Lok Sabha Question No. 2510 (UNSTARRED), answered on 2016-03-11
Subject: NBFC/Chit Fund Frauds
Ministry: FINANCE
Asked by: PRATAPRAO GANPATRAO JADHAV, SANTOSH AHLAWAT, LAXMAN GILUWA, NANABHAU FALGUNRAO PATOLE, (ADV.) JOICE GEORGE

## GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF FINANCIAL SERVICES

## LOK SABHA UNSTARRED QUESTION NO. †2510

TO BE ANSWERED ON THE 11 th  March, 2016/ Phalguna 21,1937 (SAKA)

## NBFC/Chit Fund Frauds QUESTION

## †2510.  SHRI PRATAPRAO JADHAV: SHRIMATI SANTOSH AHLAWAT: SHRI LAXMAN GILUWA: SHRI NANA PATOLE: ADV. JOICE GEORGE:

Will the Minister of FINANCE be pleased to state:

- (a) whether  the  Government  has  noticed  that  a  number  of  Non-Banking  Finance  Companies (NBFCs)/Multi  Level  Marketing  (MLM)/Chit  Fund  companies  are  increasing  day  by  day  in  the country and operating without requisite registration;
- (b) if so, the details thereof including the name of the said companies against whom complaints regarding  non-payment  of  investors  money  have  been  received  by  the  Reserve  Bank  of  India during the last three years and the current year, company and State-wise;
- (c) whether  the  Government  has  any  proposal  to  regulate/scrutinize  such  companies  in  the wake of the recent scams noticed therein and if so, the details thereof; and
- (d)     the monitoring mechanism put in place by the Government to keep a check on the activities of the said companies and to protect interests of the investors?

## ANSWER

## The Minister of State in the Ministry of Finance (SHRI JAYANT SINHA)

(a):   Reserve  Bank  of  India(RBI)  is  conducting  a  one-time  exercise  based  on  the  list  of  34,754 Companies  forwarded  by  the  Ministry  of  Corporate  Affairs  (MCA)  which  are  registered  under Companies Act, 1956 and classified/  categorized  as  'NBFCs'  in  the  records  of  MCA  and  these Companies  may  be  carrying  on  Non-Banking  Financial  Institution  (NBFI)  activities  without mandatory registration as required under Section 45IA of RBI Act, 1934 as only 12,375 Companies are  registered  with  RBI  as  NBFCs  (as  on  February,  2013).  MCA  had  requested  RBI  to  initiate action against such Companies. While several Companies in the list were not registered with RBI as NBFCs, the list also did not contain some companies already registered with RBI. Chit Funds are registered and regulated by the State Governments under the Chit Funds Act, 1982. Further, money circulation schemes are prohibited under the Prize Chits and Money Circulations Schemes (Banning) Act, 1978 and the States are the implementing agencies under the Act. However,  MCA  has  ordered  investigations  through  Serious  Fraud  Investigation  Office  (SFIO) under Section 235 of the Companies Act, 1956 and Section 212 of the Companies Act, 2013 into the  affairs  of  164  companies  against  whom  complaints  had  been  received  regarding  alleged collection of funds from the people in different States of the country.

As  on  30.11.2015,  CBI  has  registered/investigated  82  Regular  Cases  relating  to  chit  fund companies/ Non-Banking Finance Companies(NBFCs)/Multi Level Marketing(MLM) and Directorate  of  Enforcement  is  investigating  42  cases  relating  to  financial  frauds/cheating  in  the name of chit  funds  and  other  investment  schemes  under  Prevention  of  Money  Laundering  Act, 2002(PMLA) during the last three years and current years.

(b):   RBI has reported that there are 1444 NBFCs operating in different States/ Union Territories which are not registered with RBI, against whom complaints regarding Non Payment of investor's money  have  been  received  or  noticed  by  the  RBI  during  the  last  four  calendar  years  and  till February 29, 2016.

(c)    & (d):   RBI, as a one-time measure, examined the financials of all these companies (other than those registered with the Bank) to ascertain their requirement or otherwise for registration with the Bank.   The main objective is to determine whether among these companies there are companies that  ought  to  have  registered  with  the  RBI  for  carrying  on  their  NBFI  activities.   The  updated position  is  tabulated  as  under  on  the  basis  of  preliminary  examination  of  the  financials  and  the action taken by the Bank thereafter:-

| Sr. No.   | Category                                                                                                 | No. of Companies   |
|-----------|----------------------------------------------------------------------------------------------------------|--------------------|
| 1         | Companies Referred by MCA to RBI                                                                         | 34,754             |
| 2         | Of the above, Companies registered with RBI as NBFCs                                                     | 4,585              |
| 3         | Companies in MCA Database, not registered with RBI                                                       | 30,169             |
| 4         | Of the above (3), Companies under Liquidation                                                            | 4,302              |
| 5         | Of the above (3), Companies whose B/S not available on MCA website                                       | 4,253              |
| 6         | Companies, which required further investigation (3-4-5)                                                  | 21,614             |
| 7         | Of the above (6), Companies found not meeting PBC criteria, i.e. are not considered as NBFCs             | 16,309             |
| 8         | Of the above (6), Companies prima-facie meeting PBC (Letters of Explanation issued to all the companies) | 5,305              |
|           | Of the above (8) :                                                                                       |                    |
|           | A) Companies suspected of holding public deposits                                                        | 104                |
|           | i) Of (A), No. of companies found to be holding public deposits on detailed scrutiny/ analysis           | NIL                |
|           | B) Cases taken up for detailed review (approx.)                                                          | 2,300              |
|           | C) Scrutiny conducted                                                                                    | 1,326              |
|           | D) Cases closed (on account of companies not meeting PBC / registered with another regulator)            | 1,555              |
|           | E) Referred back to MCA (since the company was not found on its registered address)                      | 297                |

As  may  be  observed  from  above  that  there  were  5305  companies  prima  facie  observed  to  be carrying  out  NBFI  activity.  Since  the  conclusions  were  arrived  at  on  the  basis  of  information available on MCA website, the RBI had issued a 'letter of explanation' to the companies providing them an opportunity to clarify their position, before initiating action for violation of the RBI Act.

The  RBI  made  its  action  plan  giving  priorities  to  certain  categories  of  companies,  e.g.  the companies suspected of accepting deposits, large Non- deposit taking companies etc. A graded approach to deal with these cases, having regard to the nature of violations, has been adopted by the  RBI.  The  RBI  had  also  carried  out  scrutiny/visits  of  the  companies  suspected  of  accepting deposits. However, as can be seen from the Table above (row A (i)), RBI has observed that none of the companies was accepting/ holding any public deposits, and as such there was no concern from the perspective of non-repayment of investors' money.

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