigenous financial organizations that combine the savings and credit in single scheme.
In the study carried out by Kapoo et al Eds. (2014), they pointed out the fact that however the chit
funds are a significant basis of finance for the low – income households and small businesses in India,
there is a general evacuation of the low value chits from that the registered market of chit funds.
However, there is also a chit fund crisis that arises, which use to create great loss to all the people who
put money on that. So this study indents to explore the reasons behind the chit crisis in India through
specifically analysing the case study on the strategies of corporate governance in Saradha Group.
Chit fund is a financial savings instrument widespread from even before the formal banking system
began. Such an arrangement is carried out based on coordination and trust between operators and
members. Various schemes are operated by organized financial institutions whereas many
unstructured schemes are also managed by small groups of people who know each other, can be
relatives, friends and others. Chit fund companies are classified as NBFC i.e. non-banking financial
companies. ‘The Hindu’ quoted that there are almost 193 registered chit funds which are operating in
Bangalore and registered under the Chit Fund Act 1982. The turnover of all these are estimated to be
around Rs. 4,000Cr per annum. But the number of other unregistered chit fund operators is likely to
be 100 times more than the registered ones. All India Association of Chit Funds are making attempts
to build people awareness about the business of chit funds.

2. REVIEW OF LITERATURE
In this we4 will give a review of the history of chit funds. The way the idea of chit funds was misused
by many people is the main issue of this chapter. Many unregistered chit fund firms operated in India
due to soft penal regulations against them. This chapter focuses on the Saradha Group chit fund
scandal. This chapter also details the involvement of the government in the recovery of the economy
from the scam.
Ardener explained that the member who defaults in one ROSCA may suffer to such an extent that he
may not be accepted as a member of any other. In some communities, the rotating credit institution
has become so rooted in the economic and social system that exclusion would be a serious
deprivation.
Dasgupta who made four case studies of money-lenders in rural India, explains that default is only 23
per cent of the interest rate charged.
F.J.A. Bouman discussed the financial intermediation, formal and informal financial sectors and rural
finance. Financial institutions can play an important role in the growth and development of an
economy by channeling funds from surplus sectors (savers) to deficit sectors (investors).
V.Krishnan mentioned the growth, importance, types, features and malpractices of chit funds. The
favouring circumstances that fostered the growth of the chit funds were the lack of organized credit
facilities to permit of savings deposits, the accommodation of small capital and the availability of
loans on easy terms. The dominant feature of the transaction is that it enables a large number to
gradually lay by money to receive their savings in a lump sum, and the scheme in their case is an
incentive to thrift.
M. S. Joshi explained that, financial intermediaries acquire unique importance in the developing
economy as they perform multifarious activities in a development process. Their main function is to
purchase primary securities from ultimate borrowers and issue indirect securities to ultimate lenders.
Financial intermediaries responsible to some extent for (a) sponsoring or (b) encouraging or (c)
discriminating between, various industries whereby sectoral balance is affected.

R.Kalyansundaram opined that the chit funds have doubtless a positive role in the economy of the
country and a separate department for chit funds to control them is an essential need. A commission at
Government level is necessary to be set up to go into details of their working, giving chit funds an
opportunity to represent their case.

S.K.Basu A Non-Banking Financial Company (NBFC) is a company incorporated under the

Srinivas and Higuchi Observed that Chit funds have been grouped under the category ‘Mutual Credit
Suppliers’, because the demand and supply of credit is mutual-that there is a give and take process
involved. Participants typically support each other for credit needs in mutuality. The money supplied
or saved by some participants is lent and borrowed by some other participants. Thus the benefits of
the operation are mutual to all participants and equally distributed. The central idea of mutual credit
suppliers is that they encourage savings from the participants.
3 RESEARCH AND METHODOLOGY
3.1 INTRODUCTION
Research methodology (RM) includes three basic sections, research methods, data collection methods
and sampling, and interpretation (Stewart, D. W., & Kamins, M. A., 1993). RM for this study would
follow the same process and performing of the first two sections one by one. Research methods are
decided first and on that basis sampling and data collection is done. A
research could be conducted with any one of the three basic methods of research that is decided on the
very purpose or objective of the study. The three types are exploratory, descriptive and causal
researches that are applied with specific research requirement of the study. In this study, descriptive
study would be carried out since the descriptive study helps in find out the exact situation and helps in
make assessments on the reasons behind the scam of Saradha Group and its impact on the investors.
3.2 RESEARCH METHODS
The research method is of three types: - exploratory research, causal research, and the descriptive
research. The Exploratory research is done in cases where information is required in a broad context.
Application of this type of method provides a better understanding of a situation. Exploratory research
does not help in finding solutions to problems or making a final decision. It helps in developing a
hypothesis related to the situation. Exploratory researches are applied in cases where something new
has to be explored out and new concept, theories or principle etc. have to be developed. This type of
research is mostly done with the help of extensive literature review, secondary data sources or focus
group interviews (Stewart, D. W., & Kamins, M. A., 1993). Fundamentally, exploratory researches
are done to find out the key variables that may be independent or dependent. Academic research is the
best example of exploratory research however this research type has universal applicability to develop
a sense of understanding about the areas still untouched.
Causal researches are done to establish a cause and effect relationship between the key variables.
Impact of independent variables over the dependent, the variables is defined with causal researches.
Descriptive researches are used to describe the characteristics of variables that are having impact over
the phenomena. Descriptive research is underpinned to provide the description of observations of
phenomena with a clear mapping of all the objects that are included in the study. Descriptive
researches are done with the help of primary data generally
and involve extensive surveys, interviews etc. to collect data for completion of the study. In some
cases where the research path is not so clear, hypotheses for the research is set out before the data
collection and that is proved with statistical analysis of the responses obtained through primary
sources. This study will follow the descriptive research method. In this study, quantitative research
method will be used. It is since, basically the quantitative is descriptive in nature (Jackson, 2011).
Descriptive research involves three main categories: observation, case studies, and surveys. For
conducting this research we will follow the survey methods which participants answer questions
administered through questionnaires (close-ended). However as the primary data will be required to
be collected via victims of the scam of Saradha group in the state of West Bengal there are chances
that the response rate of questionnaires is low and not sufficient for analysing and processing. Further
it will not possible for anyone to travel to every possible areas to collect data or read and speak every
language therefore based on the response rate received from questionnaires, Schedule Method or help
from Local Agents will be used.
In schedule method the questionnaires are sent through the enumerators to collect information.
Enumerators are persons appointed by the investigator for the purpose. They directly meet the
informants with the questionnaire. They explain the scope and objective of the enquiry to the
informants and solicit their cooperation. The enumerators ask the questions to the informants and
record their answers in the questionnaire and compile them. Also help from local agents or
correspondents shall be taken. These agents will be appointed by the local agency contacted by the
researcher. They are well conversant with the local conditions like language, communication, food
habits, traditions etc. Being on the spot and well acquainted with the nature of the enquiry they are
capable of furnishing reliable information.
3.3 TARGET POPULATION AND SAMPLE
The target population of the quantitative study are the victims of the scam of Saradha group in the
state of West Bengal. The sample size of the study will be 300.
3.4 DATA COLLECTION
Data can be collected with the two basic methods that are through primary and secondary data
collection sources. Primary sources of information are needed to have knowledge of current
conscience, thinking and views of respondents directly which paves the ways for obtaining solution on
ground reality (Daas, P. & Beukenhorst, D., 2008). A structured questionnaire is prepared for
recording the responses of respondents or help from local agents will be taken. Secondary data refers
to the second hand information. Secondary data can be numeric and non-numeric. As the data in this
case is already collected, therefore it is less accurate in comparison to the primary data. Secondary
data can be collected from various sources which can be generally classified into two types i.e.,
published sources and unpublished sources (Patton, M.Q., 1990).
Non-numeric or qualitative secondary data include data collected from interviews, accounts,
documents, conversations, photographs, government publications, journals, books and articles, etc.
These serve as useful literatures for the research study to be conducted (Daas, P. & Beukenhorst, D.,
2008). This study will use both primary and secondary data. The primary data will be collected from
the victims of scam of Saradha Group in order to understand the impact of scam and how the steps
taken by Government help them in this concern. The secondary data in this report is collected from
journals, newspaper articles and publications. . The primary data will be collected through surveys
with the use of closed – ended questionnaires. Based on the response rate, enumerators or help from
local agent will be taken.
3.5 LIMITATIONS OF THE RESEARCH
It is a universally accepted fact that every research has limitations and it can never be 100 per cent
accurate. The limitations can be external and internal. Internal limitations can be the data and material
used, the extent to which a problem has been researched, and the final result derived from the data. It
is not possible for anyone to travel to every possible library, museum to collect data or read and speak
every language, this act as an external limitation in a research. Similarly the accuracy of the data
collected by enumerators or agents depends on the honesty, skills and sincerity. However, research is
done in a manner that it could give the best possible solution to the problem. Census studies or
complete enumeration techniques become more relevant than sampling techniques for serving the
purpose of generalization but it is difficult to conduct census in every case.
Use of primary data may become a big limitation when respondents either do not respond or respond
with opaque, ambiguous or fake answers. This research follows the secondary data collection method
where data collected from newspaper articles and journals do have limitations. This report has
considered only one example of chit fund crisis in India i.e., the scandal of Saradha group. Moreover
the report has only considered the secondary data and no information could be collected from the
primary data. The data collected from secondary sources are not 100% accurate; therefore, there are
possibilities of misinformation.

REFERENCES: -
1. All India Trinamool Congress Leads, (2013). “Success Story” Vol. II, pp. 4-9, New
Delhi, available at https://aitmc.org/Vol%202_Issue%201.pdf [Accessed on 27th February, 2014].
2. Daas, P. and Beukenhorst, D. (2008), Databronnen van het CBS: Primaire en secundaire
bronnen (Statistics Netherlands data sources: Primary and secondary sources). Internal report,
Statistics Netherlands, Heerlen.
3. Millennium Post Edition, (2013). CBI ready to take up Saradha probe, pp. 7, Delhi, available
at http://cbi.nic.in/newsarticles/pressclips/may_2013/pc_20130508_2.pdf [Accessed on 27th
February, 2014].
4. Besley, Timothy, Stephen Coate and Glenn Loury. 1993. "The Economics of Rotating Savings
and Credit Associations", The American Economic Review, Vol. 83, No.4.
5. Bouman, F. J. A. 1995. "Rotating and Accumulating Savings and Credit Associations: A
Development Perspective", World Development, Vol.23, No.3.
6. Calomiris, Charles W. and Indira Rajaraman. 1998. "The Role of ROSCAs: Lumpy Durables
or Event Insurance?" Journal of Development Economics, Vol.56.
7. The Hindu Business Line (Archives) Klonner, Stefan. 2002. "Understanding Chit Funds: Prize
Determination and the Role of Auction Formats in Rotating Savings and Credit Associations",
Yale university mimeo.
8. Srinivas, Alam and Rajeev Dubey. 1999. "The Nidhi Nightmare", Business Today.
9. F.J.A. Bouman, “ Small Short and Unsecured: Informal Rural Finance in India, Oxford
Unversity Press,(1989)
10. M.S. Joshi, “Financial Intermediaries in India” , University of Bombay, Series In Monetary
and International Economics, No. 8, 1965.