In a chit fund scheme, a group of people contribute periodically to the chit value for a duration equal to the number of investors (members or subscribers). The amount collected is given to the person who is either selected through a lucky draw (lottery system) or an auction.
Chit funds are legal in a majority of states and UTs in India. Chit fund companies in India are under the Chit Fund Act, 1982. Since chit funds are not financial companies, they are not regulated by the rules or guidelines of the RBI. A chit fund is a type of rotating savings and credit association system practiced in India and other Asian countries.
Chit fund schemes may be organized by financial institutions, or informally among friends, relatives, or neighbours. In some variations of chit funds, the savings are for a specific purpose.
The annualised interest rate is 22%. Despite these shortcomings, investors flock to chit funds in large numbers. This is because the option offers tremendous flexibility to the member. He can treat it as a recurring deposit until he needs the money, just like an overdraft facility with a bank. Chit funds are often microfinance organizations.
An entity managing chit funds registered under the Companies Act 2013 is known as a chit company.
Types of chit funds
Registered Chit Funds
Registered chit funds are the ones that are registered with the Registrar of Firms, Societies, and Chits.
Unregistered Chit Funds
Unregistered chit funds are saving schemes that are operated among friends, family, or colleagues.
Online Digital Chit Funds
With digitalization, chit funds have evolved and are organized online. These types of chit funds have online auctions. The subscribers can make their monthly contributions online and also receive their prize money through online modes.
Organized Chit Funds
More common in North India, this type of chit fund requires all the members
to come together on a monthly or weekly basis. The names of all the members are written on small paper slips and collected in a box. The person in charge of the group picks up a paper slip in front of all the group members.
Special Purpose Chit Funds
Special-purpose chit funds are organized to save for
Chit Fund Company
An entity managing a chit fund scheme is usually referred to as a chit fund company.
The persons participating in a chit fund scheme are referred to as members
A chit fund company will usually have many different chit fund schemes, each with a set of members and a limited duration.
Chit Fund Registration
The chit fund business in India is regulated under the Chit Fund Act, 1982.
In chit business, a person eagreeswith a number of persons that every one of them shall subscribe a certain sum of money by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as it determines by lot or by auction or by tender or in such other manner as may be in the chit agreement, and entitles to the prize amount.
A transaction is not a chit if some but not all of the subscribers get the prize amount without any liability to pay remaining future subscriptions, or all the subscribers get the chit amount by turns with a liability to pay future subscriptions.
Though chit fund companies are a category of Non-Banking Financial Companies (NBFC), chit funds are exempt from registration with the Reserve Bank of India.
Chit funds are a category of NBFCs in which the regulators regulate the funds, and thus, they are exempt from the requirement of registration with the RBI.
Promoters of the chit fund company first start a Private Limited Company with the objective of operating a chit fund business.
After incorporating a private limited company, the company can apply to the relevant Chit Fund Registrar of the State to obtain registration.
A chit fund business can commence only after obtaining chit fund business registration from the relevant State Registrar.
Note
The minimum capital requirement for a Chit fund company registration is Rs . 1 lakh. RBI capital requirements are not applicable to the Chit Fund Company in India
Steps for registration
Step 1: Obtaining a digital signature for all directors and members
Step 2: Approval of the name should be obtained
Step 3: Preparation of documents such as MOA, AOA, and other documents
Step 4: Filing of forms in Spice e-form
Step 5 Registration of the fund with the concerned state chit registrar
