Chit Funds – How it Works? – Rules & Regulations
Chit funds are a popular option for those who want to save money and also borrow money as and when the requirement arises. Chit funds have a unique business model so that they afford the opportunity to save and borrow money at the same time. In India, chit funds are governed by the Chit Funds Act, 1982. The Act makes registration of chit funds mandatory. The Act also prescribes the various rules and procedures that have to be followed by a chit fund business.
On 20th November 2019, the Chit Funds Amendment Bill, 2019 was passed by the Lok Sabha. The bill makes several changes in the Act, aimed at addressing the concerns faced by the various stakeholders involved with chit funds. Permission to use the term ‘Rotating Savings and Credit Institution’ as a part of the name of the chit fund, enhancement of the minimum amount of capital needed to be invested by chit fund businesses, permitting members of a chit fund to take part in draws through video-conferencing, and increasing the ceiling-limit for the foreman (manager)’s commission.
The Chit Fund Amendment Bill (2019) can be accessed here:ChitFund Amendment Bill-2019
Permission to Start Chit Fund Business
According to Section 4(1) of the Act, a sanction from the state government should be obtained before starting a chit fund business. Usually, the state government delegates its power to grant sanction to the Registrar of Chits. Therefore, the application for sanction should be made by the foreman (manager) of the chit fund business to the Sub-Registrar, Registrar of Chits. Before applying for the sanction, the foreman should deposit in a nationalised bank an amount which is the same as the chit amount in the name of the Registrar. The procedure for applying for sanction and the format for the application varies from state to state.
Chit agreement is a document agreed to and signed by the foreman and the subscribers. It contains all the details about the chit scheme floated by the chit fund business. It should contain the following particulars:
- Name and permanent address of the subscriber, and number of tickets subscribed by him
- Number of instalments and amount payable on each instalment
- Manner of selection of the successful bidder
- Amount of discount which has to be paid by the successful bidder (It should not be in excess of thirty per cent of the chit amount as per Section 6(3) of the Act)
- Amount of commission that the foreman will receive out of the discount. It should not exceed five per cent (Seven per cent as per Section 8(i) of the Chit Funds Amendment Bill, 2019).
- Bank details for the account in which the chit money is deposited
- Location and date at which the bid will be conducted
- Details of how the chit business will be continued in case of death of the foreman
- Details of security offered by the foreman
- Undertaking containing a statement that inspection of chit records will be allowed by the foreman
- Nominee details of the subscriber
Two copies of all chit agreements should be filed with the Registrar within three months. One copy should be endorsed by the Registrar and returned to the applicant. Bidding on the chit is allowed only after copies of these endorsed agreements have been distributed among all the subscribers. A declaration stating that this distribution has been carried out should be filed with the Registrar.
Maximum Permissible Chit Amount
The chit amount refers to the total amount of subscriptions for any instalment of a chit. This amount is regulated by Section 13 of the Act as follows:
If a person carrying on a chit fund business is:
- An individual, the maximum chit amount permitted is one lakh rupees (Three lakh rupees as per the Chit Funds Amendment Bill, 2019).
- A firm has four or more members, the maximum chit amount permitted is six lakh rupees (Eighteen lakh rupees as per the Chit Funds Amendment Bill, 2019).
- A firm having less than four members, the maximum chit amount permitted is one lakh rupees (Three lakh rupees as per the Chit Funds Amendment Bill, 2019).
- A company, the maximum chit amount permitted is ten times the net owned funds of the company (Net owned funds means the sum of the paid-up capital and free reserves of the company, reduced by its accumulated losses and deferred revenue if any).
A draw is a process by which the successful bidder is selected. It should be performed in the presence of the foreman and at least two members. Members may participate through video-conferencing. Every time a draw is conducted, the following particulars should be entered in the minutes’ book:
- Place and time at which the draw was conducted
- Particulars of the instalment for which the draw was conducted
- Names of the subscribers who were present
- Name of the successful bidder and the discount paid by him.
All the participants should sign the minutes’ book. In case the members participated through video-conferencing, the minutes’ book should be signed within two days (Section 7 of the Chit Funds Amendment Bill, 2019). A copy of the minutes should be filed with the Registrar within 21 days. Notice of the draw should be given to the Registrar 21 days prior to the date of draw.
Withdrawal from the Chit Fund
Withdrawal from the chit fund is permitted only for the following reasons:
- Carrying on the chit fund business
- Giving loans to members of the chit funds
- Making deposits with the bank mentioned in the chit agreement
Before any withdrawal can be made, application for approval for the withdrawal should be made to the Registrar (In Tamilnadu, Form IV should be used for this purpose). Withdrawal can be made only after the Registrar gives his approval through the prescribed form (Form IV-A in the case of Tamilnadu).
Other Provisions to be Followed by Chit Funds
- The memorandum and articles of the chit fund company should not contain any provision which is contrary to the provisions of the Act.
- Only companies which have a paid-up capital of one lakh rupees or more can start a chit fund business.
- Any advertisement or notice inviting the public to subscribe to the chit should carry an announcement that a sanction to start the chit fund business has been obtained under Section 4(1) of the Act.
- The maximum permitted duration of a chit fund is five years. However, the state government has the power to extend it up to ten years.
- A person who engages in a chit fund business should use as a part of the name of the business the words, “chit”, “chit fund”, “chitty”, “Kuri”, “fraternity fund” or “Rotating Savings and Credit Institution”. (Section 4 of the Chit Funds Amendment Bill, 2019).
- A company which carries on the business of chit funds should not carry on any other business.
- The foreman (manager) should maintain at the registered office of the chit fund a register of particulars of subscribers, a minutes book of all draws conducted, a ledger showing particulars of contributions made by members, amounts paid as prize money, and amounts deposited in the approved bank.