Gaps allowing dubious schemes likely to be plugged

Amendment of the Multi-State Co-operative Act, 2002 is expected to address regulatory gaps.

Updated - February 02, 2017 03:27 am IST

Published - February 01, 2017 10:50 pm IST - THIRUVANANTHAPURAM

Dubious schemes launched by individuals and some funds using the regulatory gaps of co-operatives would likely to come to an end with the amendment of the Multi-State Co-operative Act, 2002.

The draft Bill to curtail the menace of illicit deposit schemes has been placed in the public domain and will be introduced shortly after its finalisation.

The government feels that there is an urgent need to protect the poor and gullible investors from another set of dubious schemes, operated by unscrupulous entities who exploit the regulatory gaps in the Multi State Cooperative Societies Act, 2002.

“We will amend this Act in consultation with various stakeholders, as part of our ‘Clean India’ agenda,” said Finance Minister in his budget speech.

The 2002 Act says that this is “an Act to consolidate and amend the law relating to co-operative societies, with objects not confined to one State and serving the interests of members in more than one State, to facilitate the voluntary formation and democratic functioning of co-operatives as people’s institutions based on self-help and mutual aid and to enable them to promote their economic and social betterment and to provide functional autonomy and for matters connected therewith or incidental thereto.”

Lure of lucre

An example of a dubious offering is a Ponzi scheme that receives funds from depositors on the basis of promise shown by a non-existing enterprise. It does not earn adequate revenue or interest and hence uses funds from new deposits to pay off old depositors. When such operators fail to attract deposits any further, a section of their client base is unable to get back the invested sums.

The Act’s main objectives are to serve the interests of members in more than one State; and its bye-laws provide for social and economic betterment of its members through self-help and mutual aid in accordance with the co-operative principles.

The word “limited” or its equivalent in any Indian language shall be suffixed to the name of every multi-State co-operative society registered under this Act with limited liability.

As per this Act, a multi-state cooperative society is not only one which operates in more than one state but has a minimum of 50 members in one State. This allowed unscrupulous operators to launch chit fund companies and money circulation firms that masquerade as credit cooperative societies. The government was surprised by the the increase in number of such funds in recent times, mostly credit ones.

The Parliamentary Standing Committee on Finance which submitted a report to the Lok Sabha Speaker on October 7, 2015 noted that multi-state cooperatives under the Agriculture Ministry, operating without any financial regulatory over sight, have become a conduit for transferring huge amounts of money for dubious Ponzi schemes that are ripping off the savings of people across India.

The Committee noted: “It seems that the present regulator for multi-state cooperatives i.e. Central Registrar, falls under Ministry of Agriculture, which do not have any financial regulatory infrastructure. As the number... of multi state cooperatives have increased hundred times since 2010, the Committee would suggest that the enforcement aspect with regard to financial schemes operating through multi state cooperatives be shifted to Department of Economic Affairs under Ministry of Finance, since the multi-state cooperatives have now become some kind of a shelter for illegitimate funds, which seemed to have surprisingly escaped the notice of the concerned Authorities, particularly the Central Registrar under Ministry of Agriculture.”

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