Initially launched to attract NRI investors from the UAE, the scheme is now being extended to Oman, Kuwait and Bahrain. From May 17, NRIs living in Europe can enroll as subscribers.
Launched by Kerala State Financial Enterprises (KSFE), a non-banking company fully owned by the government of Kerala, Pravasi Chitty is designed for NRIs.
The chitty scheme is a fund-raising instrument of the Kerala Infrastructure Investment Fund Board (KIIFB), a government institution that mobilises funds for the state government’s long-term developmental projects. KSFE invests the proceeds from the chitty fund in the KIIFB as bonds.
“So far 564 auctions were conducted in 159 chitties and mobilised INR 210m ($3m, €2.68m, £2.31m). Out of 385 auction winners, 303 chose to deposit their win in fixed deposits,” said Peelipose Thomas, chairman of KSFE.
Most of the chitty winners prefer to put the prize money as fixed deposit with the KSFE. More than INR 50m has been deposited like this. The subscribers are given the option to select any of the KIIFB-assisted projects in which their money could be spent.
All subscribers will get a life insurance cover from the state-owned Life Insurance Corporation (LIC) during the chitty’s tenure. If the subscriber dies without or after bidding the chitty, LIC will pay the rest of the instalments.
Customers who join the Pravasi Chitty can choose which development projects they want their funds to go towards.
They have 10 options: renovation of schools, hospitals, roads and bridges, coastal roads, high-range roads, IT parks, stadia, cultural complexes, inland waterways and drinking water projects.
Working of the scheme
The Pravasi Chitty is “a risk-free safe haven for the public” as it is governed by India’s federal government’s Central Chit Fund Act 1982.
This defines a ‘chit’ as “a transaction whether called chit, chit fund, chitty or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money by way of periodic instalments over a definite period.”
It further states that “each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”.
A chitty is a contract whereby each subscriber agrees to remit a fixed amount of money every month for a period of time. In the case of Pravasi Chitty, the monthly instalments range from INR1,000 to INR500,000, with the usual duration of payments being over 30, 40, 50, 60 or 100 months.
The so-called ‘chitty amount’ is then given out as ‘prize money’ to the person who bids the least for it (up to a maximum of a 25% discount). For example, if 50 people each pay a monthly instalment of INR10,000, the monthly prize money is INR500,000.
This amount is then put up for auction among the subscribers. The subscriber who agrees to take the lowest amount will get the prize. For example, if they bid up to the 25% discount and win they will receive INR375,000 up front.
They will continue to pay their INR10,000 installment for the duration of the scheme. The remaining amount INR125,000 will be distributed among the other subscribers. In this example, they each receive INR3,000.
So, the effective contribution for the first month would be INR7,000 for every subscriber.