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NRIs permitted to invest in Chit Funds

Few days back RBI announced that henceforth Non-Resident Indians (NRIs) could subscribe to Chit Funds in India.

This comes after a 15-year period, during which chit funds were on the 'prohibited list' of investments for the NRIs.

It was in May 2000 when RBI had imposed such a prohibition stating that "no person resident outside India shall make investment in India, in any form, in any company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage in the business of chit fund".

As per the recent notification Subscription to chit funds by Non-Resident Indian on non-repatriation basis, RBI has amended its May 2000 regulations pertaining to investment by NRIs in the chit funds. This has been done in consultation with the Govt. of India.

Accordingly, NRIs are now permitted to subscribe to chit funds, subject to the following terms and conditions.

1. The is no limit prescribed on such investments by the NRIs.

2. Such investment would have to be on a non-repatriation basis. In other words, NRIs are not allowed to take back this money outside India.

3. Subscription amount has to be brought in through the normal banking channels. This includes the money in their accounts maintained with any bank in India.

RBI additionally stipulates that "The Registrar of Chits or an officer authorized by the State Government in accordance with the provisions of the Chit Fund Act in consultation with the State Government concerned, may permit any chit fund to accept subscription from Non-Resident Indians on non-repatriation basis".

As I had argued in my blog post Is Chit Fund always a Cheat Fund?, these are high-risk, high-cost, rigid schemes with no assurance of returns. As such, they may be considered only by those people who have NO ACCESS to either the deposits or loans, on competitive terms, from the banking channels or other such institutions.

Therefore, given that NRIs can earn high, safe, assured and tax-free returns on their NRE FDs, besides having access to excellent investment alternatives such as mutual funds, they should ideally avoid investing in the chit funds (where, apart from the other issues, the returns are fully taxable).

In fact, given the dubious record of chit funds in India, it is indeed surprising that RBI and Govt. of India have taken such a step.

Govt. of India and RBI, through the Jan Dhan Yojna, are already doing a great job to bring the financially excluded people and the unorganized sector into the formal banking channel. In light of this, allowing NRIs to subscribe to chit funds is really a mystery.

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