The Chit Fund Act 1982-Understand the law first

Their was a huge uproar in media about the recent scam of Saradha Group and canvassing it as a chit fund company. But do you know the reality that it will not come under Chit Fund Act?? Yes it will not, if one goes by the Chit Fund Act 1982. Hence to be a knowledgeable investor better first understand the act.

Below are the important findings and must known points of The Chit Fund Act 1982.

• This act will extends to whole of India except the state of Jammu and Kashmir.
• Other similar names to Chit Fund are chitty or kuri.
• Transaction is not called a Chit Fund if

1. Some alone, get the price money without obligation of paying future installments.
2. All subscribers get chit amount by turns with liability to pay future installments.

• Chit fund companies name should include “Chit”, “Chitti” or “Kuri” with their name. No other person have right to use these above mentioned words as a part of their business names.
• All chit fund companies need to be registered with respective state government wherein they will operate. Registration may be not permitted in case foreman (person who conduct chit fund) found to be convicted under this act or any other act related to chit business, defaulted the payment of fees or non filing of any record or statement required by law. Or if he convicted of any offence involving moral turpitude and sentenced to imprisonment unless five years of period elapsed since his release.
• All prospectus, notice, circular, proposal inviting people to invest in chit must be taken the approval of the same under Sec 4 of act.
• Each agreement should be in duplicate and shall be signed by subscribers. It mainly contains name and address of subscriber, number of chits he will be holding, installment amount, interest and penalty, probable date of commencement and end date, the maximum amount of discount, how the discounted amount will be distributed, date and time of drawn, name of the bank where collected amount will be deposited and any other details.
• Capital required to start Chit Fund is minimum one lakh.
• No chit fund companies are allowed to do business until they get prior permission by respective state governments.
• Money so collected can not be utilized for any other business purpose except carrying on chit business, giving loans to non-prized subscribers on the security of subscriptions paid by them, investing in trustee securities and making deposit in mentioned bank.
• A chit agreement can not be altered, cancelled or added unless the prior approval of both foreman and subscribers.
• Foreman need to deposit equal amount of chit amount in an approved bank.
• A non prized subscriber if defaulted then he can be removed from the list of subscribers by sending written notice about the same by foreman within fourteen days of the date of such removal.
• Prized subscriber need to either give security deposit or receive the balance amount after deducting the future installments.
• Foreman commission will be maximum of 5%.
• Bidding amount should be not more than 40%.
• The aggregate chit fund value must not be more than 10 times it’s net owned capital.
• Chit fund account need to be audited by CAs.

Above are the few important points which I found to be important. Now will Saradha Group will be considered as chit fund company??? No…because it never mentioned anywhere “CHIT” with it’s name even company was not registered as chit fund company. Visit at it’s site, you will not find a word chit, chitti or kuri. In my view it is a fradulant collective scheme rather than a chit fund scheme. Any new ideas than mine???