The chit fund is a type of banking scheme aimed to save money under different plans. In India, the chit funds are regulated by the Chit Funds Act of 1982 enacted on August 19, 1982. The Act defines ‘chit’ as any deal or transaction which can be called in different names like chit, chit fund, kuri or chitty and persons enter into contracts specifying that all of them shall contribute an amount or even grain instead of money by installments in different intervals for definite term. The contract shall also contain that each contributor shall get in return in total or by public sale or tender or as specifically provided in the contract, be given the prize amount.
The provisions of the act shall be implemented despite the sections of any other legal principles or memorandum, bye laws, articles of association prior or subsequent to the enforcement of the Act. Any laws already prevalent in India shall be invalid to the extent of its inconsistency with the present legislation. The chits shall be conducted only with the prior permission of the State Government where the chit is functioning or by the officer entrusted with such function and obtain registration. The chits shall be registered within twelve months from the date of obtaining the permission unless the State Government grants extension when an application is filed for this reason. The application shall be submitted by the foreman in the prescribed manner.
The prior approval shall be refused where the foreman has been convicted and imprisoned by any wrong provided under the present legislation or any other enactment dealing with chit funds. The sanction shall be refused if the foreman had evaded from paying the fees or failed to file any document which he is required to be filed. The order of the State Government or any officer empowered to give sanction either granting or refusing permission shall be final and absolute. The aggrieved person from the order of the officer shall file an appeal before the State Government within the prescribed period. A person is banned from circulating or publishing a notice welcoming the public to give any chits for tickets, unless such circular or notification expressly contains a declaration that the prior sanction of the concerned authority has been obtained.
The chit agreement shall be the replica which shall be signed by the contributors or any authorized person in written form and also signed by the foreman. It shall also contain the name and address of the contributor, the number and fraction of tickets retained by the subscribers, total number of installments under which the fund is to be paid, the date of initiation of the chit and its duration, the discount available to the subscriber, the place and time where the chit fund is drawn, the name of the bank where the fund is deposited, the procedure to continue the chit when the foreman becomes unsound mind or mentally incapable, details of the defaulting subscriber, the nominees of the chit etc. A duplicate copy of the chit agreement shall be submitted to the Registrar by the foreman.
The Act further provides that a company shall not initiate or conduct the chit business unless it holds a paid up capital of one lakh or more. But when such a company starts the business of chit funds with paid up capital of less than one lakh, the company shall enhance the paid up capital to one lakh or more within three years of the establishment of business. The foreman shall file a statement to the registrar declaring that the tickets prescribed under the chit agreement are completely subscribed. The funds of the chit shall be utilized other than for the purpose of conducting chit business, granting loan to non prized contributors, investment of the fund in trustee securities or deposit in the banks approved in the chit agreement.
The Act further imposes certain duties and confers rights on the foreman. He shall deposit in the bank a sum equivalent to the chit amount in the name of the registrar, hand over securities to the registrar etc and such other functions as specified under the Act. The non prized contributors shall remit amounts and receive receipts from the foreman. The names of the subscribers who fail to pay the amount shall be removed from the list of contributors and another subscriber shall be included in the place of the defaulting contributor. The act entrusts certain responsibilities and bestows rights on the prized subscribers as well. The foreman shall allow certain subscribers to examine the documents and records of the chit business.
The Act contains elaborate legal principles dealing with the rights and duties of all persons involved in the chit fund. The initiative of the Parliament is to avoid and check fraudulent practices carried out in the name of chit business. The Government has also formulated effective measures through the legislation to safeguard the interests of the depositors. The Act also specifically provides the mode of utilization of funds by the proprietors.