About Chit Fund

Chit fund is a type of savings scheme practiced in India. A chit fund company is a company that manages, conducts, or supervises such a chit fund, as defined in Section of the Chit Funds Act, 1982. According to Section 2(b) of the Chit Funds Act, 1982:

"Chit means a transaction whether called chit, chit fund, chitty, kuree 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 (or a certain quantity of grain instead) by way of periodical instalments over a definite period and 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”.

Such chit fund schemes may be conducted by organised financial institutions or may be unorganised schemes conducted between friends or relatives. In some variations of chit funds, the savings are for a specific purpose.


THE CHIT FUNDS ACT, 1982

Act. No. 40 of 1982

An Act to provide for the regulation of chit funds and for matters connected therewith

BE it enacted by Parliament in the Thirty-third Year of the Republic of India as follows -


CHAPTER 1

PRELIMINARY

1. Short title, extent and commencement - (1) This Act may be called the Chit Funds Act, 1982.

2. It extends to the whole of India except the State of Jammu and Kashmir.

3. It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint, and different dates may be appointed for different States.


2. Definitions - In this Act, unless the context otherwise requires -

a)     "approved bank" means the State Bank of India constituted under section 3 of the State Bank of India Act, 1955, or a subsidiary bank constituted under section 3 of the State Bank of India (Subsidiary Banks) Act, 1959, or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or a Regional Rural Bank established under section 3 of the Regional Rural Banks Act, 1976, or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or a banking company as defined under clause (c) of section 5 of the Banking Regulation Act 1949 or a banking institution notified by the Central Government under section 51 of that Act or such other banking institution as the State Government may, in consultation with the Reserve Bank, approve for the purposes of this Act;

b)     "chit' means a transaction whether called chit, chit fund, chitty, kury or by any other name 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 (or a certain quantity of grain instead) by way of periodical installments over a definite period and 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.


Explanation - A transaction is not a chit within the meaning of this clause. if in such transaction,

a)     some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscription; or

b)     all the subscribers get the chit amount by turns with a liability to pay future subscriptions;

c)     'chit agreement ' means the document containing the articles of agreement between the foreman and the subscribers relating to the chit;

d)     'chit amount' means sum-total of the subscriptions payable by all the subscribers for any instalment of a chit without any deduction of discount or otherwise;

e)     'chit business' means the business of conducting a chit;

f)     'defaulting subscriber' means a subscriber who has defaulted in the payment of subscriptions due in accordance with the terms of the chit agreement;

g)     'discount' means the sum of money or the quantity of grain which a prized subscriber is under the terms of the chit agreement, required to forego and which is set apart under the said agreement to meet the expenses of running the chit or for distribution among the subscribers or for both;

h)     "dividend' means the share of the subscriber in the amount of discount available under the chit agreement for rateable distribution among the subscribers at each instalment of the chit;

i)     "draw" means the manner specified in the chit agreement for the purpose of ascertaining the prized subscriber at any instalment of the chit;

j)     "foreman' means the person who under the chit agreement is responsible for the conduct of the chit and includes any person discharging the functions of the foreman under section 39;

k)     'non-prized subscriber' does not include a defaulting subscriber;

l)     "prescribed" means prescribed by rules made under this Act;

m)     "prize amount" means the difference between the chit amount and the discount, and in the case of a fraction of a ticket means the difference between the chit amount and the discount proportionate to the fraction of the ticket, and when the prize amount is payable otherwise than in cash, the value of the prize amount shall be the value at the time when it becomes payable;

n)     "prized subscriber" means a subscriber who has either received or is entitled to receive the prize amount;

o)     'Registrar' means the Registrar of Chits appointed under section 61, and includes an Additional, a Joint, Deputy or an Assistant Registrar appointed under that section;

p)     p. "Reserve Bank' means the Reserve Bank of India constituted under the Reserve Bank of India Act, 1934;

q)     "State Government", in relation to a Union territory, means the administrator of the Union territory appointed by the President under article 239 of the Constitution;

r)     "subscriber" includes a person who holds a fraction of a ticket and also a transferee of a ticket or fraction thereof by assignment in writing or by operation of law;

s)     "ticket" means the share of a subscriber in a chit.


3. Act to override other laws, memorandum, articles, etc. - Save as otherwise expressly provided in this Act, -

a)     the provisions of this Act shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force or in the memorandum or articles of association or bye-laws or in any agreement or resolution whether the same he registered, executed or passed, as the case may be, before or after the 'commencement of this Act; and

b)     any provision contained in the memorandum articles, bye-laws, agreement or resolution aforesaid, shall, to the extent to which it is repugnant to the provisions of this Act become or be void, as the case may be.


CHAPTER IV

RIGHTS AND DUTIES OF NON-PRIZED SUBSCRIBERS

Non-prized subscribers to pay subscriptions and obtain receipts Every non-prized subscriber shall pay his subscription due in respect of every instalment on the dates and times and at the places mentioned in the chit agreement and shall, on such payment, be entitled to obtain a receipt from the foreman.

Removal of defaulting subscribers -

1.     A non-prized subscriber who defaults in paying his subscription in accordance with the terms of the chit agreement shall be liable to have his name removed from the list of subscribers and a written notice of such removal shall be given by the foreman to the defaulting subscriber within fourteen days of the date of such removal: Provided that if the defaulter pays the defaulted instalment with interest at such rate as may be prescribed within seven days of the date of receipt of such notice, his name shall be re-entered in the list of such subscribers.

2.     Every such removal under sub-section (1) shall within the date thereof by entered in the relevant book maintained by the foreman.

3.     A true copy of the entry referred to in sub-section (2) shall be filed by the foreman with the Registrar within fourteen days from the date of removal.

4.     Any defaulting subscriber aggrieved by the removal of his name from the list of subscribers may within seven days of the date of receipt of the notice of removal refer the matter to the Registrar for arbitration under section 64.


Substitution of subscribers

1.     A foreman may substitute in the list of subscribers any person (hereafter in this Chapter referred to as the substituted subscriber) in place of the defaulting subscriber whose name has been removed under sub-section (1) of section 28.

2.     Every substitution referred to in sub-section (1) shall, with the date therefor, be entered in the relevant book maintained by the foreman and a true copy of every such entry shall be filed by the foreman with the Registrar within fourteen days from the date of substitution.


Amounts due to defaulting subscribers

1.     A foreman shall, out of the amounts payable by and realized from the substituted subscriber towards the instalments relatable to the period before the date of substitution (including the arrears due from the defaulting subscriber), deposit before the date of the next succeeding instalment in a separate identifiable account in an approved bank mentioned in the chit agreement, an amount equal to the contributions made by the defaulting subscriber less such deductions as may be provided for in the chit agreement, and shall inform the defaulting subscriber as well as the Registrar of the fact of such deposit and shall not withdraw the amount so deposited except for payment to the defaulting subscriber.

2.     The amount so deposited under sub-section (1) shall be paid to the defaulting subscribers as and when he claims the amount and the amount so deposited shall not be withdrawn by the foreman for any purpose other than for such payment.

3.     The contributions of any defaulting subscriber who has been substituted till the termination of the chit shall be paid to him within fifteen days from the date of termination of the chit subject to such deductions as may be provided for in the chit agreement.


CHAPTER V

RIGHTS AND DUTIES OF PRIZED SUBSCRIBERS

Prized subscriber to furnish security

Every prized subscriber shall, if he has not offered, to deduct the amount of all future subscriptions from the prize amount due to him, furnish, and a foreman shall take, sufficient security for the due payment of all future subscriptions and, if the foreman is a prized subscriber, he shall give security for the due payment of all the future subscriptions to the satisfaction of the Registrar.


Prized subscriber to pay subscriptions regularly

Every prized subscriber shall pay his subscriptions regularly on the dates and times and at the place mentioned in the chit agreement and, on his failure to do so, he shall be liable to make a consolidated payment of all the future subscriptions forthwith.


Foreman to demand future subscriptions by written notice

1.     A foreman shall not be entitled to claim a consolidated payment from a defaulting prized subscriber under section 32 unless he makes a demand to that effect in writing.

2.     Where a dispute is raised under this Act by a 'foreman for a consolidated payment of future subscriptions from a defaulting prized subscriber and if the subscriber pays to the foreman on or before the date to which the dispute is posted for hearing the arrears of subscriptions till that date together with the interest thereon at the rate provided for in the chit agreement and the cost of adjudication of the dispute, the Registrar or his nominee hearing the dispute shall, not withstanding any contract to the contrary, make an order directing the subscriber to pay to the foreman the future subscriptions on or before the dates on which they fall due, and that, in case of any default of such payments by the subscriber, the foreman shall be at liberty to realise, in execution of that order, all future subscriptions and interest together with the costs, if any, less the amount if any, already paid by the subscriber in respect thereof:Provided that if any such dispute is on a promissory note, no order shall be passed under this sub-section unless such promissory note expressly states that the amount due under the promissory note is towards the payment of subscriptions to the chit.

3.     Any person who holds any interest in the property furnished as security or part thereof, shall be entitled to make the payment under sub-section (2).

4.     All consolidated payments of future subscriptions realised by a foreman shall be deposited by him in an approved bank mentioned in the chit agreement before the date of the succeeding instalment and the amount so deposited shall not be withdrawn except for payment of future subscriptions.

5.     Where any property is obtained as security is lieu of the consolidated payment of future subscriptions, it shall remain as security for the due payment of future subscriptions.


THE CHIT FUNDS (AMENDMENT) BILL, 2018

BILL

further to amend the Chit Funds Act, 1982.

BE it enacted by Parliament in the Sixty-ninth Year of the Republic of India as follows:—

1.    (1) This Act may be called the Chit Funds (Amendment) Act, 2018.

        (2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.

2.     In the Chit Funds Act, 1982 (hereinafter referred to as the "principal Act"), in section 2, in clause (b), after the word "kuri", the words, "fraternity fund" shall be inserted.

3.     For section 11 of the principal Act, the following section shall be substituted, namely:—

11. (1) No person shall carry on chit business unless he uses as part of his name any of the words "chit", "chit fund", "chitty", "kuri" or "fraternity fund" and no person other than a person carrying on chit business shall use as part of his name any such word.

(2) Where at the commencement of this Act,—

    (a) any person is carrying on chit business without using as part of his name any of the words specified in sub-section (1); or

    (b) any person not carrying on chit business is using any such word as part of his name,

    he shall, within a period of one year from such commencement, add as part of his name any such word or, as the case may be, delete such word from his name:

    Provided that the State Government may, if it considers it necessary in the public interest or for avoiding any hardship, extend the said period of one year by such further period or periods not exceeding one year in the aggregate.’.

4.     In section 16 of the principal Act, in sub-section (2), after the words "two subscribers", the words "present in person or through video conferencing duly recorded by the foreman" shall be inserted.

5.     In section 17 of the principal Act, in sub-section

    (1) (i) after the words "at least two other subscribers who are present", the words "in person or through video conferencing" shall be inserted;

         (ii) the following proviso shall be inserted, namely:—

         "Provided that where two subscribers required to be present under sub-section (2) of section 16 are present through video conferencing, the foreman shall have the minutes of the proceedings signed by such subscribers within a period of two days of the date of the draw.".

6.     In section 21 of the principal Act, in sub-section

    (1) (i) in clause (b), for the words "five per cent.", the words "seven per cent." shall be substituted;

         (ii) for clause

             (f), the following clauses shall be substituted, namely:—

                 (f) to substitute subscribers in place of defaulting subscribers;

                 (fa) to exercise his right to lien against the credit balance in other non-prized chits; and

7.     In section 85 of the principal Act, in clause (b), for the words "one hundred rupees", the words "such amount as may be specified, by notification in the Official Gazette, by the State Government " shall be substituted.


STATEMENT OF OBJECTS AND REASONS

(1)   The Chit Funds Act, 1982 was enacted to provide for the regulation of chit funds which are indigenous business in India and have conventionally satisfied the financial needs of the low-income households. The chit is a mechanism which combines credit and savings in a scheme, in which a group of individuals come together for a pre-determined duration and subscribe a certain sum of money by way of periodical instalments and each such subscriber, in his turn as determined by lot or by auction or by tender or any other specified manner, gets the collected sum. In this way, people who are in need of funds and those who want to save are able to meet their requirements simultaneously.

(2)   In past, concerns had been expressed by various stakeholders regarding challenges being faced by the chit business. Therefore, the Central Government constituted a Key Advisory Group on Chit Funds to review the existing legal, regulatory and institutional framework for Chit Funds and its efficacy and to suggest legal and regulatory initiatives required for orderly growth of the said sector. The Key Advisory Group submitted its recommendations relating to improvements in the institutional and legal structure to further develop the chit business in order to reduce the regulatory burden of the chit business and to protect the interest of the subscribers of the chits.

(3)   The Parliamentary Standing Committee on Finance (Sixteenth Lok Sabha), in its twenty-first Report on Efficacy of Regulation of Collective Investment Schemes (CIS), Chit Funds, etc., had also recommended to finalise the legislative and administrative proposals for strengthening and streamlining of the registered Chit Fund sector. Further, the said Committee, in its thirty-fifth Report on the Action Taken by the Government on the Recommendations contained in the twenty-first Report, had recommended the need to quickly firm up the legislative and administrative proposals for the Chit Funds sector.

(4)   In view of the above, it has been decided to amend the Chit Funds Act, 1982. Accordingly, the Chit Funds (Amendment) Bill, 2018, inter alia, proposes—

(a) the use of “fraternity fund” also for chits by amending sections 2(b) and 11;

(b) to allow the mandatory presence of two subscribers, as required under section 16(2), either in person or through video conferencing duly recorded by the foreman;

(c) that where the presence of the mandatory two subscribers was through videoconferencing, the minutes of proceedings should be signed by them within two days;

(d) the increase of ceiling of foreman’s commission from five per cent. to seven per cent. under section 21;

(e) to enable the foreman to have a right to lien for the dues from subscribers, so that set-off is allowed by the chit fund for subscribers who have already drawn funds, so as to discourage default by them;

(f) to amend section 85(b), so as to confer power upon the State Government to specify the amount, by notification, upto which any chit fund shall be exempted under the said section.

(5)   The Bill seeks to achieve the above objects.


ANNEXURE
EXTRACTS FROM THE CHIT FUNDS ACT, 1982 (40 OF 1982)

Definitions

(2) In this Act, unless the context otherwise requires,—

(b) "chit" means a transaction whether called chit, chit fund, chitty, kuri 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 (or a certain quantity of grain instead) by way of periodical instalments over a definite period and 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.

Explanation.—A transaction is not a chit within the meaning of this clause, if in such transaction,—

(i) some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or

(ii) all the subscribers get the chit amount by turns with a liability to pay future subscriptions;

(11) (1) No person shall carry on chit business unless he uses as part of his name any of the words "chit", "chit fund", "chitty" or "kuri" and no person other than a person carrying on chit business shall use as part of his name any such word.

(2) Where at the commencement of this Act,—

(a) any person is carrying on chit business without using as part of his name any of the words specied in sub-section (1); or

(b) any person not carrying on chit business is using any such word as part of his name,

he shall, within a period of one year from such commencement, add as part of his name any such word or, the case may be, delete such word from his name:

Provided that the State Government may, if it considers it necessary in the public interest or for avoiding any hardship, extend the said period of one year by such further period or periods not exceeding one year in the aggregate.

(16) (1)

(2) Every such draw shall be conducted in accordance with the provisions of the chit agreement and in the presence of not less than two subscribers.

(17) (1) The minutes of the proceedings of every draw shall be prepared and entered in a book to be kept for that purpose immediately after the closure of the draw and shall be signed by the foreman, the prized subscribers, if present, or their authorised agents, and at least two other subscribers who are present, and where a direction has been made under sub-section (3) of section 16, also by the Registrar or the person deputed by him under that sub-section.

(21) (1) The foreman shall be entitled,—

(b) to such amount not exceeding five per cent. of the chit amount as may be fixed in the chit agreement, by way of commission, remuneration or for meeting the expenses of running the chit;

(f) to substitute subscribers in place of defaulting subscribers; and

(85) Nothing in this Act shall apply in respect of—

(b) any chit the amount of which, or where two or more chits were started or conducted simultaneously by the same foreman, the aggregate amount of which does not exceed one hundred rupees.