RESERVE BANK OF INDIA UNION OF INDIA PEERLESS GENERAL FINANCE AND INVEST MENT CO LIMITED STATE OF WEST BENGAL Vs. MENT COMPANY LIMITED:PEERLESS GENERAL FINANCE AND INVEST MENT COMPANY LIMITED:RESERVE BANK OF INDIA:PEERLESS GENERAL FINANCE AND INVEST MENF COMPANY LIMITED

JUDGEMENT

(1.) The question is "Is a prize-less chit a prize chit - So posed the answer appears to be self-evident. That is what it is in the ultimate analysis.

(2.) The Peerless General Insurance and Investment Co. Ltd.' was incorporated in 1932. After the nationalisation of the business of life insurance the name of the company was changed to 'the Peerless General Finance and Investment Co. Ltd.' For over a quarter of a century now, the business of the company has been that of 'finance and investment'. The company offers three schemes, the principal of which is the Endowment Certificate Scheme. Under this scheme, a subscriber is required to pay a fixed annual subscription for a fixed number of years varying between the minimum of 10 years and the maximum of 30 years. On the expiry of the period, the subscriber will be paid by the company a sum of money called the Endowment Sum which is the face value of the Certificate. The subscriber is also entitled to be paid a guaranteed fixed bonus. For example, an annual subscription of Rs. 77/- for 10 years will fetch the subscriber at the end of the 10 years period a sum of Rs. 1,000/- as endowment sum and a sum of Rs. 100/- as bonus, making a total of Rs. 1,100/-. If any instalment, that is, any amount of annual subscription is not paid within the stipulated period and period of grace, the Certificate lapses unless it has acquired a surrender value. A Certificate acquires surrender value after the expiry of three years from the date of commencement if the subscription for two full years has been paid. A Certificate which has not acquired surrender value lapses on non-payment of instalments and the amounts paid become forfeit to the company. A lapsed certificate may, however, be revived at any time before the expiry date of maturity on payment of all dues together with interest at one paisa per rupee per month. There is also provision in the scheme for conversion of the Certificate into a paid up Certificate, the paid up amount to be paid at the end of the period, but without bonus. A person purchasing a Certificate automatically becomes entitled to a free accident insurance policy under a group insurance scheme.

(3.) A noticeable feature of the scheme is the remarkably low yield to the subscriber on his investment. In the example that we gave we said a subscriber investing Rs. 77/- every year for ten years will get, at the end of the tenth year, a return of Rs. 1,000/- by way of 'Endowment Sum' and Rs. 100/- as bonus. Treating the total sum of Rs. 1,100/- as the amount which the investor gets back on his ten-years annual investment of Rs. 77/-, the yield on his investment works out of compound interest of about 6% or simple interest of a little over 7%. This is on the assumption that he does not commit default but pays his annual subscription regularly. But consider what happens to the investments of those who commit default; a subscriber who defaults in payment of annual subscription after payment of the first subscription, forfeits the subscription previously paid, by him. A subscriber who pays the first two subscriptions but commits default thereafter is entitled to have a refund of the subscriptions paid by him but only at the end of the full endowment period. That is to say, the amount invested by the subscriber up to the time of default will be with the company, earning interest for the company but nothing for the subscriber himself. The subscriber who commits default after payment of two annual subscriptions is entitled to have the surrender value paid to him after the expiry of three years from the date of commencement. The surrender value is 90% of the subscriptions paid by him excluding the first year's subscription. In other words, if a subscriber who commits default after payment of two subscriptions opts for immediate payment after three years he forfeits his first year's subscription and 10% of the subsequent years' subscription. On the other hand, if he opts for payment at the end of endowment period he will get a refund of the subscriptions paid by him but without interest and without bonus. If he commits default after paying three years' subscription but opts for payment at the end of the Endowment period he will get back a proportionate part of the Endowment Amount and this without bonus. The yield will be very much lower than the 6% compound interest or 7% simple interest that we mentioned earlier. The subscriber is always at the losing end. It is a perfect case of 'Heads I win, tails you lose'.