A CRITICAL ANALYSIS OF THE CHIT FUNDS ACT, 1982

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This article is written by Mehak Vardhan of BBA LLB of NMIMS Kirti P. Mehta School of Law, an intern under Legal Vidhiya

ABSTRACT

The Chit Funds Act, 1982, is a significant piece of legislation aimed at regulating and overseeing chit funds in India. Chit funds are unique financial schemes where a group of individuals come together to contribute money regularly, with the chance to win a prize through various methods like lotteries, auctions, or tenders. This law outlines the rules, registration procedures, and responsibilities for both chit fund operators, known as foremen, and participants. It also addresses termination procedures and circumstances for winding up chits.

This critical analysis explores the key provisions and implications of the Chit Funds Act, highlighting its role in ensuring the proper functioning of chit funds and safeguarding the interests of participants. The act sets forth stringent regulations regarding the registration of chit funds, the content and filing of chit agreements, minimum capital requirements for chit businesses, and the rights and duties of foremen.

Keywords– Chit Funds Act 1982, Chit funds regulation, Chit fund operators, Foremen responsibilities, Chit fund termination, Chit fund dispute settlement

INTRODUCTION

This is a law that has been created to oversee and control chit funds and related issues. Chit funds are essentially financial schemes where a group of people come together, contribute money, and then take turns receiving the total amount contributed. This law is designed to ensure that these financial arrangements are managed properly and to address any issues associated with them.

This law has been passed by the Indian Parliament in the thirty-third year of the Republic of India. It outlines the rules and regulations that need to be followed when it comes to chit funds and related matters. It sets the guidelines and legal framework for how chit funds should operate and be regulated to protect the interests of the people participating in these financial schemes

DEFINITION

This Act is established to govern and regulate chit funds and related matters. It is enacted by the Indian Parliament in the 33rd year of the Republic of India.

WHAT IS A CHIT FUND?

A chit fund is a unique savings scheme where a group of people, known as subscribers, come together to save money. They each contribute a fixed amount of money regularly over a specific period, and in return, they have a chance to win a prize. The prize winner is determined through methods like a lottery, auction, or tender, depending on the type of chit fund.

Let’s take an example to understand it better: Imagine there are 50 subscribers in an auction-type chit fund, and they each contribute Rs 100 every month. This means that the monthly pool of money is Rs 5,000, which is up for auction every month. The highest bidder in the auction, let’s say, bids Rs 1,000. This winning bid of Rs 1,000 is the discount, and it is then distributed among all the subscribers.

The winner of the auction, who bid Rs 1,000, would receive the rest of the money from the pool, which is Rs 4,000 (Rs 5,000 – Rs 1,000). The other subscribers would also get a share of the discount, which, in this case, would be Rs 20 each (Rs 1,000 divided by 50 subscribers). Importantly, once someone wins the auction, they can’t participate again, and they continue to contribute their monthly subscription.

The company that manages the chit fund, often called the foreman, retains a commission from the prize amount every month for their services. Collectively, all the subscribers in a chit fund form a chit group, and a chit fund company may oversee multiple such groups, each running its own chit fund.

PROVISIONS OF THIS ACT

REGISTRATION AND REGULATION OF CHIT FUNDS

Sanction and Registration: Chit funds cannot be started or operated without getting permission from the State Government in the area where the chit fund will operate. This permission should also include the chit fund’s registration according to the law. If permission is granted, but the chit fund is not registered within a year (or within a specific extended period allowed by the State Government), the permission becomes invalid.
Application for Sanction: To get permission to start a chit fund, the person in charge of the chit fund (referred to as the foreman) needs to submit an application in a specific format and following specific rules.
Grounds for Refusal: The State Government can refuse permission if the foreman has a history of criminal convictions related to chit funds, hasn’t paid required fees or filed necessary reports, or violated the rules of the law. The refusal cannot happen without giving the foreman a fair chance to explain their side.
Finality of the Decision: The decision of the State Government or an empowered officer about granting or refusing permission is considered final and binding.
Appeal: If the foreman disagrees with the decision made by an empowered officer, they can appeal to the State Government. The State Government’s decision on this appeal is also considered final.
Conditions for Public Invitations: No one can ask the public to invest in a chit fund without stating in their advertising or documents that they have the necessary permission under Section 4 and provide details of this permission.
Chit Agreement: The agreement that outlines the rules and terms of the chit fund must be in duplicate and signed by all participants. It needs to include various important details, such as the names and addresses of all participants, the number of contributions each member needs to make, the interest or penalty for missed payments, when the chit fund will start and end, how winners are determined, how discounts are distributed, and much more. It also has to specify the procedures if the foreman becomes unable to manage the chit fund or if any participant violates the agreement.
Security: The agreement should also define what security the foreman provides to ensure the safety of the chit fund’s money.
Filing of Chit Agreement: Chit agreements must be submitted in duplicate to the Registrar by the foreman. The Registrar registers one copy and returns the other to the foreman. Registration can be refused for reasons like insufficient security or prior convictions, with a chance for the foreman to explain. Failure to submit the required declaration within three months from registration date results in the registration being void.
Minimum Capital Requirements for Chit Business: Companies must have a minimum paid-up capital of one lakh rupees to start a chit business. Companies with lower capital initially must increase it to the minimum requirement within three years, with possible extensions granted by the State Government. They must also maintain a reserve fund, to which at least ten percent of annual profits must be transferred. Withdrawals from the reserve fund require prior approval from the Registrar.

FOREMAN

In the chit agreement, the “foreman” is the person who takes on the responsibility for managing and conducting the chit. This role includes making sure the chit operates smoothly, adheres to the agreement, and ensures that subscribers receive their due payments. Essentially, the foreman is like the manager of the chit. This definition also covers situations where someone else temporarily takes on the foreman’s duties as described in Section 39 of the chit-related law. So, the term “foreman” refers to the individual in charge of the chit and anyone temporarily fulfilling the foreman’s role as specified in Section 39.

SECURITY TO BE GIVEN BY FOREMAN

Before a foreman can seek approval for a chit scheme under Section 4, they are required to provide security to ensure the chit operates smoothly. There are three options for this security:

The foreman must deposit an amount equal to 50% of the total chit funds (referred to as the “gross chit amount”) in cash in an approved bank and provide another 50% in the form of a bank guarantee from an approved bank.
The foreman can transfer government securities with a face value or market value (whichever is less) of at least one and a half times the gross chit amount to the Registrar.
Alternatively, the foreman can transfer other securities that meet specific criteria set by the State Government. These securities should be of a value not less than one and a half times the gross chit amount.

The value of securities under the third option should never be less than one and a half times the gross chit amount. This security is not accessible to the foreman during the chit’s operation and can only be released after the chit ends, and all subscribers’ claims are settled. There is a procedure in place for releasing this security, as prescribed by the law.

RIGHTS OF A FOREMAN

The foreman, who manages the chit, has certain rights. Unless the chit agreement specifies otherwise, the foreman can receive the total chit funds (the “gross chit amount”) at the first instalment without any deductions, as long as they also participate as a subscriber by purchasing a ticket in the chit.

However, if the foreman has subscribed to more than one ticket in the chit, they are not entitled to receive more than one gross chit amount without any deductions. This rule ensures that the foreman can benefit from the chit but doesn’t receive an undue advantage by subscribing to multiple tickets.

DUTIES OF A FOREMAN

The foreman’s responsibilities are as follows:

Paying Prized Subscribers: Provide the “net chit amount” to prized subscribers. If subscribers agree, deduct future subscription amounts and pay the net chit amount within seven days after the draw.
Dealing with Defaulting Prized Subscribers: If prized subscribers don’t pay the net chit amount until the next instalment, deposit it in a separate bank account and notify the subscribers and Registrar. If a prized subscriber doesn’t collect their net chit amount within two months, the foreman can hold another draw.
Disclosing Payments and Deposits: Inform subscribers about payments and deposits during the next draw. Record these transactions in the draw’s minutes.
Earnings Limit: The foreman can’t take more money than agreed upon in the chit agreement, as stated in Section 21.

RIGHTS AND DUTIES OF NON-SIZED SUBSCRIBERS

The authorization from the Registrar is a prerequisite for the foreman to transfer the rights to collect subscriptions from prized subscribers.

If the transfer of the foreman’s subscription-receiving rights poses a potential detriment to non-prized or unpaid prized subscribers, the affected subscriber can dispute it and declare it voidable.

In the event of a dispute arising from a transfer under sub-section (2), the transferee is responsible for proving the solvency of the foreman at the time of the transfer and demonstrating that the transfer does not harm the interests of the disputing subscriber.

For non-prized subscribers, any transfer of rights must be documented in writing, attested by at least two witnesses, and presented to the foreman.

The foreman must acknowledge a proposed transfer under Section 35 within fourteen days, unless the transferee is insolvent or the transfer is suspected of attempting to circumvent the law. The foreman’s decision must be promptly communicated to the involved parties.

The foreman is obliged to promptly log each transfer under Section 34 or Section 35 in the chit’s records, and an authenticated copy of this entry must be provided to the Registrar within fourteen days of its recording.[1]

RIGHTS AND DUTIES OF PRIZED SUBSCRIBERS

Security Requirement for Prized Subscribers:

Every prized subscriber is required to provide sufficient security for the timely payment of all upcoming subscriptions.
If a prized subscriber hasn’t chosen to deduct future subscriptions from the net chit amount owed to them, they are obligated to furnish security.
In cases where the foreman is also a prized subscriber, they must provide security that meets the satisfaction of the Registrar.

Regular Payment Obligation for Prized Subscribers:

Prized subscribers are obligated to make consistent and timely payments of their subscriptions according to the specified dates, intervals, and designated location as outlined in the chit agreement.

If a prized subscriber fails to make payments punctually, they become liable to make an immediate consolidated payment covering all upcoming subscriptions.

Demand for Future Subscriptions by Foreman:

Before seeking a consolidated payment from a defaulting prized subscriber under Section 32, the foreman must first issue a written demand.
In the case of a dispute initiated by a foreman for a consolidated payment, if the defaulting prized subscriber settles the outstanding subscriptions, interest, and adjudication costs before the scheduled dispute trial date, the Registrar or nominee may instruct the subscriber to pay future subscriptions on their respective due dates.
Subsequently, the foreman is authorized to implement the order, recouping all future subscriptions, interest, and costs, excluding any prior payments made by the subscriber.
If the dispute involves a promissory note, no order will be issued unless the note explicitly designates the amount for chit subscriptions.
Any party with an interest in the security property is entitled to make payments under this provision.
All consolidated payments received by the foreman must be deposited in an approved bank before the upcoming instalment’s due date and can only be withdrawn for future subscription payments.
If property is provided as security in lieu of a consolidated payment, it remains as security for the due payment of future subscriptions.

TERMINATION OF CHITS

A chit is considered terminated under the following circumstances:
When the specified period in the chit agreement ends, and all dues are paid to all subscribers.
When all non-prized and unpaid prized subscribers, along with the foreman, consent in writing to terminate the chit, and a copy of this consent is filed with the Registrar.
If the foreman dies, becomes incapacitated, and the chit is not continued according to the chit agreement. However, in the case of a foreman being a firm, if a partner faces such circumstances, the chit doesn’t terminate, and the surviving partner or partners take over unless the chit agreement states otherwise.
Filing of Assent or Consent with Registrar

Any written agreement to continue the chit or consent to terminate it, as mentioned in Section 26 or Section 40, needs to be provided to the Registrar. This should be done by the foreman or, in the case of a firm, the surviving partner or partners, within fourteen days from the date of the agreement.

Subscribers’ Dues as First Charge on Chit Assets

Any amount that a subscriber is owed by the foreman in relation to the chit business is considered the first charge on the chit’s assets. This means that the subscribers have a legal claim on the chit’s assets to ensure they receive their due payments.

INSPECTION OF DOCUMENTS

Foreman’s Obligation to Allow Inspection:

• Foremen are required to allow non-prized subscribers and unpaid prized subscribers the opportunity to inspect chit records.

• A fee, not exceeding five rupees as specified in the chit agreement, may be levied.

• Inspection can take place on draw dates or other specified dates and hours outlined in the chit agreement.

• The examination encompasses security bonds, documents, receipts, and all chit records, including financial statements.

Chit Record Preservation by Foreman:

Foremen are needed to maintain all chit records for eight years from the chit-end date.

Registrar’s Inspection Authority:

• The Registrar or an authorized representative is empowered to inspect chit books and records at the foreman’s premises during business hours, with or without prior notice.

• Foremen are required to present all pertinent books and records and furnish requested statements or information within a specified time frame.

• If deficiencies are identified during the inspection, the Registrar can issue an order instructing the foreman to rectify the deficiencies within a specified period.

• Foremen are obligated to comply with the directives outlined in the order.

Reserve Bank’s Inspection Authority:

• Section 46 does not impact the Reserve Bank’s authority to scrutinize the books and records of foremen in accordance with the Reserve Bank of India Act, 1934.

• The Reserve Bank has the authority to forward a duplicate of its audit report to the foreman for required actions.

• Foremen are obliged to adhere to the guidance provided by the Reserve Bank and furnish periodic reports as deemed necessary.

• Additionally, the Reserve Bank can transmit the audit report to the State Government for necessary actions, especially in cases where the foreman is a company.

WINDING UP OF CHITS

Circumstances for Winding Up a Chit

The Registrar, in whose jurisdiction the chit is registered, can initiate the winding up of a chit under certain circumstances or upon receiving an application from a non-prized or unpaid prized subscriber. These circumstances include:

The chit has terminated according to Section 40(c).
The foreman does something that negatively affects the security specified in Section 20.
The foreman fails to deposit required amounts as per this Act.
The Registrar is convinced that the foreman cannot pay the amounts owed to the subscribers.
Legal processes initiated by subscribers in favour of the amounts due to them from the foreman are returned unsatisfied.
Fraud or collusion has occurred regarding the securities from prized subscribers.
The foreman has used the net chit amount without providing sufficient security for future subscriptions.
The Registrar believes that the chit’s affairs are being managed in a way that harms the subscribers’ interests.
It’s deemed fair and reasonable to wind up the chit. When determining the foreman’s inability to pay, the Registrar considers his future liabilities related to the chit.

Bar to Winding Up Proceedings

Regardless of the provisions in Sections 48 and 49, there are situations where a petition for winding up a chit will not be entertained by the Registrar. This includes instances where:

Insolvency proceedings are underway against the foreman.
In the case of a foreman who is part of a firm, insolvency proceedings are ongoing against all partners or all partners except one, or if proceedings for the firm’s dissolution are in progress.
If the foreman is a company or cooperative society, and proceedings for winding up that entity are in process.

AMENDMENT AND PROCEDURES OF APPEAL

If any party is dissatisfied with a decision made by the Registrar, nominee, or an award issued by them under section 69, they have the right to file an appeal with the State Government within two months from the date of the decision or award.

[State Amendment – Karnataka]

In the Chit Funds Act, 1982 (referred to as the principal Act), the following amendments are made in section 70:

(i) Section 70 is renumbered as subsection (1), and in this renumbered subsection (1), the phrase “State Government” is followed by “or to such officer or authority, as may be empowered by notification by the State Government, in that behalf.”

(ii) After subsection (1) as renumbered, a new subsection is added, which states that the State Government or the designated officer or authority may, after providing the appellant with an opportunity to present their case, issue final orders on the appeals as they see fit.

(iii) Any appeals that were already pending before the State Government on the date of the notification empowering the designated officer or authority will be transferred to such officer or authority and will be addressed as if they were initially filed before that authority

SETTLEMENT OF DISPUTES

Section 66 of the Chit Funds Act, 1982, deals with the settlement of disputes related to chit funds. Here is a paraphrase of the section:

(1) If the Registrar determines that any matter brought to his attention is a dispute falling within the scope of section 64, he shall, in accordance with the prescribed rules, either resolve the dispute himself or assign it to a designated individual (referred to as the “nominee” in this Chapter) for resolution.

(2) In cases where a dispute is referred to the nominee as per subsection (1), the Registrar may, for reasons recorded in writing, withdraw the dispute from the nominee at any time. He may then proceed to settle the dispute himself or reassign it for resolution to another nominee appointed by him.

CONCLUSION

The Chit Funds Act, 1982, provides a robust regulatory framework for chit funds in India. It ensures transparency, accountability, and legal protection for both operators and subscribers. The Act covers essential aspects like registration, chit agreements, minimum capital requirements, and the rights and duties of foremen. It also addresses chit termination and winding-up procedures, safeguarding subscribers’ financial interests. While the Act is a comprehensive tool, periodic updates may be needed to address evolving industry challenges. Overall, it remains a crucial component of India’s financial regulations, promoting the orderly operation of chit funds and securing subscribers’ investments.

REFERENCES

[1] S., & S. (2023, July 25). chit fund act. #KASH. https://kopuramchits.com/chit-fund-act/#:~:text=Transfer%20of%20non%2Dprized%20subscriber’s,be%20filed%20with%20the%20foreman.

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