Chit finance is very popular in India, especially with the middle-class businessmen. Such chit fund schemes may be conducted by organised financial institutions or may be unorganised schemes conducted between friends and relatives.
With stringent procedures prevailing in banks and financial institutions, for a middle class / common man to obtain a formal loan for any financial exigencies, seems a herculean task for an ordinary citizen to procure the required finance from the formal financial institutions in our economy.
Here emerges the prominence of chit fund where the unbanked if they may be called gets access to the finance he/she was looking for in less regulated regime at fairly competitive interest rates prevailing in the market. As on date, one may note that much of the chit transactions are executed in cash and this goes unaccounted substantially. Due to the recent economic reform of Demonetisation,
Due to the recent economic reform of Demonetisation, the majority of these chit business has become stagnant for the reason that there is no liquid cash available. The majority of them are not aware of the chit fund law in India. In this article, we have tried to give a brief overview of the law behind operating and running a chit fund.
History and Trivia
Chit fund concept came into the eyes of people in 1800’s when Raja Rama Varma, ruler of erstwhile Cochin state, gave a loan to a Syrian Christian trader, by keeping a certain portion of it to himself for other expenses and later he drew that money for the principle of equity.
In North India, a common type of chit fund uses small paper slips with each member’s name, gathered in a box. When all members are at a monthly or weekly meeting, the one in charge — in front of the other members — picks a slip from the box. The member so selected gets that day’s collection. Afterwards, that person’s name slip is discarded. Thereafter, he comes to the meetings and pays his share, but his name isn’t selected again.
According to All Kerala Kuri Foremen’s Association, Kerala has around 5,000 Chit companies, with Thrissur district accounting for the maximum of 3,000. These chit companies provide employment to about 35,000 persons directly and an equal number indirectly.
Chit Fund is known in India with many names like Chitti, Kuri, etc. In order to understand the law behind the Chit Fund, we need to first understand the basics of a Chit Fund.
Chit is a transaction wherein a person enters into an agreement with a specified group of people, where every one of them subscribe a certain sum of money (either in the form of cash or earlier it used to be in the form of food grains) by way of periodical instalment for a predetermined period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender as may be specified in the chit agreement, be entitled to a prize amount.
In India, Chit Fund is a kind of personal savings which people practice. Generally, Chit Funds are run by a person in his individual capacity without being registered and as mentioned earlier, most of the chit transactions takes place in the form of cash.
Chit funds in India are governed by various State or Central laws. Organised chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.
The law governing and regulating the business of Chit Fund in India is ’The Indian Chit Fund Act, 1982’ (herein after referred to as ‘the Act’). This Act extends to the whole of India except to the state of Jammu and Kashmir. The Act has come into force by way of notification in the Official Gazette and each state have a different commencement dates. However, the same is commenced by now in all the States.
Organizing a Chit Fund
Firstly, once has to note that no person or entity shall conduct the business of Chit Fund without obtaining a prior sanction from the concerned State Government authority. The concerned State Government authority is the Registrar of Chits who is appointed in every State by its Government.
Any person who desires to organise a Chit Fund, firstly has to get the business of the Chit Fund registered with the concerned Registrar.
Next, for every chit scheme the organiser desires to run, has to get the approval of the scheme by the Registrar. Only after the scheme is approved, the organiser may invite subscriber to subscribe for the Chit Fund.
Later, the organiser has to get such scheme registered with the Registrar. In case a period of 12 months lapses from the date of approval of a scheme and the organiser fails to get the chit registered, the approval of the scheme granted earlier ceases to exist.
The approval of a chit scheme may be refused by the registrar if the chit organiser has been convicted of any offence under the Act or has defaulted inn the payment of fee or filing any statement required under the Act or has been convicted of any offence involving moral turpitude and sentenced to imprisonment and a period of 5 years has not been lapsed since the release.
It is important to note that all the banks(including co-operative banks) in our country are prohibited from conducting chit business as per Section 86 of the Chit fund Act 1982.
Prohibition for invitation to subscribe a Chit Fund
As per the provisions of the Act, no person shall issue any notice, circular, prospectus, proposal or any other communication document inviting people to subscribe for the tickets in any chit unless such communication contains a statement that a previous sanction / approval from the concerned State Government authority has been obtained.
This provision helps the public understand that the Chit Fund is a registered one and their interest shall be protected if subscribed. Further, this provision imposes a restriction that no person other than a registered chit organiser shall conduct the business of chit.
a) Every chit organiser is required to enter into an agreement with all the subscribers for each chit scheme individually. Such agreement is known as ‘Chit Agreement’.
b) Each Chit Agreement shall be made in duplicate and shall be signed by each of the subscriber or a person having a written authorisation and the organiser of the Chit Fund. Such signature shall be attested by at least two witnesses.
c) Generally, a standard Chit Agreement has to contain the following:
- Details of the nominee of each subscriber
- Nature and other particulars of the security to be offered by the organiser
- Conditions under which a subscriber shall be treated as a defaulter
- Where the chit organiser is an individual, the manner in which a chit shall be continued when such individual dies or becomes unsound or otherwise incapacitated
- Bank details where all the chit moneys shall be kept as required under the provisions of the Act
- The instalment at which the organiser is to get the chit amount
- Date, time and place where the chit will be drawn
- Probable date of commencement of the chit and the duration of the chit fund
- of instalments, amount of each ticket, interest and penalty for default in payment of an instalment
- Number of tickets held by each subscriber
- Name and residential address of every subscriber to the Chit Fund
d) The Chit Agreement is basically a contract wherein all the subscribers enter into an understanding with the chit organiser. This document is required to have all the terms clear which will definitely avoid the conflicts that may arise at a later point of time.
e) Under the provisions of the Act, it is sufficient if the signature of each subscriber is obtained in separate copies of the agreement. In other words, if a scheme contains 10 subscribers, then there can be 10 different Chit Agreements and in each such agreements, both the subscriber and the organiser must have signed. If such agreements are signed in the above fashion manner, it is deemed to be compliant with the provisions of the Act.
f) As mentioned above, a Chit Agreement shall contain the duration / time period for which the Chit Fund is functional. However, such duration shall not exceed beyond a period of five years from the date of commencement of the Chit. However, on a special request by the organiser, the State Government may permit the duration of the chit upto a period of ten years if it is satisfied that it is necessary to do so, having regards to the following:
- Financial conditions of the organiser
- His methods of operations
- Interests of the prospective subscriber
- Security requirements
- Other factors as may be relevant
g) Every Chit Agreement shall be filed by the organiser with the registrar in duplicate. The Registrar shall retain once copy of the agreement and acknowledge the other copy which shall remain with the organiser. This helps the Registrar keep a track of the Funds that are being organised under his jurisdiction.
h) An organiser is required to furnish a certified true copy of the chit agreement to all the subscribers once the ‘Certificate of Commencement’ is received. Upon fulfilling this, the organiser is required to intimate the Registrar that this provision is complied with.
i) No alteration, addition or cancellation can be done to the Chit Agreement unless there is a written consent from the chit organiser and all the subscribers. This is strictly to protect the interests of the innocent subscribers who may not be aware of the changes otherwise.
Capital & Reserve Requirements
1. Where the chit organiser is a company registered under the Companies Act, 2013, the company shall not commence chit business unless it has a paid-up capital of not less than rupees one lakh. This provision is required to be satisfied by the chit company in addition to the provisions under the Companies Act, 2013.
2. Further, every company carrying on the business of chit shall create and maintain a separate reserve fund. Every year out of its current years’ profit before declaration of dividend, shall transfer a sum of not less than ten percent of the net profit.
3. The provision for creating reserve fund every year is required in order to maintain the net-worth of the company. The owners should not withdraw all the profits of the company without considering the interests of the chit subscribers.
4. Further, such rule is not just to create the reserve, but there is restriction on utilisation of such reserve as well. The provision of the Act is that no company shall appropriate any sum from such reserve fund, except with the prior approval from the Registrar giving explanations of the circumstance to do so.
|Commencement of Chit|
1. Once all the tickets specified in the chit agreement are fully subscribed, the chit organiser shall file a declaration with the Registrar giving mentioning the facts.
2. Upon receipt of the declaration by a chit organiser, the Registrar shall verify if all the provisions of the Act pertaining to sanction of the chit, registration and other matters are fulfilled. Once the Registrar is satisfied with the same, the Registrar shall a ‘Certificate of Commencement’ to the chit organiser.
3. An organiser shall commence the auction, draw any chit and appropriate any chit amount only after obtaining the ‘Certificate of Commencement’ from the Registrar.
Conduct of Chit
1. Every draw in a chit shall be held on the date, time and at the place as mentioned in the Chit Agreement. A prior notice of the same shall be issued by the organiser to all the subscriber.
2. The minutes of the chit proceedings of every draw shall be prepared and entered in an exclusive book and it shall be signed by the organiser and the subscriber. Such minutes book shall contain details of the dear proceedings such as subscribers present, amount of discount, instalment number which the draw relates to, etc.,
3. Once the minutes is prepared, a certified true copy of the same shall be filed with the Registrar within twenty days from the date of the relevant draw. Filing of minutes with the Registrar would bring more transparency in the conduct of chit business and protects the interests of the chit subscribers.
4. The organiser of a Chit is required to make a deposit of 100% of the chit amount in a bank approved by the Registrar. The organiser may instead make such security in the form of Government Securities whose value is 150% of the chit fund value. Here, the value of such security is lower of market and face value of the security. This provision is made in order to protect the interest of the subscribers to the chit.
1. A person carrying on the business of chit fund shall compulsorily use the words ‘Chit Fund’, ‘Chitty’ or ‘Kuri’ as part of the business name. Corollary to this, a person not carrying on the business of chit is prohibited to use these words as a part of his business name. The intent behind this provision is that a chit business is to be recognised easily from its business name itself.
2. A company carrying on the business of chit is prohibited to conduct any business other than the business of chit funds. However, if a company desires to do so, it should seek special approval from the State Government to do so.
3. A chit organiser is prohibited to open a new place of business without prior approval of the Registrar. A place of business includes any branch office, sub-office or any similar thing. Such restriction is imposed in order to ensure that the public is not misguided to feel that the other place of business is also compliant one.
Though in the above piece of information we have tried to cover the important requirements under the Chit Fund law, it is not exhaustive. The law primarily tries to regulate the chit business in India and attempts to protect the interests of the Chit subscribers as chit savings will be one of the main savings amongst many.
Disclaimer: Best efforts have gone into compiling the above information. However the author/s are not responsible for any consequences occurring directly / indirectly based on decisions taken from the above information published.