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Chit fund concerns are covered under Chit Fund Act. Chit funds are those business concerns which accept from its customers a fixed amount every month for a stipulated period which may be ranging from 1 year to 5 years. The members belonging to the chit company are classified into different groups according to the chit amount and the period.
How do Chit fund companies function
The first and second month chit amount will be taken over by the organizations concerned conducting the chit. From the 3rd month onward, auction will be held among the members for the chit amount. The member who gives the highest bid will be allotted the chit amount less the amount that has been bid. The discount amount that has been decided in the auction through the bidding will be distributed among the members. We can explain the whole system through an example.
Example of Chit Auction process:
Say for example there are 25 members in a chit, with Rs. 400 as monthly installment. They subscribe for a period of 25 months. So the total chit amount will be Rs. 10,000. The Chit auction process goes in the following manner.
- The members will take part in the chit auction from the 3rd month and those who are in need of money will be bidding in the auction which will commence from minimum amount of Rs. 100/-.
- The bidding period will last for 5 minutes
- The person who bids, say, Rs 3,000, will get the balance of Rs. 7,000 as the chit amount.
- Remaining Rs. 3,000 will be distributed among the members.
- By this, the members will be paying a lesser amount towards the chit subscription of Rs. 400 (in this case Rs. 3,000 divided among 25 members, i.e., a sum of Rs. 120 will be deducted from the subscription amount of Rs. 400.
- The balance amount of Rs. 280 will be collected as chit subscription from other members.
Chit Fund Act
Chit Fund Act was passed in 1987 and a Stay order was obtained on its implementation. The Stay order was vacated by the Supreme Court in 1995 and subsequently, the Act came into force, after which certain regulations have been imposed in the running of chit companies in India. They are as follows.
Regulations Imposed by RBI on chit fund business
1. No chit fund business can be conducted except by a registered company. Chit business run by family concerns, partnership firms are restricted.
2. In every state, there will be a Registrar of Chit companies with whom all the chit companies must register, giving full particulars about the chit company.
3. The maximum discount that can be taken in a bid was restricted to 30% of the total chit amount. However, in 2001, the same has been enhanced to 40% (in the case of a chit for Rs. 1 lakh, not more than Rs. 40,000/- can be the bid amount).
4. The details of every chit have to be furnished to the Reserve Bank of India along with the names and addresses of members.
5. One month chit amount of all the members has to be kept with the Reserve Bank of India till the particular chit comes to an end.
What is a Price Chit
Prize chit: Prize chits are those run by jewellery and textile shops, wherein the members will be paying monthly installment till their turn comes in the lot. Suppose a member is lucky enough to get her lot in the second installment, she need not pay the subsequent installments and she will get either jewel or cloth, equivalent to the chit amount. However, these are not legally valid as they are not permitted by the Reserve Bank of India.
Examples of chit concerns are
- Balussery Benefit Chit Fund (P) Ltd.
- Shriram Chits & Investments Ltd.