REGULATION OF CHIT FUNDS

A. LakshminarayananAdvocate

CHIT FUND

• A Chit fund is a kind of savings scheme practiced in India.

• Such chit fund schemes may be conducted by organized financial institutions or may be unorganized schemes conducted between friends or relatives. There are also variations of chits where the savings are done for a specific purpose.

• Chit Funds are also misused by its promoters and there are many instances of the founders running what is basically a Ponzi scheme and absconding with their money.

DEFINITION

According to Section 2(b) of the Chit Fund Act, 1982, "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 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"

EXAMPLE

Take a typical chit fund with 25 members contributing Rs.100 per week. This fund will run for 25 weeks. On the first week all members will contribute Rs.100. An auction meeting will be conducted, and the foreman of the chit fund will preside over it. The total amount will be Rs.2500. The auction will start with this amount. Bidders will start bidding by discounting this amount. Let us consider that lowest any person bids is Rs.2150 (a discount of Rs.350). This amount (Rs.2150) is given to this winning bidder. Rest of the amount is divided by 25, bringing the discount per person to Rs.14. This discount amount is returned back to each member. Sometimes a part of this may be kept by the foreman as service charges, usually in organized chit funds.

ACTS

Chit funds in India are governed by various state or central laws. Organized chit fund schemes are required to register with the Registrar or Firms, Societies and Chits.•Union Government - Chit Funds Act 1982 (Except the State of Jammu and Kashmir)•Kerala - Kerala Chitties Act 1975•Tamil Nadu - Tamil Nadu Chit Funds Act, 1961•Karnataka: The Chit Funds (Karnataka) Rules, 1983•Andhra Pradesh - The Andhra Pradesh Chit Funds Act, 1971•New Delhi- The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007•Maharashtra - Maharashtra Chit Fund Act 1975

REGISTRATION• The Registrar of Chits of a particular jurisdiction is

responsible for registering the chit funds in that jurisdiction. As a first step in the formation of a group or scheme, prior sanction needs to be obtained from the Registrar. The prior sanction is granted at the filing of an application and at the payment of fees of Rs. 50. Subsequently the company needs to file a chit agreement with every member in that particular group. The fee for the purpose is around Rs. 20 per member. Once the chit agreement is filed and approved, the certificate for commencement of the scheme is issued. The chit manager needs to deposit 100% of the chit value with the Registrar prior to the commencement of the scheme. This deposit will be refunded to the chit manager on the successful completion of the chit cycle.

CHIT FUND SCAM

ILLEGAL TRANSACTIONS

• Investors, mostly from the middle and lower income groups, blindly trust the operators, organizers don't maintain records, the chit funds are not registered as per law, and many clients deposit their matured chit amounts with the organizers, lured by better interest rates. Basically, all transactions in the name of unregistered chit funds are illegal.

• Still, chit fund frauds are reported regularly, as the operators first win the confidence of depositors by ensuring prompt payments for some years and disappear with large sums of money suddenly. In many cases, the investors don't even approach the police fearing loss of their money if the operator is arrested.

CHIT VIGILANCE CELL

• To detect unauthorized chits and other irregularities committed by the Chit Fund Companies, a Chit Vigilance Cell has been formed which is headed by the Additional Registrar of Chits. The Personal Assistant (Chits) to Inspector General of Registration and Chit Inspectors of Chennai – North, South and Central are members of the Cell.

OTHER PROVISION• Most of the provisions of the Central Act apply to the Chit

funds run in different parts of India. However, the State Acts may override certain provisions as deemed necessary. For instance, the Andhra Pradesh Chit Funds Act 1971 had previously required the chit managers in that state to deposit only 50% of the chit value with the Registrar of Chits prior to the commencement of the chit scheme. This provision has been amended recently with the adoption of the provision from the Central Act that requires 100% deposit from chit managers.

SUGGESTION

To save the innocent public from being cheated by unscrupulous Chit conducting companies, periodical checks are conducted by the department. The officials of the Registration Department are keeping strict vigil over the conduct of unauthorized chits.

THANK YOU FOR YOUR PATIENCE