The Chit Funds Act is the legislation governing the operations of chit funds in the country. Chit funds are a popular form of financial arrangement in India in which a group of people pool their money for a period, and the collected funds are given out to participants based on a predetermined scheme.
The Chit Funds Act 1982 was enacted to regulate and streamline the functioning of these chit funds, ensuring the protection of the interests of both organisers and participants.
The Act was created to give chit funds, which are crucial in helping people, especially in rural regions, mobilise savings and gain access to credit, a legal framework within which to operate. To facilitate these financial arrangements and protect the interests of all parties concerned, a balance must be struck.
Table of Contents
The Chit Funds Act of 1982
Important Definitions Under the Act (Section 2):
- Chit: The legislation outlines a ‘chit’ as any arrangement or transaction with different titles such as chit, chit fund, kuri, or chitty. Under this provision, individuals engage in agreements where they commit to making periodic contributions, either in monetary form or even in grain, across distinct time frames for a predetermined period. The agreement must also stipulate that each participant will ultimately receive the prize sum, either in its entirety, through public auction or bidding, or as explicitly detailed in the agreement.
- Approved bank: The term ‘approved bank’; refers to the State Bank of India, subsidiary banks, new banks, Regional Rural Banks, banking companies, Central-Government-notified institutions, or other approved institutions for this Act. After consulting with the Reserve Bank, these institutions may be authorised by the State Government for the purposes of this Act.
- Chit agreement: ‘Chit agreement’; refers to the written contract that encompasses the terms of agreement between the ‘foreman’ and the ‘subscribers’ concerning the chit.
- Chit business: ‘Chit business’; refers to the business of organising and conducting a chit.
- Defaulting subscriber: A ‘defaulting subscriber’; pertains to a participant who has failed to make payments for subscriptions following the terms outlined in the chit agreement.
- Discount: ‘Discount’; signifies the monetary value or grains that a subscriber, who has won a prize, is required to forgo as stipulated by the chit agreement. This amount is allocated as per the agreement to cover chit administration expenses, distribute among subscribers, or fulfil both purposes.
- Dividend: ‘Dividend’; represents the portion of the discount sum available under the chit agreement that is meant to be fairly distributed among the subscribers at each instalment of the chit.
- Draw: ‘Draw’; denotes the method specified in the chit agreement for determining the winning subscriber at any particular instalment of the chit.
- Foreman: Any person performing the duties of the foreman as defined by Section 39 of the Act falls is a person who, under the terms of the chit agreement, is responsible for the conduct of the chit.
The Chit Funds (Amendment) Bill 2019
The Chit Funds (Amendment) Bill of 2019 was presented in the Lok Sabha on August 5, 2019. This Bill aims to modify the Chit Funds Act of 1982, which governs chit funds. The 1982 Act mandates that chit funds can only be established with prior approval from the state government. In a chit fund setup, individuals collectively contribute amounts at regular intervals into a pool. Periodically, one of the participants is selected by drawing a lot (chit) to receive the prize sum from the accumulated fund.
Designations for a Chit Fund
The Act outlines various titles that can be used to refer to a chit fund, including chit, chit fund, and kuri. Fraternity funds and revolving savings and credit institutions are proposed to be added to this category in the Bill.
Alteration of Terms
The Act defines the following terms related to chit funds:
- ‘Chit amount’ is the total of subscriptions payable by all participants in a chit.
- ‘Dividend’ is the portion of the amount set aside for managing the chit that belongs to a participant.
- ‘Prize amount’ is the difference between the chit amount and the reserved amount for managing the chit.
The Bill renames these terms ‘gross chit amount’, ‘participant’s share of discount’, and ‘net chit amount’.
Participation of Subscribers via Video Conferencing
According to the Act, a chit drawing should be performed in the presence of a minimum of two subscribers. The Bill aims to enable these participants to join the process through video conferencing.
The Act designates a ‘foreman’ to oversee chit funds, with a proposed 7% commission and lien on subscriber credit balance.
Cumulative Chit Amount
The existing legislation allows chits for individuals, associations, or firms, with thresholds of Rs 1 lakh for individuals and Rs. 6 lakh for firms with four or more partners. The proposed Bill raises these limits to Rs. 3 lakh and 18 lakh, respectively.
Scope of the Act
Currently, the Act has exceptions for (i) chits initiated before its enactment and (ii) any chit (or multiple chits managed by the same foreman) where the amount is below Rs 100. The Bill eliminates Rs 100 restriction and empowers state governments to establish the minimum threshold over which the provisions of the Act would be applicable.
Rights and Duties of Foreman
Rights of Foreman (Section 21)
- Acquiring a complete chit without the need for an auction and complying with the agreed-upon instalment stated in the contract.
- Receiving a commission each month, not exceeding 7% of the chit amount as determined in the chit agreement.
- Collecting all contributions from subscribers and distributing the prized sum and dividends among them.
- Requesting appropriate security from prized subscribers to ensure the timely payment of future subscription(s).
- Substituting subscribers for those who default on their payments.
Duties of Foreman (Section 22)
- Distribute an authentic duplicate of the chit agreement to all subscribers before the initial draw of the chit takes place.
- Inform all subscribers about the monthly chit subscription’s date, timing, and sum.
- Dispense the chit amount to the prized subscribers once adequate security for subsequent instalments is acquired.
- Permit subscribers to review chit records upon payment of the specified fee.
- Submit minutes of proceedings, transfer forms for subscribers, balance sheets, and related documents to the Registrar of Chit Funds in Delhi within the prescribed time frame.
Withdrawal of Foreman (Sec 26)
Foreman in a chit cannot withdraw until written consent from all non-prized and unpaid subscribers and a copy filed with the Registrar under section 41.
Rights and Duties of Non-prized Subscribers
Rights of Non-Prized Subscribers
- Non-prized subscribers have the right to receive dividends.
- Non-prized subscribers retain the right to participate in chit draws in subsequent periods.
Duties of Non-Prized Subscribers
- Non-prized subscribers must adhere to a chit agreement schedule for timely contributions, ensuring fund functioning and distribution availability.
- Non-prized subscribers must follow chit agreement terms, including contributions, draws, and fund operation rules.
- Non-prized subscribers’ participation and engagement contribute to the chit fund’s success, maintaining its communal nature.
- Non-prized subscribers can expect transparency from foreman regarding chit fund operations.
Non-prized Subscribers to pay Subscriptions and Obtain Receipts (Section 27)
Each non-prized subscriber must fulfil his/her obligation to pay the subscription amount for each instalment on the specified dates, times, and locations as stated in the chit agreement. Upon making this payment, they have the right to receive a receipt from the foreman.
Removal of Defaulting Subscribers (Section 28)
- Non-prized subscribers can be removed from the subscriber list if they fail to make payment in accordance with the chit agreement. The foreman must provide notice within 14 days. If the defaulter settles the overdue instalment within 7 days, their name is reinstated.
- Any such removal, as described in the preceding paragraph, must be recorded, along with the date, in the pertinent record maintained by the foreman.
- A certified copy of this entry from the aforementioned record must be submitted by the foreman to the Registrar within 14 days of the removal date.
- If a defaulting subscriber, whose name has been removed, disagrees with this action, they have the option to refer the matter to the Registrar for arbitration under section 64 within 7 days of receiving the removal notice.
- Foreman’s rights to collect subscriptions from prized subscribers require prior written approval from the Registrar.
- Non-prized or unpaid subscribers can challenge and render the transfer void.
- The transferee must prove the foreman’s financial condition was sound and not harming subscriber interests.
Transfer of Non-Prized Subscriber’s Rights in Writing (Section 35)
Every transfer of a non-prized subscriber’s rights within the chit should be documented in writing, properly attested by at least two witnesses and subsequently filed with the foreman.
Recognition of Transfer by Foreman (Section 36)
The foreman must acknowledge transfers under Section 35 within 14 days, unless solvency or subversion are concerned, and communicate the decision to all parties.
Entry of Transfer (Section 37)
All transfers under Sections 34 or 35 must be promptly recorded by the foreman in the chit’s records. Additionally, the foreman should provide a certified copy of this record entry to the Registrar within 14 days from the date the entry was made.
Termination of Chits (Section 40)
The termination of a chit is established under the following circumstances:
- Chit termination occurs when the agreed-upon duration ends and obligations are met.
- Written agreements between non-prized and unpaid subscribers and the foreman are submitted to the Registrar.
- Incapacitation occurs if the chit is not performed in accordance with the agreement.
Inspection of Documents
- Foreman to Allow Certain Subscribers to Inspect Chit Records (Section 44)
- Every Foreman must allow non-prized and unpaid prized subscribers to inspect chit records during draw dates or agreed-upon time frames.
- Inspections may charge a fee of up to Rs 5.
- Security bonds, documents, receipts, and financial records must be available for examination.
- Preservation of Chit Records by Foreman (Section 45)
- The foreman is responsible for maintaining all records associated with a chit for a duration of 8 years from the chit’s termination date.
- Inspection of Chit Books and Records by Registrar (Section 46)
- Without prior notice, the Registrar or authorised officer can inspect chit books and records during regular working hours. Foreman must present all books and records and provide statements or information within specified time frames.
- Registrars can issue notices to foremen 7 days in advance, requesting chit books and records for inspection at specified locations.
- Registrar can identify irregularities during inspections and issue orders for foreman to rectify issues within specified timeframes.
- Every foreman must adhere to the directives outlined in an order issued under subsection 3 and take the prescribed actions to rectify any detected issues.
- Authority of Reserve Bank to Examine Chit Books and Records (Section 47)
- Section 46 does not hinder the Reserve Bank’s authority to scrutinise foreman’s books and records under regulations.
- If necessary, the bank may furnish an inspection report to the foreman, facilitating necessary actions.
- The foreman must adhere to directives and provide periodic reports. The bank can also forward the inspection report to the State Government, if the foreman is a company or not, for implementing necessary measures.
Period of Limitation (Section 65)
- The Limitation Act, 1963 (36 of 1963) provides specific clauses regarding the period of limitation for disputes brought to the Registrar under Section 64.
- For disputes related to the recovery of sums and interest owed by a deceased subscriber, the limit is 3 years.
- For disputes between a foreman and a deceased subscriber, the limit is 3 years.
- The Registrar’s role is similar to a civil court. Despite these provisions, the Registrar can accept disputes after the specified timeframe, but applicants must demonstrate valid reasons for not referring to the dispute.
Penalties Under the Act
A. Penalties for Violation (Section 76)
- Any person who goes against or assists in going against any provisions mentioned in Sections 4, 5, 8, 9, 11, 12, 13, 14, 19, 20, 22, 24, 30, 31, subsection (4) of Section 33, Sections 46, 47, or subsection (5) of Section 61, and is proven guilty, can face imprisonment for a period that could reach up to 2 years. Alternatively, they may be subject to a fine that could extend to Rs 5000, or both penalties could be imposed.
- Any foreman who fails to submit required documents, neglects chit agreement stipulations, violates obligations, or fails to adhere to drawing date, time, and location shall, upon conviction, be subject to a fine that can stretch up to Rs 3000.
- Any individual who knowingly presents a statement in any document that is required to be filed under this Act containing falsehoods pertaining to essential details can, upon conviction, face imprisonment for a period of up to two years. Alternatively, they may incur a fine of up to Rs 5000, or both penalties could be applied.
B. Penalty for Repeat Offences
If an individual previously convicted of an offence under subsection (1) or subsection (3) of Section 76 is subsequently convicted of another offence under either of the aforementioned subsections, they shall be subject to imprisonment for a period of up to two years for the second and all subsequent offences. Additionally, they shall be liable to pay a fine.
Exclusions from the Scope of the Act
The provisions of this Act shall not be applicable to the following situations:
- Any chit initiated prior to the enactment of this Act.
- Any chit in which the total amount, or in cases where multiple chits are initiated or operated concurrently by the same foreman, the combined amount, is less than Rs 100.
Additionally, no bank shall engage in or continue chit business following the commencement of this Act.
Power to Establish Rules (Section 89)
- The State Government, in consultation with the Reserve Bank, has the authority to establish rules to implement the provisions outlined in this Act. These rules can be published through an official notification in the Official Gazette.
- Specifically, and without undermining the comprehensive scope of the aforementioned authority, these rules may cover a range of matters, including but not limited to:
- The prescribed format and method for submitting applications to obtain prior sanction, as stated in subsection (2) of Section 4.
- Additional details that a chit agreement can encompass, as specified in clause (q) of subsection (1) of Section 6.
- Details that can be incorporated in the minutes of draw proceedings, in accordance with Section 17.
- The valuation method to be employed by the Registrar for security purposes in grain chits under Section 20.
- The Registrar can adhere to the protocol when releasing security provided by the foreman, pursuant to Section 20.
- The formats and procedures for maintaining registers and books by the foreman, as delineated in Section 23.
- The timeline within which balance sheets and profit and loss accounts for chit businesses should be filed, as per Section 24.
- The rate at which interest will be applicable to defaulted instalments by subscribers who have defaulted, in accordance with Section 28.
- The details to be included in applications for chit winding-up as stipulated in Section 49.
- The procedures governing chit winding-up in Chapter X.
- Fees to be paid under Section 63.
- The process of auditing balance sheets and profit and loss accounts for chit businesses, as well as the issuance of audit certificates.
- The prescribed format and method for referring disputes to the Registrar under Section 64.
- The procedures followed by the Registrar or their designee for resolving disputes referred to them under Section 64.
- Matters outlined in clause (f) of subsection (1) of Section 67.
- Conditions and payment amount applicable to offences composition under Section 81.
- The procedure and format for filing appeals under this Act, along with the corresponding fees.
- The issuance and delivery of notices and other legal processes under this Act.
- The process and methodology for receiving payments due under this Act.
- Any additional aspects necessitating prescription, as mandated by the Act.
Every rule made pursuant to this section shall be brought before each House of the State Legislature, where there are two Houses, or, where there is only one House, before that House, as soon as practicable after it is made.
The Chit Funds Act and its subsequent amendments, including the Chit Funds (Amendment) Bill of 2019, provide a comprehensive regulatory framework for the operation and management of chit funds in India. These financial arrangements provide individuals a unique method to save and access funds through collective contributions. The Act establishes rules and regulations to safeguard the interests of both foremen and subscribers, ensuring transparency, accountability, and fair practices within the chit fund industry.
The Act defines chit fund terms, rights, duties, transfers, terminations, inspections, and penalties, and establishes powers for Registrar, Reserve Bank, and State Government oversight. The Act ensures a secure financial transaction environment, protecting rights, and establishing clear guidelines, dispute resolution, and supervision mechanisms for industry stability.
As India’s financial landscape continues to evolve, the Chit Funds Act is a significant piece of legislation, ensuring that chit funds operate within a structured framework, thereby fostering financial inclusion and economic growth.
FAQs on Chit Funds Act
What is the Chit Funds Act?
The Chit Funds Act is a legislative framework governing chit funds in India, outlining rules, terms, and procedures for the operation of these financial arrangements.
What does the Chit Funds (Amendment) Bill, 2019 propose?
The Bill introduces amendments to the existing Chit Funds Act, including changes in commission rates, accessibility through video conferencing, and terminology updates.
What is the role of the foreman in a chit fund?
The foreman manages and oversees the chit fund, ensuring proper administration, record-keeping, and compliance with the Chit Funds Act.
How do chit funds operate under the Chit Funds Act?
Chit funds involve participants contributing funds at regular intervals into a pool, with one participant receiving the pooled funds through a draw at predefined intervals.
How does the Chit Funds Act protect participants?
The Act mandates government approval for chit fund operations and sets rules for the fair distribution of pooled funds among participants.