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INTRODUCTION TO CHIT FUND

CHIT BUSINESS

It means the business of conducting a chit and “chit” means a transaction 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 volume of grain rather) by way of installments over a definite period and that each 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. But a transaction is not a chit within the meaning of this clause, if in such transaction roughly alone, but not all, of the subscriber get the prize amount without any liability or all the subscribers get the chit amount by turns with liability to pay future subscriptions.[1]

CONVENTIONAL CHIT

A transaction whether called chit, chit fund, kuri or by any other name by or under which a person responsible for the conduct of the chit enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money by way of periodical installments for 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 provided for in the chit agreement, be entitled to a prize amount. Here, “prize amount” means the amount, by whatever name called, arrived at by abating from out of the total amount paid or payable at each installment by all the subscribers.[2]

HISTORY OF CHIT FUND

Tamil Nadu was the first state to regulate chit fund business through The Madras Chit Fund Act, 1961 after independence followed by The Andhra Pradesh Chit Funds Act, 1971 for the state of Andhra Pradesh to protect the interest & returns of the investors. The Kerala legislated The Kerala Chitties Act, 1975 and also established the Kerala Financial Enterprise Corporation to regulate several chit funds throughout the state. In 1974, the Reserve Bank of India constituted a study group relating to non-banking financial companies under the chairmanship of James. S. Raj and the study group observed that the prize chit, benefit, saving schemes were beneficial for promoters but against the public policy as well as fiscal policy and did not serve any social purpose. Then union parliament passed The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 to ban the promotion or conduct of prize chits and money circulation schemes within the country. Finally The Chit Funds Act, 1982, a central legislation, was made to regulate chit funds in India where previous sanction of state government is needed to conduct chit fund business and every chit agreement shall be filed to the concerned authority i.e. the Registrar of Chits.

NRIs are eligible to subscribe to the chit funds on non- repatriation basis subject to the following conditions:

a. The Registrar of Chits or an officer authorized by the State Government in accordance with the provisions of the Chit Fund Act in deliberation with the State Government concerned, may permit any chit fund to accept subscription from Non-Resident Indians on non-repatriation basis.

b. The subscription to the chit funds shall be brought in through normal banking mechanism, including through an account maintained with a bank in India.[3]

No purchase of shares or convertible debentures of an Indian company shall be made under the Scheme[4] if the company concerned is a Chit Fund or a Nidhi company or is engaged in agricultural/plantation activities or real estate business or construction of farm houses or dealing in Transfer of Development Rights. But real estate business shall not include development of township, construction of residential/ commercial premises, roads, bridges, etc.[5]

References:

1. Section 2(e) and 2(b) of the Chit Fund Act, 1982.
2. Section 2(a) of the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
3. Master Circular on Foreign Investment in India, Foreign Exchange Department, Reserve Bank of India, July 01, 2015, Page 14.
4. Purchase and sale of shares/ convertible debentures by a Non-resident Indian (NRI) or an Overseas Corporate Body (OCB), on non-repatriation basis.
5. Schedule 4 of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000.

About the Author:-
This Article is Authored by Aryan Sinha, 4th Year law (BBA+LLB(H) student at Galgotias University, Greater Noida.

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