Chit Funds Law | Senthur Chits

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Clearly understand rights, duties, responsibilities, and compliance needs under the Act.

Chapter I – Preliminary (Detailed)

Section 1: Short title, extent, and commencement

This Act may be called the Chit Funds Act, 1982. It extends to the whole of India except the State of Jammu and Kashmir. It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint, and different dates may be appointed for different States.

Section 2: Definitions

Chit: 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 number of persons that every one of them shall subscribe a certain sum of money (or a 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.
Chit agreement: The document containing the articles of agreement between the foreman and the subscribers relating to the chit.
Defaulting subscriber: A subscriber who has defaulted in the payment of any installment due in accordance with the terms of the chit agreement.
Discount: The sum of money or the quantity of grain which a prized subscriber has, under the terms of the chit agreement, to forego and which is set apart under the said agreement to meet the expenses of running the chit or for distribution among the subscribers or for both.
Foreman: The person who under the chit agreement is responsible for the conduct of the chit and includes any other person discharging the functions of the foreman under Section 39.
Non-prized subscriber: A subscriber who has not either received the prize amount or relinquished his claim to the prize amount.
Prized subscriber: A subscriber who has either received the prize amount or relinquished his claim to the prize amount.
Registrar: The Registrar of Chits appointed under Section 61 and includes an Additional, Joint, Deputy or Assistant Registrar of Chits.
Subscriber: A person who subscribes to a chit.

Chapter II – Registration of Chit Funds (Detailed)

Section 3: Prohibition of chit business without registration

No individual or company shall start or continue a chit fund business unless they have been registered under the provisions of this Act.
Conducting chit business without registration is punishable by law and may result in imprisonment, fines, or both, as decided by the legal authorities.

Section 4: Application for registration

To initiate a chit fund business, the promoter must submit an application to the Registrar in the prescribed format.
This application must include all necessary documents, such as:

A copy of the chit agreement,
Proof of net-owned funds,
Security deposit details,
Other documentation as specified by the rules under this Act.

Section 5: Grant of certificate of registration

After verifying the authenticity and completeness of the application and supporting documents, and ensuring that all legal conditions are fulfilled, the Registrar will issue a Certificate of Registration. This certificate is the official authorization to legally run chit fund operations.

Section 6: Refusal of registration

The Registrar is empowered to refuse registration if the application is incomplete, misleading, or not in compliance with the law, or if granting such registration is not in the public interest. A written explanation citing reasons for rejection must be provided to the applicant.

Section 7: Revocation or suspension of registration

If any chit fund company violates the Act’s provisions, engages in illegal practices, or furnishes false information, the Registrar may suspend or cancel its Certificate of Registration. This action shall follow principles of natural justice, including providing the company a fair hearing.

Section 8: Appeal against orders of the Registrar

Any applicant or registered chit fund entity aggrieved by an order of refusal, suspension, or revocation passed by the Registrar has the right to appeal. The appeal must be filed within the specified period to the State Government or a designated appellate authority as prescribed under the Act.

Chapter III – Incorporation and Structure of Chits (Detailed)

Section 9: Commencement of chits

No chit shall be commenced or conducted without obtaining a prior sanction from the Registrar. Such sanction is conditional upon compliance with all provisions of this Act and the rules prescribed therein.

Section 10: Minimum capital requirement

To commence and carry on chit business, the foreman must have a minimum capital amount as prescribed by the rules under this Act. This ensures the financial stability and trustworthiness of the chit organizer.

Section 11: Security to be deposited by foreman

Every foreman, before starting a chit, is required to deposit a security amount with the Registrar. The nature, form, and value of such security shall be prescribed by rules and may include bank guarantees, fixed deposits, or government bonds. This deposit acts as a financial safeguard for the protection of subscriber interests.

Section 12: Filing of chit agreement

A true copy of every chit agreement executed between the foreman and subscribers must be filed with the Registrar before the chit begins. No changes or alterations shall be made to the agreement unless agreed upon by all parties and updated with the Registrar.

Section 13: Commencement and conduct of chit

A chit shall only commence after the registration of the chit agreement and receipt of the Registrar’s approval. Once started, the foreman must conduct the chit strictly in accordance with the terms mentioned in the agreement.

Section 14: Use of the word “chit,” “chitty,” or “kuri”

Only entities registered and authorized under the Chit Funds Act are permitted to use the terms “chit,” “chitty,” or “kuri” in their name or operations. Unauthorized use of these terms is punishable under the law.

Section 15: Issue of shares, debentures, etc., prohibited

A chit fund company is prohibited from issuing shares, debentures, or other securities linked to its chit business unless otherwise provided under this Act. This ensures that chit operations remain simple, transparent, and regulated solely as per chit fund law.

Chapter IV – Rights and Duties of Foreman (Detailed)

Section 16: Duties of foreman

Every foreman has the responsibility to conduct the chit in strict adherence to the terms laid down in the chit agreement. This includes:

Holding periodic draws or auctions as per schedule.
Ensuring transparency in determining the prized subscriber.
Collecting installments from all subscribers.
Disbursing prize money to the winning member promptly.
Maintaining updated records of payments, auctions, and receipts.
Filing periodic statements and accounts with the Registrar.
Notifying any default, deviation, or dispute in chit operation to the concerned authorities.

The foreman acts as a trustee of the subscribers and must not indulge in mismanagement or misuse of collected funds. Any misconduct may result in penalties or cancellation of registration.

Section 17: Right to obtain contributions

The foreman has the right to demand and receive contributions from all subscribers in accordance with the chit agreement. If a subscriber defaults in paying any installment, the foreman is entitled to take legal or recovery action to ensure collection.

Section 18: Right to take a commission

The foreman is entitled to a commission or remuneration for managing the chit. This amount is usually specified in the chit agreement and deducted from each auction or prize amount before distribution.

Section 19: Right to interest, fees, and charges

In case of default by any subscriber, the foreman may charge interest or penalty as defined in the chit agreement. Any other service fees or administrative charges may also be levied if agreed to by subscribers.

Section 20: Right to substitute subscribers

The foreman has the right to introduce or substitute a new subscriber in place of a defaulting one, provided the terms of the chit agreement allow for such substitution.
This ensures continuity in the chit operations and maintains financial discipline.

Section 21: Duties related to balance amount

If after auction or prize distribution, there is any surplus amount (like undistributed discount), the foreman must ensure it is returned or adjusted to the rightful subscribers as per the terms of the agreement.

Section 22: Legal implications of misconduct

Any deviation by the foreman from the prescribed duties—such as misappropriation of funds, misreporting, or unjustified delay in payments—shall be considered a violation under the Act. Legal action, cancellation of chit license, or imprisonment may follow based on the severity of the misconduct.

Chapter V – Rights and Duties of Subscribers (Detailed)

Section 23: Subscriber’s liability for payments

Every subscriber undertakes to pay each installment on or before the due date specified in the chit agreement. Punctual payment sustains the collective pool of funds, ensuring that prize money can be disbursed on schedule. Failure to pay on time classifies a member as a defaulting subscriber and may attract penalties, forfeiture of dividends, or even termination of membership depending on the severity and frequency of default.

Section 24: Subscriber’s right to prize money

Each subscriber is entitled to receive the prize amount exactly once during the entire chit cycle. The right is exercised either through a competitive bidding process (auction/discount) or by a lot/draw system as stated in the agreement. Upon winning, the prized subscriber must furnish any stipulated security (if required) and continue to pay all remaining installments without fail until the chit concludes.

Section 25: Consequences of default

The foreman may impose interest or late payment charges at the rate specified in the agreement.
Persistent default can lead to removal from the chit and substitution by another eligible person.
Any dividend or bonus payable to the defaulter may be withheld and adjusted against outstanding dues.
Legal recovery proceedings can be initiated to safeguard the interests of the remaining subscribers.

Section 26: Substitution of subscriber

When a member defaults irretrievably or voluntarily exits, the foreman may, with the Registrar’s approval, substitute another eligible individual who agrees to assume the obligations (including arrears) of the outgoing subscriber. This substitution ensures the chit’s cash flow and contractual integrity remain intact.

Section 27: Nomination facility

Subscribers may nominate a legal heir or beneficiary to receive any benefits or residual amounts in the event of the subscriber’s death. The nomination must be recorded in writing and filed with the foreman and Registrar to be legally valid.

Section 28: Transfer of rights

A subscriber may, with prior written consent of the foreman and subject to the terms of the agreement, transfer their rights and liabilities to another person. All transfers must be documented, stamped, and registered per the applicable state rules to avoid future disputes.

Section 29: Settlement of disputes

Any dispute between subscribers and the foreman—or among subscribers themselves—regarding the chit shall be referred to the Registrar or an appointed arbitrator under the Arbitration and Conciliation Act, 1996. The decision or award rendered is binding on all parties.

Section 30: Bonus and dividend entitlement

When a prized subscriber bids at a discount, the foregone amount constitutes a dividend distributed proportionately among the non prized subscribers. Prompt and full payers may also earn an additional bonus if such an incentive is built into the chit agreement.

Section 31: Rights to inspect records

Every subscriber has the right to inspect the chit records—auction minutes, payment registers, and financial statements—during office hours at the foreman’s premises. This transparency clause fortifies trust and allows members to verify that funds are handled responsibly.

Section 32: Voluntary withdrawal

A subscriber may voluntarily withdraw prior to winning the prize, subject to forfeiture clauses and replacement conditions laid out in the agreement. Refund of contributions (if any) will be made only after deducting reasonable administrative costs and any penalties.

Section 33: Obligations after winning

Provide any collateral/security stipulated in the agreement (property deeds, sureties, etc.).
Continue paying remaining installments promptly.
Cooperate with audits or verifications until the chit terminates. Failure to meet these post prize obligations can result in legal action, seizure of security, or disqualification from future chits.

Section 34: Termination and final settlement

Upon completion of the final auction/lot, the chit is deemed terminated. Within the statutory period (generally 30 days), the foreman must prepare a final statement of accounts, settle any outstanding dividends, and refund security deposits. Subscribers may raise objections before the Registrar if discrepancies arise.

Chapter VI – Meetings of General Body of Subscribers (Detailed)

Section 51: Convening of meetings

The foreman must convene a meeting of the general body of subscribers:

Whenever required by a majority of the subscribers (at least 2/3rd in number), or
As prescribed by the rules, including before any material change in the chit agreement or in case of any default or dispute that needs subscriber approval.

Notice of the meeting must be issued in writing to every subscriber, stating the date, time, venue, and purpose of the meeting. The notice period and mode of communication (e.g., registered post or in-person delivery) should comply with rules outlined in the Act or as per terms of the chit agreement.

Section 52: Quorum for the meeting

A meeting of the general body of subscribers requires a quorum for it to be valid. The quorum is usually prescribed as two-thirds of the total number of non-prized and prized subscribers (unless otherwise stated by state rules). If the required quorum is not present, the meeting shall be adjourned and reconvened as per procedure. An adjourned meeting may be conducted with lesser quorum subject to conditions prescribed.

Section 53: Powers of the general body

The general body of subscribers, when properly convened, has the authority to:

Approve changes in the chit agreement,
Consider and decide upon any issue related to the chit operations such as delays, disputes, mismanagement,
Request an investigation or audit into the conduct of the chit,
Pass resolutions to safeguard collective subscriber interests,
Appoint a representative committee (if needed) to assist in decision-making,
Recommend action to the Registrar in case of malpractice by the foreman.

Section 54: Decisions by majority

All decisions in the general body meeting are taken by a majority vote unless the Act or chit agreement stipulates a higher threshold (such as two-thirds majority for amending the agreement). Each subscriber, unless disqualified, has one vote. The decisions passed in the meeting are binding on all subscribers, including those absent or dissenting.

Section 55: Recording of minutes

The minutes of every meeting must be documented clearly, mentioning the resolutions passed and the list of attendees. These records must be signed by the foreman and a majority of the subscribers present. A copy of the minutes must be submitted to the Registrar within the timeframe specified under the rules. This ensures accountability and regulatory oversight.

Section 56: Registrar’s intervention

If the foreman fails to convene a meeting despite valid requisition or if there are complaints of irregularities in the meeting, the Registrar has the power to summon or conduct such a meeting himself or authorize an officer to do so. The Registrar’s decisions in such matters shall be final and binding.

Section 57: Rights of subscribers in the meeting

Every subscriber has the right to:

Attend and speak at the meeting,
Vote on matters concerning the chit,
Raise concerns or questions regarding the operation of the chit,
Demand inspection of records and justifications from the foreman.

These rights ensure participative governance and transparency in chit fund operations.

Section 58: Meeting expenses

The costs related to organizing and conducting the general body meeting (hall rental, postage, stationery, refreshments, etc.) shall be borne by the chit fund account unless otherwise specified. However, unnecessary or frequent meetings may require subscriber approval for such expenditure.

Chapter VII – Audit and Inspection (Detailed)

Section 59: Audit of chit accounts

Every foreman must maintain proper and up-to-date books of account for each chit group. The accounts must include details of:

Subscriber contributions,
Prized money disbursed,
Commission and charges collected,
Expenses incurred,
Outstanding dues, and
Bank transactions.

At the end of each chit cycle or financial year (whichever is earlier), the foreman shall prepare a balance sheet and profit & loss account of each chit. These financial statements must be audited by a qualified Chartered Accountant. The audit must verify the accuracy, completeness, and compliance of all transactions with the Chit Funds Act and the agreement terms.

Section 60: Filing of audit report

A duly signed copy of the audited financials must be submitted to the Registrar within the period prescribed by the rules (typically 3 to 6 months after the close of accounts).
The audit report must also include:

Any discrepancies or irregularities observed,
Comments on subscriber defaults,
Verification of foreman’s security,
Use of the foreman’s commission.

Failure to submit the audit report in time may result in penalties or suspension of registration.

Section 61: Registrar’s powers of inspection

The Registrar has the authority to inspect:

The books of account,
Chit agreements,
Correspondence,
Subscriber registers, and
Any other document relevant to the conduct of chits.

Such inspections may be initiated suomotu or based on complaints. Foremen are bound by law to cooperate and provide access to all records during inspection.

Section 62: Special audit or investigation

In cases of suspected fraud, mismanagement, or non-compliance, the Registrar may order a special audit or investigation. This may involve independent auditors or experts appointed by the Registrar.

The cost of such audits, if arising due to mismanagement or concealment, may be recovered from the foreman. The outcome of the investigation may lead to:

Suspension or cancellation of registration,
Legal proceedings against responsible individuals,
Direction to return money to subscribers.

Section 63: Subscriber access to audit reports

Subscribers have the right to inspect audited reports of the chit in which they are members. These reports must be made available at the registered office of the foreman. A subscriber may also request a certified copy of the audit report upon payment of a nominal fee.

Section 64: Penalties for false records

Any foreman or employee who knowingly prepares or maintains false or misleading records related to the chit operations shall be liable for prosecution under this Act.
Penalties may include:

Monetary fines,
Suspension from chit business,
Imprisonment as determined by the severity of the offence.

This chapter ensures financial accountability and protects subscribers by enforcing stringent audit and inspection mechanisms.

Chapter VIII – Winding Up of Chits (Detailed)

Section 65: Circumstances for winding up

A chit may be wound up under the following circumstances:

If the chit has been conducted in a fraudulent or illegal manner,
If there is a persistent failure to comply with the provisions of the Act or rules,
If the foreman is unable to pay the prized subscribers,
Upon application by two-thirds of the total number of subscribers,
By direction of the Registrar on just and equitable grounds.

Section 66: Application for winding up

An application for winding up can be made by:

The Registrar,
The foreman,
A minimum of 25% of the total number of subscribers.

This application must be accompanied by a statement of reasons and supporting documents indicating the necessity for such action.

Section 67: Appointment of liquidator

Upon admitting the winding up application, the Registrar may appoint a liquidator who shall:

Take charge of the assets and liabilities of the chit,
Prepare a list of creditors and subscribers entitled to a refund,
Recover dues from defaulting subscribers,
Disburse funds as per priority.

The liquidator has the powers of a civil court for summoning individuals, examining records, and carrying out the winding-up process efficiently.

Section 68: Priority in disbursement

In the winding-up process, funds shall be disbursed in the following order of priority:

Secured creditors have priority,
Then non-prized subscribers,
Then prized subscribers not yet paid,
Then unpaid dues to employees (if any),
Then any remaining dues to the foreman.

Section 69: Final report and closure

After disbursing all dues, the liquidator shall prepare a final report of winding up and submit it to the Registrar. On approval, the chit shall be officially closed and removed from records.

Section 70: Legal protection during winding up

All proceedings under this chapter are protected under law. No suit or legal proceeding shall lie against the Registrar or liquidator for actions taken in good faith under this Act.

Chapter IX – Offences and Penalties (Detailed)

Section 71: Penalty for non-compliance

Any person, including a foreman, who contravenes or fails to comply with any provisions of this Act or the rules made thereunder, shall be liable to a fine which may extend to ₹5,000. In case of a continuing offence, an additional fine of ₹500 per day during which the default continues may also be imposed.

Section 72: Punishment for conducting chit without registration

Any individual or entity conducting a chit fund without proper registration, or continuing to operate after suspension or cancellation of registration, shall be punishable with imprisonment for a term which may extend to two years, or with a fine which may extend to ₹25,000, or both. The Registrar has authority to initiate prosecution and issue necessary directions to cease such unregistered activities immediately.

Section 73: Failure to file records or information

If any person fails to file documents such as balance sheets, audit reports, chit agreements, or fails to maintain prescribed books of account, they shall be liable to a fine which may extend to ₹3,000. Repeated defaults can attract more serious penalties including suspension of chit operations.

Section 74: Misuse of subscriber funds

If a foreman is found to have diverted, misused, or mishandled the funds of subscribers, or has failed to pay prize amounts or refunds within prescribed time, such foreman shall be punishable with imprisonment up to two years, a fine up to ₹50,000, or both. The court may also direct compensation to the affected subscribers.

Section 75: Tampering with records or documents

Whoever alters, destroys, fabricates, or falsifies any books of account, agreements, minutes, or any document related to chit business with the intent to defraud or conceal material facts, shall be liable for criminal prosecution. The punishment includes imprisonment which may extend to three years and a fine.

Section 76: False statement to Registrar

Any person who knowingly makes a false statement or provides misleading information in any document or return submitted to the Registrar shall be punishable with imprisonment up to one year, or a fine up to ₹10,000, or both.

Section 77: Responsibility of officers

If an offence under this Act is committed by a company, firm, or association, every person who was in charge or responsible for the conduct of business at the time of the offence shall be deemed guilty, unless they prove the offence was committed without their knowledge or despite due diligence.

Section 78: Cognizance and trial of offences

No court shall take cognizance of an offence under this Act except on a complaint made by the Registrar or an officer authorized by him. All offences under this Act shall be tried by a Magistrate of the first class.

Section 79: Compounding of offences

Certain minor offences under this Act may be compounded by the Registrar before the initiation of prosecution, subject to payment of a prescribed compounding fee. Once compounded, no further legal proceedings shall be initiated in that matter.

Section 80: Appeal against penalties

Any person aggrieved by an order of the Registrar imposing a penalty may appeal to the State Government or designated appellate authority within the prescribed time limit (generally 30 days). The decision of the appellate authority shall be final.

This chapter provides for strict enforcement and accountability to ensure that chit fund operations remain compliant, fair, and trustworthy. The penalties serve as a deterrent against misuse, fraud, and negligence.

Chapter X – Miscellaneous (Detailed)

Section 81: Power to make rules

The State Government is empowered to make rules by notification in the Official Gazette to carry out the purposes of this Act. These rules may cover various operational aspects including forms, procedures, limits, and regulatory standards.

Section 82: Power to exempt

The State Government may, by notification in the Official Gazette, exempt any person or class of persons or any chit or class of chits from any provisions of this Act or the rules made thereunder, subject to conditions as it deems fit. This provision offers flexibility to encourage innovations and accommodate local conditions.

Section 83: Power to delegate

The State Government may delegate any of its powers under this Act, except the power to make rules, to any officer or authority subordinate to it. This decentralization aims to make administration and enforcement more effective.

Section 84: Protection of action taken in good faith

No suit, prosecution, or legal proceeding shall lie against the State Government, Registrar, or any officer acting under this Act for anything done in good faith in pursuance of its provisions.

Section 85: Repeal and savings

The previous enactments corresponding to this Act shall stand repealed. However, any action taken or orders passed under the repealed enactments shall be deemed to have been done or taken under the corresponding provisions of this Act.

This final chapter ensures administrative clarity, legal immunity for bona fide actions, and flexibility for state governments to adapt and implement the Act effectively. It ties up loose ends and provides the legal mechanism for transition and continuity from older legislation.

Chapter XI – Power to Remove Difficulties (Detailed)

Section 86: Power to remove difficulties

If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions not inconsistent with the Act as may appear to be necessary for removing the difficulty.

This power is time-bound: no such order can be made after the expiry of two years from the date of commencement of this Act. All such orders must be laid before each House of Parliament as soon as possible.

This chapter acts as a safety valve, giving the government a temporary authority to address unforeseen implementation hurdles without amending the entire Act. It ensures smooth enforcement of the law during its early stages.

Chapter XII – Schedule

Schedule I: Form of Chit Agreement

This schedule provides the standard format for a legally binding chit agreement between the foreman and subscribers. It includes:

Name, address, and signature of all subscribers
Details of the chit amount, number of installments, periodicity, and duration
Conditions regarding auction, prize money disbursement, commission, and foreman remuneration
Rules regarding default, substitution, and rights of subscribers
Acknowledgement by each party to abide by the provisions of the Act
Space for Registrar’s certification of registration

This agreement is a foundational document that ensures all participants are aware of their rights and obligations under the chit fund scheme.

Schedule II: Registers and Records to be Maintained

The Act mandates every chit fund operator to maintain the following records:

Register of subscribers
Minutes book for all meetings related to chit operations
Ledger showing each subscriber’s payments, defaults, and prize amounts
Cashbook and bank book for accounting purposes
Copies of all notices issued to subscribers
Chit receipts and payment vouchers

These records are crucial for audit, transparency, and regulatory compliance, and must be preserved for at least eight years.

Schedule III: Forms for Statutory Filings

This schedule outlines standardized forms to be used for communication with the Registrar:

Form A: Application for registration of chit
Form B: Certificate of commencement
Form C: Report of auction proceedings
Form D: Balance sheet of the chit business
Form E: Intimation of substitution or transfer of subscriber
Form F: Termination of chit group or closure

These forms ensure uniformity and streamline the process of regulatory oversight.

Schedule IV: Compounding Fees Table

The Act permits compounding of minor offences on payment of specified fees. This schedule provides the fee structure:

Failure to file documents on time: ₹500 per default
Delayed disbursement of prize money: ₹1,000 per case
Non-maintenance of prescribed registers: ₹2,000

These fees are intended to encourage compliance without requiring immediate litigation, allowing minor errors to be resolved efficiently.

Schedule V: Appellate Authorities and Jurisdictions

This schedule lists the designated appellate bodies for various matters under the Act:

Registrar of Chits – Primary authority for all chit-related disputes and penalties
State Government Appellate Officer – For appeals against Registrar’s decisions
Civil Courts – For broader disputes not resolved through administrative channels

Subscribers and foremen must be aware of these channels to ensure fair representation and legal recourse.

This chapter provides the practical formats and administrative framework necessary for enforcing the provisions of the Chit Funds Act. The schedules bring operational clarity, establish standardized procedures, and ensure legal enforceability of all documents and transactions.