• The Chit Fund Act - Non Prized Subscriber Rights

1. How  Chit Funds Act 1982 FORCE a subscriber to become a defaulted subscriber (Registered Chit Company in Karnataka) when he has paid all the subscription in time and noticed his intention to withdraw from Chit Fund due to good reasons (say financial constraints beyond his own control) ?
(Ref. Sec. 28, 29 and 30 ) and leave him at the mercy of a chit company to issue a notice and make him re-subscriber or a default subscriber ? Why would a subscriber be financially forced
 to be at the ability??? of Foreman/ Chit Fund Company to find a substitution of him and has to wait till the end of chit to get his hard earned money within 15 days ? Why a foreman is authorized to make the deductions like his commissions plus all the dividends he may have earned till then, even at the end of chit when subscriber was wrongly made to wait for so many months ? (For eg. a non prized Subscriber who paid 12 months in time and on 13th month he 
conveys his inability to continue and request money deposited so far and ask them them to deduct the 5% commission too and as per agreement but not contrary to the law of land?). What protection law provides if a chit company doesn't or choose not to replace with the substitution ?
How a non-prized subscriber protect himself from being forced to become a default subscriber without revoking his earlier instruction/request to withdraw and be at the mercy of chit company and have no option but to wait and loose the dividends earned earlier and again 5% and may be some other? Please reply in details.
I want to stop this fraudsters using law and lawmakers making laws to make desperate people to be exploited. I am ready to loose the money so far I deposited if it does GOOD TO THE SOCIETY OF POORS ESPECIALLY. please provide detailed reply including constitutional validity and way to make the law amended and if there is any chance to punish the lawmakers who draft such one sided laws.I will provide further details if required.

Thanks & Best Regards,
Raj
Asked 2 years ago in Civil Law from Puttur, Karnataka
Supreme Court of India
M/S. Shriram Chits & Investment ... vs Union Of India And Others on 13 July, 1993
Equivalent citations: AIR 1993 SC 2063, 1994 79 CompCas 298 SC, (1994) 2 CompLJ 430 SC, JT 1993 (4) SC 399, 1993 (3) SCALE 125, 1993 Supp (4) SCC 226, 1993 Supp 1 SCR 54
Author: Y Dayal
Bench: J Verma, Y Dayal, N Venkatachala

ORDER

Yogeswar Dayal, J.

1. This order will dispose of Civil Appeal No.448 of 1989 and the batch coupled with Writ Petition No.1092 of 1991 and the batch. Civil Appeal No.448 of 1989 arises from the judgment of the Karnataka High Court at Bangalore dated 29th April, 1989 passed in Writ Petition Nos.19321/86, 17110/84, etc.

2. The above appeals and writ petitions involve challenge to constitutional validity of the Chit Funds Act, 1982 (Central Act No.40 of 1982) (hereinafter called as 'the Act' or 'the impugned Act').

3. The various appellants/petitioners are either Public/Private Limited Companies incorporated under the Companies Act, 1956 or proprietary or partnership concerns or individual organisers. According to Section 1(3) of the Act is will 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. In all these matters, apart from challenge to the vires of various provisions of the Act, the legislative competence of Parliament, which enacted the Act, has also been challenged.

4. In karnataka the impugned Act came into force on 2nd January, 1984. There was no Act in this State for regulating Chit fund business and as a result, some of the Chit Fund Companies in Tamil Nadu, Kerala, Maharashtra and Andhra Pradesh which came under their respective regulatory measures shifted their business to Karnataka State and carried on Chit fund business in that State without being hampered by the regulatory measures of the respective enactments in such States. When the impugned Act was brought into force, the appellants were asked to comply with a number of requirements under the Act by the State of Karnataka, therefore, complaining of the violation of their constitutional rights to carry on business, they had filed writ petitions challenging the vires of the Act.

5. The competence of the Parliament to enact the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 (Act 43 of 1978) came up for consideration before this Court in Srinivasa Enterprises and Ors. v. Union of India etc.. This Court in the aforesaid case held that having regard to pith and substance of that Act, it fell within Entry 7 of List III and not in the ambit of Entry 34 of List II within the State List. While dealing with the constitutional validity of banning private prized chits, this Court drew support from the reports of Expert Committees. In the circumstances, before going to the question of legislative competence and reasonableness of the various provisions of the Act, it will be useful to refer to the recommendations of various expert bodies who had occasion to examine the matter The report of the Banking Commission prepared in the year 1972; report of the Study Group on Non-Banking Financial Intermediaries (dated 10.8.1971) constituted by the Banking Commission; the report of the Study Group of Non-Banking Companies headed by the Chairman J.S. Raj (otherwise known as Raj Committee) dated 14.7.1975 and the report of the Select Committee of Parliament. These reports give us an insight into the origin of Chit fund business in this country, the mechanism of Chit fund transcations, the benefits that accrued to the needy public who are not in a position to avail themselves of the credit facilities from the financing banks, the evils that flow from such Chit fund transactions on account of the unscrupulous and unethical methods employed by persons who run and control Chit fund business and need for the legislation in order to protect the interests of the subscribers to the Chit funds from some of the unscrupulous promoters and foremen. (emphasis supplied)

6. The first report dated 10th August, 1971 was submitted by the Study Group of the Non-Banking Financial Intermediaries appointed by the Banking Commission. Chapter 6 of this report is devoted to Chit Funds. The introduction to this report is quoted in the judgment under appeal and reads as follows: In this chapter it is proposed to study the working and role of one of the oldest of the indigenous NBFIs, viz. Chit Funds. We have, in particular, examined the role of chit funds as a saving and lending institution. Our analysis and observations are based on published material, data collected by the Reserve Bank of India, memoranda received from various chit fund companies as well as material submitted by the representatives of some of the leading chit funds to the Banking Commission. The Annual reports of a few chit funds have also been made use of. The Study Group received in all twelve memoranda (listed in Appendix II). The Banking Commission had issued a questionnaire to commercial banks and the replies received in response thereto pertaining to their chit fund business have been analysed and used for our discussion. (emphasis supplied)

Paras 6.4 to 6.29 of the report deal with various aspects of Chit fund business. Paras 6.2. and 6.3 of the report deserve to be excerpted since they tell us about the origin of this financial institution in India. They read as:- Chit Fund is perhaps the oldest indigenous financial institution in India. The origin of chitty or kuri or chit fund is traceable beyond more than a century in the rural parts of Southern India. Periodically, a fixed measure of grain could be deposited with a trustee and received back when sufficiently large quantity was collected. The needy person was ascertained through draw of lots. The word 'chit' suggests its origin. Chit means a written note on a small piece of paper. Since the winner of the Chit amount was to be ascertained though draw of lots, it involved writing of names of eligible members on separate chits, as in a lottery. The Scheme thus came to be known as 'chit funds'. Its equivalent in Malayulam 'kuri' is derived from 'Kurippu' which is a synonym of chit. The trustee's reputation for honesty attracted more savers to him. In the earlier stages when the idea of modern banking had not reached the people, chit fund institutions developed quickly and spontaneously. It was an expression of co-operative efforts of mustering savings through instalments and advancing the pooled savings as loan to the members with facilities of repayment in instalment. With the growing importance of commerce and industry and the consequential rise in the population of towns and cities, chit fund was brought to the urban areas. In paras (6.7, 6.8 and 6.9 the working of business chit is considered and we are concerned with this type of chit business. They read as:-

In this case, there is a promoter called foreman who enrolls a number of subscribers and draws up the terms and conditions of the scheme in the form of an agreement. Every subscriber has (o pay his subscription in regular instalments. The foreman charges, for his service, a commission on which there is a ceiling fixed by law in some States. He also reserves the right to take the entire chit amount at the first or second instalment as prize. Depending on the terms of the agreement, a fixed amount is also sometime set aside for distribution among the non-prized members. After making provisioin for the above deductions, the balance is put to auction (except at the last instalment) and given as prize to the member who is prepared to forego the highest discount. The amount of discount is distributed as dividend either among all the members or only among the non-prized members. In some States a ceiling has been fixed on the discount that a member can offer. In case more than one person is prepared to offer the same discount or when there arc no bidders, lets are drawn to choose the prize winning member. The number of subscribers in a chit series equals the number of instalments so that every member is assured of the opportunity of getting the prize. Sometimes with a view to catering to as many subscribers as possible, a chitty comprises a series expressed in terms of a sub-division or fraction of a full ticket (ticket means the share of a subscriber which entitles the holder thereof to the prize amount at any one instalment). In such cases the number of subscribers can exceed the number of insalments. In some cases only auctions are held to determine the prize winner while there are chit funds in which prize winning tickets are determined both by lots and by auction. The prize winner can get the prize only on furnishing security acceptable to the foreman for the payment of the remaining instalments. In the event of default by subscribers in payment of instalment on clue dates, penalties are imposed in various forms, e.g., forfeiture of dividends or levy of penal interest. The above are the essential features of a business chit scheme although there are any number of variants. Chit fund can thus be described as a mutual recurring deposit scheme under which every member is entitled to receive prize amount as loan from the chit fund; for the last prize winner, however, the prize amount cannot be considered as loan. Although no rate of interest is specifically mentioned, the deductions on account of discount and the foreman's commission make the loan in a majority of the cases, an interest-bearing one, the interest rate depending on the specific terms and conditions under which the scheme operates. For the foreman, however, no interest rate is involved on his 'loan'. Paras 6.13 to 6.18 deal with the role of the foreman, his actions legal and illegal and the risks and responsibilities in his intrepid role. They read as under :

At this stage it would be useful to study the foreman's role in the chit transactions. Subject to law, he decides practically everything about the chit - the number of members, the amount of instalments, the chit amount, his commission, the instalment at which he himself would remain the prize, the penalties to be imposed on defaulting members, etc. It is easy for him to exercise his powers because the number of subscribers is in many cases large and they are usually scattered over many places. Some foremen, in addition to carrying on the business of chits, also accept deposits from third parties. These are utilised as working funds and lent at high rates of interest to subscribers and perhaps to others. According to Reserve Bank survey, the amount of deposits of 106 reporting chit fund companies at the end of March, 1968, was about 1.1 crores. In terms of Reserve Bank's directions, a chit fund company cannot accept deposits repayable after a period of less than 12 months from the date of receipt of such deposits nor can the amount of such deposits exceed 25 per cent of its paid-up capital and free reserves. It may be noted that the subscriptions received from the members of chit funds in terms of contract are not treated as 'deposits' for the purpose of Reserve Bank's directions. According to available information, one-third of the outstanding loans and advances as on 31st March 1967, given by the foremen of 100 chit fund companies were personal loans; 27 per cent were meant for the commerce sector and 15 per cent were professional loans. 'Industry' and 'agriculture' got a negligible proportion, these advances accounting respectively for 0.5. per cent and 0.1. per cent of the total. The foreman derives his income in different ways, both legal and illegal. In the former category can be included items such as admission lee from members, penal interest or penalty fee from defaulting members and forfeiture of their dividend, interest on loans to non-prized chit holders, fees for transfer of shares in the chit, deduction from the subscription paid by a member who wants to resign, dividends on the chit reserved for himself, interest on the chit prize taken without deduction, interest on the chit prize which the prized member may not be in a position to collect immediately, and subscriptions paid by members who discontinue in the middle of the scheme but do not care to claim refund. The unscrupulous among the foremen resort to so many unfair methods to secure illegal gains. A few of these methods are briefly mentioned below:

(i) Enrolment of factious members to complete the required number of members in a chit series. If a real and needy non-prized member is not able to come forward to offer a high discount at the auction, one of these benami members is shown to get the prize thereby depriving the real members of the opportunity, (ii) Similarly, it is possible to exploit needy non-prized member or a new member so that he gets the prize only at the maximum discount. (iii) The prized member is supposed to get the amount soon after the draw or auction is over of course on furnishing the security. But the foreman adopts tactics which delay the actual payment for a considerable time, meanwhile he uses the money interest-free. If he succeeds in delaying the payment till the succeeding draw, the earlier prize winner is given the prize out of the collections of the succeeding draw. Thus, one instalment is perpetually in the hands of the foreman to be utilised in any way he likes. The above are only examples to illustrate the way in which some foremen maximise their profits. They do not take into account the cases where the foreman and his associates disappear from the scene and are untraceable. The police have many such cases on their record. During 1962-66, as many as 255 chitties collapsed in several districts of Kerala on account of such malpractices. It may be noted that the foreman has to undertake some responsibilities and risks. He is responsible for regular collection of subscriptions from a widely scattered body of members. He has to conduct the draws or the auction and maintain accounts. He is under obligation to pay the prize amount on the due date whether or not all the members have paid their subscriptions. In case of defaults, he had often to make good the deficit out of his own resources. If the prized member defaults in his instalments, litigation follows to recover the amount. If the defaulter is a non-prized member, the foreman has to find out a suitable substitute or, in the alternative , has to take over the chit himself and continue the business. According to the memoranda submitted by some chit funds to the banking Commission, the foreman requires finance from banks as well as moneylenders and others private sources. Some companies have also pointed out that their profits are not very large in relation to the risks involved. According to memoranda submitted to the Study Group, 15 to 18 per cent of the subscribers fail to pay their subscriptions after getting the prize amount. (emphasis supplied)

Paras 6.23 to 6.34 deal with the pecuniary aspects of the Chit Fund from the point of view to the subscribers. Some basic issues highlighted in the Report require to be noted. They are found in paras 6.30 and 6.31. They read as: As emphasised earlier, the rate of return on the savings of a subscriber to a chit fund and the interest rate that is involved for a subscriber joining the chitty as a borrower, will vary according to the terms and conditions of the chit fund. In fact, examples can be worked out on the basis of certain assumptions where the rate of return to prized subscribers at late stages will be quite high and the interest rate involved for a prize winner will be comparatively low. The essential it is that the rate of interest involved in chat funds is discriminatory and varies from person to person so that there is an irrational distribution of gains and losses. Ordinarily, the more needy a person, the higher will be the discount that he would be prepared to offer for winning a prize. Therefore, the more urgent his need the higher the rate of interest that a borrower has to pay. Another point is that there are institutions which offer savings schemes which are superior to the one involved in a chit fund. The savings and fixed deposits, recurring deposits, monthly income deposits schemes, cash certificate schemes, annuity or retirement schemes, insurance linked deposit schemes, small savings, provident funds and insurance schemes, cash certificate schemes, annuity or retirement schemes, insurance linked deposit schemes, small savings, provident funds and insurance schemes have features which are superior to those in chit funds. The popularity of chit funds can be explained by the fact a subscriber is entitled to borrow from it. Also, long standing social habits and the gaming element involved in the scheme, which perhaps provided an added attraction to some subscribers are also factors accounting for popularity of this institution. So far as the end-use of the prize is concerned, there are conflicting views. It would appear the likelihood of productive use of the prize money is small. A prospective producer would not depend on the uncertainties involved for a chit fund .The rates of interest generally involved for a prize winner in a chit fund are so high that an inference can be drawn that the prize money is mostly used for consumption or speculative purposes. Sonic persons join chit funds and are prepared to pay high rates of interest by way of large discount for the purpose of hoarding certain scarce commodities. They are not only able to recover the interest but also earn a profit on account of the difference between the relatively low price at which they buy the goods and the High price at which they sell them later (emphasis supplied)

The Study Group in paras 6.52 to 6.54 considered the legislative measures to be introduced for eliminating the malpractices usually prevalent in Chit Funds. It observed as followes:

We considered the above two suggestions, viz., starting of chit funds in the public sector and the commercial bank entering the chit fund business with a view to eliminating, through competition, the malpractices, usually prevelant in private chit funds. It may be noticed that most of the unhealthy practices arise fro the lack of integrity of the foreman. It was, therefore, natural that the regulation of chit fund business assumed high priority in the States where the business is concentrated i.e., in the Southern States. At present State legislation regulates the running of chit funds in the areas where such legislation is in force. The Tamil Nadu Chit Funds Act of 1961, seeks to regulate the chit fund business in the State of Tamil Nadu. With appropriate changes, this Act was adopted, with effect from 15th July, 1964, in the Union Territory of Delhi. The Union Territory of Pondicherry has the Pondicherry Chit funds Act, 1966, which came into force from 1st August, 1967. In Kerala, the Travancore Chitties Act of 1964, and Cochin Kuris Regulations 1932, are in force in some areas of the State. The question of introducing a uniform enactment in Kerala has been under the consideration of the Government for some lime. Some Sales are in the process amending or enacting laws to regulate chit fund activity. In Andhra Pradesh a bill on the lines of the legislation in the neighbouring Stale is under consideration. Mysore and certain other Stale Government are also contemplating passing of legislation for regulating chitties. Punjab Government is contemplating the starting of chit funds in the public sector on the lines of Kerala Government. In Uttar Pradesh, chit funds, lotteries etc., are regulated by the provisions of the Manual of Government Orders. According to these regulations, publication of advertisements in newspapers, of any proposals regarding lotteries not authorised by the Government is an offence under the Indian Penal Code. Also local authorities have been asked not to accord sanction for holding lotteries nor should they authorise advertisements regarding such undertakings. The object of legislation is to regulate the conduct of chit funds by requiring the foreman to obtain permission of competent authorities before a chit fund can be started, stipulating security to be provided by the foreman to the Registrar, detailing his rights and obligations and providing for punishment for infringement of law. Wherever legislation is in force, no foreman can state a chit fun until the Registrar is satisfied about the bye-laws of the fund and the security offered by the foreman. (emphasis supplied)

7. This report of the Study Group was incorporated in the report of the Banking Commission dated 31st January, 1972. The Banking Commission again emphasised the need for legislation in para 1.7.43 of its report thus:- A few States have legislation on chit funds, the object of which is to safeguard the interests of the members. The Commission feels that it is essential to have a uniform chit fund legislation applicable to the whole country. Depending upon the constitutional position, whether chit funds come under the Union list, Concurrent list or the State list, either an All India Chit Fund Act may be enacted or a model law may be framed which may be adopted by all the States with such modifications as may be necessary. It will be desirable to provide in the legislation that only public limited Companies can run chit funds. Pending such uniform legislation, existing State laws regulating chit funds registered within the State should be made applicable to their branches in the States having no legislation. This will essentially be an interim measure because only the members of those chit funds which are registered in State where chit fund laws have been enacted will get protection. (emphasis supplied)

8. The report of the Banking Commission found favour in the report of the Raj Committee on Non-Banking Companies in its report dated 14th July, 1975. The terms of reference of the Raj Committee may he noted to appreciate its recommendations regarding Chit business. They are: I. To examine the relative provisions of the Reserve Bank of India Act, 1934, the Non-Banking Financial Companies (Reserve Bank) Directions, 1966 and the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1973, with a view to assessing their adequacy in regulating the conduct of business by non-banking Companies covered by the said directions in the context of the monetary and credit policies laid down by the Reserve Bank from time to time; to suggest measures for further tightening up the provisions so as to ensure that the activities of such Companies, in so far as they pertain to the acceptance of deposits, investments, lending operations etc., subserve the national interest and serve more effectively as an adjunct to the regulation of the monetary and credit policies of the country besides affording a degree of protection to the depositors' monies. In this connection, the Study Group may examine and make recommendations for regulating the conduct of the business of non-banking companies governed by the above sets of directions generally, and in particular, in regard to - (a) the norms which may be adopted in respect of the capital structure and debt-equity ratio that may be maintained by the various classes of non-banking companies covered by the said directions;

(b) the extent to which and the periods for which such companies may borrow by way of deposits/unsecured loans and the distinctions, if any, to be made between public and private Companies:

(c) the maintenance of cash reserves and/or a percentage of their deposit liabilities in the form of liquid assets by such Companies.

(d) the norms which may be adopted in respect of the rates of interest payable by such companies on their borrowings by way of deposits/unsecured loans and also those which may be charged on loans and advances made by them; (e) the extent to which any of the activities carried on by these companies through their subsidiaries can or should be controlled;

(f) the need for the imposition of a ceiling on risk assets to be acquired or loans to be granted by the companies;

(g) the restrictions, if any, on the grant of loans to directors and their friends and relations and companies in which they are interested;

(h) the manner in which the loopholes, if any, in the existing directions taken advantage of by private limited companies in the context of certain concessions enjoyed by such companies under the provisions of the Companies Act, 1956, could be plugged; and (i) the need to empower the Bank to apply for compulsory winding up of non-banking financial companies under certain circumstances.

II. To make recommendations on any other related topic which the Study Group may consider germane to the subject matter of the enquiry.

The Committee discussed the terms of the reference with various individuals of eminence and learned and also the representatives of companies, Associations all over India and in Bangalore.

9. During arguments we were referred to paras 6.17, 6.18 and 6.19 of the Raj Committee where the Raj Committee noticed the legal opinion as to the competence of Parliament which enacted the chit legislation in view of the provisions contained in Entry'7 of List III of Schedule VII of the Constitution of India and observed as follows:- It will be seen from the foregoing that chit fund legislation has been enacted only in a few States/Union Territories. There is also a diversity of the regulatory provisions made in the various enactments. It is not, therefore, unlikely that unscrupulous promoters or chit companies might exploit the situation by conducting chits in such of the States as have no chit legislation or in States where the provisions of such legislation are less rigorous. In fact, it was brought to the notice of the Group during the course of its discussions in New Delhi that a number of chit fund companies had shifted their registered offices from the Delhi area to the nearby places in Haryana (where there is no chit legislation) with a view to avoiding compliance with the provisions of the Tamil Nadu Chit Funds Act, 1961 as extended to the Union Territory of Delhi. In the circumstances, the need for enactment of a uniform legislation applicable to chit fund institutions throughout the country cannot be underestimated. In the context of the recommendations of the Banking Commission in regard to regulating activities of non-banking financial intermediaries, the Central Government has, inter alia, decided that a model law to regulate chit business may be formulated for adoption by all the State which have no such legislation. It has also decided that the question of making it a requirement of law that only public limited companies should run chit funds should be examined. Pursuant to the above decisions, the Reserve Bank has, at the instance of the Central Government, drafted a Model Bill which was referred to the Group for its comments in October 1974. The draft Bill is generally on the lines of the Andhra Pradesh Chit Funds Act, 1971 (which itself follows the pattern of the Tamil Nadu Chit Funds Act, 1961) and the Kerala Chittis Bill 1972 as reported by the Select Committee. Besides the usual provisions found in the existing State enactments, certain additional provisions have been made therein. We have examined the provisions of the Model Bill and after taking into account the opinions expressed by the representatives of some of the State Governments which have enacted legislation regulating chit funds in their respective States as also certain individuals having intimate knowledge of the running of chits, our views in this regard have already been conveyed to the Reserve Bank by a letter dated June 30, 1975 addressed by the Chariman of the Group to Shri S.S. Shiralkar, Deputy Governor of the Reserve Bank of India. It will be seen therefrom that the main recommendations of the Study Group are as under: (a) Since the legal opinion is that Parliament is competent to enact the chit legislation in view of the provision contained in Entry 7 of List III (Concurrent List) of Schedule VII to the Constitution of India, the proposed Bill should be enacted as a Central legislation. Such a step would, besides ensuring uniformity in the provisions applicable to chit fund institutions throughout the country, also prevent such institutions from taking undue advantage either of the absence of any law governing chit funds in any law governing chit funds in any State or exploit benefits of any lacuna or relaxation in any State law by extending their activities to such States; (b) While the Bill should be enacted as a Central Act, its administration should be left to the State Governments concerned which, in turn, may seek the advice of the Reserve Bank on policy matters. (For the purpose of tendering advice to the Central or State Governments, the Reserve Bank may have to inspect chit fund institution on a selective basis to have an idea of their working including their methods of operation. Chit funds are "financial institutions" as defined in Clause (c) of Section 45 of the Reserve Bank of India Act, 1934. Hence, it would be open to the Reserve Bank to undertake inspections of chit fund institutions whenever deemed necessary in exercise of the powers vested in it under Section 45N ibid); (c) as regards the question whether only public limited companies should be allowed to conduct chit funds, the Group is of the view that there should be no objection, in principle, to chits being conducted by private limited companies also, and on a limited companies also, and on a limited companies also, and on a limited scale, even by unincorporated bodies such as individuals/sole proprietorships/partnership firms. It might be of relevance to note in this connection that the enactments regulating chit funds in force in certain States do not prohibit chit funds being conducted by unincorporated bodies; and (d) having regard to the nature of their business, there is no necessity for chit fund institutions to borrow from the public by way of deposits and as such they may be prohibited from accepting deposits except as advance payment of subscription or deposits from prized subscribers by way of security towards payment of their future instalments. The views of the Group on certain other issues which arose for consideration are given in the Annexure to the above letter dated June 30, 1975. These are summarised below-

(i) Conduct of other business by chit fund institutions: Chit fund institutions may be prohibited from conducting any other type of business except chit business or granting of loans to subscribers against their paid-up subscriptions. (ii) Utilisation of funds: Chit fund institutions should utilise their surplus funds only for giving loans or advances to non-prized subscribers against the security of the subscriptions paid by them or investing in trustees securities or in deposits with the approved banks. (iii) Restriction on the opening of new places of business: Chit fund companies should obtain the prior approval of the Director of Chits within whose jurisdiction their registered offices are situated. The Director of Chits should take certain criteria into account before granting permission for the opening of offices. Unincorporated bodies should not be allowed to conduct business at more than one place. (iv) Maximum duration of chits : The duration of chits should not ordinarily exceed five years; but chits of a longer duration upto ten years may be started in very special cases only by chit fund companies/banks with the prior approval of the State Government concerned which should take into account factors such as the financial position and methods of operation of the company in question, interests of the prospective subscribers, requirements as to security, etc. The security deposit to be kept by the foreman of company in the case of chits of longer duration may be proportionately higher. (v) Mode of settlement of disputes : The machinery for settle-merit of disputes arising between the foreman and the subscribers relating to the adequacy of security offered by prized subscribers to the foreman for payment of future instalments, substitution of subscribers in case of default, etc. should be self-contained, cheap and expeditious on the lines of the machinery prescribed under the State Co-operative laws for settlement of disputes by arbitration. (vi) Ceilings in respect of the aggregate amount of chits that may he conducted at any point of time The aggregate amount of chits conducted by a chit fund company at any point of time may not exceed 50 per cent of the net worth of company, i.e., the paid-up capital plus free reserves less the balance of accumulated loss and other intangible assets such as deferred revenue expenditure and goodwill, if any. In the case of commercial banks conducting chit funds, no ceiling on the aggregate amount of chits that may be conducted at any point of time need be prescribed since these chits are subject to the close scrutiny of the Reserve Bank. As regards chit funds conducted by unincorporated bodies such as individuals, sole proprietorships and partnership, the aggregate amount of chits should not, at any point of time, exceed Rs. 10,000. (vii) Minimum capital requirement and the creation of a reserve fund : The minimum paid-up capital of chit fund companies incorporated under the Companies Act, 1956, whether private or public, should be Rs. 1 lakh. Companies having paid-up capital of less than Rs.l lakh may be allowed time up to three years to increase their paid-up capital to the minimum referred to above. The State Government concerned may be authorised to grant extension of time for a period not exceeding two years in appropriate cases. These companies should also be required to credit 20 per cent of their annual net profits to a reserve fund. (emphasis supplied)

10. It was in view of these recommendations of expert bodies that the Parliament enacted the impugned Act in 1982 and the same was brought into force in various States on different dates.

LEGISLATIVE COMPETENCE.

11. The impugned Act regulates the Chit fund business. The Scheme of Act, at this stage, may also be noticed.

Chapter II of the Act deals with Registration of Chits, Commencement and conduct of Chit business. Chapter III deals with the Rights and Duties of Foreman. Chapter IV deals with the rights und duties of non-prized subscribers. Chapter V deals with the Rights and Duties of Prized subscribers. Chapter VI deals with the restrictions on Transfer of Rights of Foreman, etc. Chapter VII regulates the Meetings of General Body of Subscribers, Chapter VIII provides for continuation of chits in certain eases and termination of chits. Chapter IX provides for inspection of documents. Chapter X provides for winding up of chits. Chapter XI provides for appointment of Officers and levy of fees for the purpose of discharging the duties imposed on the Registrar under the Act. Chapter XII deals with the disputes touching the management of Chit business by arbitration. Chapter XIII provides for miscellaneous provisions, viz., advisory role of Reserve Bank, Appeals from the order of the Registrar, Power of Registrar to give extension of time for filing documents, penalties, offences by companies, etc.

12. The submission of Union of India before the High Court was that the legislation in question falls in Entry 7 of List III (Concurrent List) of VIIth Schedule to the Constitution of India. Union of India also relied on the aforesaid reports of various Study Groups. The High Court accepted the contentions of the Union of India about the legislative competence of the Parliament to enact the impugned Act and dismissed the writ petitions. The point raised in the Civil Appeals inter alia is that the Parliament has no legislative competence on the subject matter as according to the appellants, the Act deals with the money lending and the same falls within Entry 30 of List II (State List) of VIIth Schedule to the Constitution of India. It was, however, submitted in reply by the Union of India that the Act falls within Entry 7 of List III of VIIth Schedule to the Constitution of India Section 2(b), 2(c), 2(d), 2(e) and 2(j) defines 'chit', 'chit agreement', 'chit amount', 'chit business' and 'foreman' respectively which read as follows: 2(b) - "chit" means 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 specified number of persons that every one of them shall subscribe of certain sum of money (or a certain quantity of grain instead) by way of periodical instalments 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. Explanation - A transaction is not a chit within the meaning of this clause, if in such transaction. -

(i) some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or

(ii) all the subscribers get the chit amount by turns with a liability to pay future subscriptions;

2(c) - "chit agreement" means the document containing the articles of agreement between the foreman and the subscribers relating to the chit;

2(d) - "chit amount" means the sum-total of the subscriptions payable by all the subscribers for any instalment of a chit without any deduction of discount or otherwise;

2(e) - "chit business" means the business of conducting a chit;

2(j) - "Forman" means the person who under the chit agreement is responsible for the conduct of the chit and includes any person discharging the functions of the foreman under Section 39.

13. Section 6 provides that the agreement shall be signed by each of the subscribers or by any person authorised by him in writing and the foreman and attested by at least two witnesses and the particulars that has to be stated in the said agreement have also been provided in Section 6 of the Act. This clearly shows that a contract has to be entered into between the subscribers and the foreman and in view of the definitions provided in Sections 2(b), 2(c), 2(d), 2(e) and 2(j) enforceable contract comes into existence and the Act provides how the contract has to be implemented and acted upon by the parties to the contract. Therefore, it is a special form of contract contemplated by Entry 7 of List III of VIIth Schedule of the Constitution of India and it cannot be termed as money lending business. It is clear that the foreman does not lend his money to any of the subscribers. The foreman acts only as person to bring together the subscribers and certain obligations are cast upon him with a view to protect the subscribers from the mischief and fraud committed by the foreman in view of his position. The amounts are paid to the subscribers as per the chit and in accordance with the provisions of Act. It will not be correct to state that each subscriber lends money to the person who gets chit earlier. It cannot also be construed that the person who gets chit later should be treated as the money lender. The agreement between the parties that is entered as per Section 6 of the Act, only provides for distribution of the chit amount. This agreement has to be treated as contract between the subscribers and the foreman and it is the foreman who brings the subscribers together and therefore the Act provided for payment of commission for the services rendered by the foreman as he does not lend money belonging to him. The dominant purpose of the Act is to regulate the chit and control the activity of the foreman and protect the interests of the subscribers. The pith and substance of the Act is that it provides for a special contract. The legislation provides for a special kind of contract and thus squarely falls within Entry 7 of List III of Schedule VII. If any support thereof is required the reference may be made to the decision of this Court in Srinivasa Enterprises' case (supra). That decision was involved with the power of the Parliament to enact the Prize Chits and Money Circulation Schemes (Baning) Act, 1978 and this Court held that the legislation fell within Entry 7 of List III of the VIIth Schedule as opposed to the claim of the petitioners therein that the legislation fell within State List Entry 34 of List II. That was a case which dealt with prohibition of dealing in private prized chits and the Court fund that the pith and substance of the legislation therein was not one against lotteries and it dealt with a special species of contracts. Similar view was taken by the Madras High Court while dealing with the Pondicherry Chit Funds Act, 1966 and held that the legislation fell within Entry 7 of List III of the VIIth Schedule and not under Entry 45 of List I or Entry 30 of List II (see) Chock Nathan Chit Fund and Finance (P) Ltd., Pondicherry and Ors. v. Union Territory of Pondicherry and Ors. .

14. The question as to the nature of chit agreement came up for consideration before a Full Bench of five Judges of the Kerala High Court in Janardhana Mallan and Ors. v. Gangadharan and Ors.. The Full Bench there was concerned with the chit agreement under the Kerala Chitties Act (Act 23 of 1975) where the Kerala High Court speaking through Poti, Acting Chief Justice, took the view that on entering into the chitty agreement a debt is not incurred by the subscriber for the amount of all the future instalments and in respect of such amount there is no debtor-creditor realationship. The chitty variola only embodies a promise to pay on future dates. That is not a promise to repay an existing debt, but to pay in discharge of a contractual obligation. For similar reasons neither the prizing of the chitty nor the execution of the security bond would give rise to a debt, for , the prize amount is not received as a loan, but as of right by virtue of the terms of the contract between the parties. Therefore, no debt due to the foreman arises by reason of the receipt of the price amount or of the execution of the security bond for securing future subscriptions. The Full Bench in this decision over-ruled its earlier decision in the case of P.K Achutan v. State Bank of Travancore,Calicut: . While rendering the decision in Janardhana Mallan and Ors. (supra) the Full Bench of the Kerala High Court considered a catena of decisions starting from 1937 in the matter of Ramanatha Iyyar v. Narayanaswami . The Andhra Pradesh High Court also, while dealing with the transaction of a chit fund organisation, in the matter of Dhoosa Narsimloo v. Yelala Rajanna and Anr. I.L.R. (1958) Andhra Pradesh 409, where the petitioner had filed a suit in the Court of the District Judge against the respondents on a promissory note executed by them for the amount they drew in a pool from a chit fund organisation and where the District Judge had dismissed the suit for want of a licence under Section 9(2) of the Hyderabad Money Lenders Act (Act V of 1349 F.) and on revision, the question that came for consideration was whether the chit fund organisation could be regarded as a money lender within the meaning of the said Act and whether its transaction partake the nature of a loan. Srinivasachari, J. speaking for the Court held that the amount drawn by a member of a chit fund who bid at the periodical auction giving the largest discount could not come within the definition of a loan within the meaning of the Money Lenders Act nor could such a transaction be regarded as a money lending transaction be and in the circumstances Section 9 of the Hyderabad Money Lenders Act (V of 1349 F.) could have no application to such a case. At page 415 of the aforesaid report it has been observed "in our opinion there is nothing in the chit fund transaction which could be called the business of money lending. It is in essence an organisation for mutual benefit." It approved the decision of the Madras High Court in Raghavan v. Armugham: (1934) 38 M.L..I. 283. That was also a case of chit fund transaction and the question for decision was whether a provision in the bond for payment of the whole amount in default of any one instalment was in the nature of a penalty coming within Section 74, Illustration (g) of the Contract Act. The learned Judges ruled that a chit fund transaction was not a case of borrowing at all and it was entirely different from a loan transaction. The learned Judges further held that "a loan envisages the relationship of a creditor and debtor in so tar as the lender and the borrower are concerned. There cannot be the relationship of a creditor and debtor between the stake holder and a subscriber, in a chit fund transaction. If the stake-holder advances any amount he advances only to one of the members, the funds of the whole body of the chit fund, as the funds belong to the whole lot of subscribers, the members, borrower is as much a creditor as a debtor. The amounts are in deposit with the stake-holder only as a trustee for the benefit of the members of the fund." Srinivasachari, J. noticed the observations of Srinivasa Iyengar, J. in Tim-marsa Pai v. Subba Rao : AIR (1928) Madras 256 where Srinivasa lyengar, J. regarded the position of the Manager of a kuri chit as a trustee for all the subscribers of the chit fund.

15. We were referred to the decision of this Court in K.P. Subbarama Sastri and Ors. v. K.S. Raghavan and Ors. wherein a contract providing for payment of money in instalments and stipulating that on default in payment of any of the instalments all the future instalments shall be payable at a time with interest was held not penal in nature in the case of kuri transaction under the Kerala Chitties Act, 1975. While upholding the transaction a Bench of this Court approved the decision of the earlier Full Bench decision of the Kerala High Court in the case P.K. Achuthan (supra) wherein the Kerala High Court had upheld such a transaction and held it, to be of not a penal nature. In this context Eradi, J. (as His Lordship then was) speaking for the Full Bench observed that a subscriber truly and really becomes a debtor for the prized amount paid to him. It will be noticed that the later Full Bench decision of the Kerala High Court in Janardhana Mallan and Ors. (supra) was not brought to the notice of this Court and the Court was referred to the over-ruled decision of the Kerala High Court. The fact remains that the question involved before us as to the true nature of transaction for the purpose of finding out the relevant entry in the Constitution into which it may fall, was not involved in that case.

16. It appear to us, but for the discordant note struck by the other Full Bench of the Kerala High Court in the aforesaid case of P.K. Achuthan (Supra), the consistent view of all the High Courts has been that it is not a moneylending transaction and that there is no relationship of debtor and creditor for the purpose of it being treated as a money lending transaction.

17. Before the Act came into force, the deposits acceptance activities of the chit companies were controlled by the directions issued by the Reserve Bank of India under Sections 45K, 45L, 45M etc. of Chapter III-B of the Reserve Bank of India Act. Chapter III-B dealing with non-banking institutions and financial institutions receiving deposits from third parties was introduced in the Reserve Bank of India Act, 1934 by the Amending Act (Act 55 55 of 1963) in the year 1963. In the case of Mayavaram Finance Corporation Ltd. v. Reserve Bank of' India reported in (1971) 41 Company Cases 890 Before the Madras High Court, the constitutional validity of Non-Banking Financial Companies (Reserve Bank) Directions, 1966, which were made applicable to 'chit fund' also were challenged on the ground that the impugned Reserve Bank of India (Amendment) Act and the Directions issued thereunder were beyond the legislative competence of the Parliament. At page 902 of the report the Madras High Court observed that "this special kind of contract falls under Entry 7 of List III. After the subscriptions are received and funded, it is no longer in the region of money lending and money lenders.... We are of the opinion that the contract entered ito by the former with the subscriber is a special contract falling under Entry 7 of List III of the Seventh Schedule. The President's assent to the Act confirms our view.... "The question considered by the Madras High Court was whether the Directions could be fairly covered under the entry 'moneylending' or 'banking' of the List II or List I respectively. The learned Judges of the High Court after considering the various rulings observed that "we are, therefore, of the opinion that the impugned provisions falling under Chapter III-B of the Reserve Bank of India Act, 1934 and the Notification dated October 29, 1966 issued by the Reserve Bank of India are valid and that there is no substance in any of the contentions raised by the petitioners".

18. The above judgment in the case of Mayavaram Finance Corporation Ltd. (Supra) was followed by the Madras High Court in the case of A.S.P. Aiyar and Anr. v. Reserve Bank of India and Anr. (1984) 56 Company Cases 352 and P. Suahmaniam and Anr. v. Reserve Bank of India and Ors. (1985) 57 Company Cases 755. In these two judgments the Madras High Court followed the ratio laid down in Mayavaram Financial Corporation Ltd. (supra) case. The decisions in A.S.P. Aiyar (supra) case, and P. Subrahmaniam's case which approved the decision in Mayavaram's case, were also approved by this Court in S.L.P. (Civil) No. 4015 of 1985 decided on 20th August, 1990 and Civil Appeal No. 2194 of 1985 on 16th January, 1990 respectively.

19. The judgment of this Court in Srinivasa Enterprises (supra) fairly covers the present Act as well. The prized chit is covered by entry 7 of List III as observed by the Court in that case. Conventional chits are also matter of contract with an added element of chance of draw of lot to choose the successful bidder. The prized chits are chits with an element of draw of luck. Otherwise prized chits and conventional chits are forms of contract and arise out of contracts only. They are not money lending business. Applying the ratio laid down in the case of Srinivasa Enterprises (supra) it has to be held that the Chit Funds Act, in pith and subtance, deals with special contract and consequently falls within Entry 7 of List III of the Third Schedule. It must, therefore, be held that the Chit Funds Act is within the legislative competence of the parliament.

20. Learned Counsel appearing for various sets of appellants/petitioners before us including Mr. Narasimhamurthy, Mr. Chidambaram, Mr. T.S. Krishnamurti, Mr. .S. Poti and Mr. K. Chandramouli challenged inter alia Sections 4(3)(b); 6(3); 9(1); 12; 13; 16(2); 16(3); 17(1); 20; 21(1)(a); 21(1)(b); 21(1)(c); 25 and 48 of the Act.

21. Before we consider the contentions of the appellant/petitioners in detail, the report of the Select Committee which considered the Chit Funds Bill, 1980, deserves to be noticed because the impugned Act incorporates all the recommendations of the Select Committee. In this regard the High Court observed as under :- The Committee held as many as 25 sittings after issuing notices to the State Government, Chit Companies, Public bodies and organisations, individuals etc. interested in the subject-matter of the Bill and also decided to hear oral evidence on the provisions of the Bill from interested parties. The Committee also issued Press communique fixing 21st February, 1981, as the last date for receipt of memoranda and requests for oral evidence. Wide publicity was given on three successive days by broadcasting the matter from all stations of All India Radio and telecast from all Door darshan Kendras. Several requests were received from various parties for being heard by the Committee and accordingly several sittings were held at Madras on 28th, 29th and 30th of May, 1981, at Bangalore on 1st and 2nd June, 1981 and at Trivandrum on 4th and 5th of June, 1981. Oral evidence was taken from the representatives of various Chit Companies, Associations, Federations, individuals etc. and the Committee also heard the representatives of the State Government of Tamil Nadu, Karnataka, Kerala and the Union Territory of Pondicherry. Since the Committee felt that sufficient number of subscribers were not forthcoming for tendering oral evidence, they decided to extend the time for receiving memoranda and receiving oral evidence upto 30th June, 1981. Further, a series of sittings were held at Ahmedabad, Hyderabad, Calcutta and New Delhi and the Committee, in all, examined 101 witnesses who appeared before the Committee for giving oral evidence. The Bill was considered clause by clause and the report of the Committee was adopted on 18th November, 1981. The recommendations of the Committee in respect of the following clauses in the Bill are :- Clause 4 : The period of 12 months was substituted for the period of six months in the proviso to the said clause since the Committee felt that the period of 6 months was not sufficient, for registering the chit from the date of sanction. Under Clause 6(i)(c) the words 'interest or penalty' were included for any default in the payment of instalments. Likewise, in Clause 6(i)(d) amendment was proposed to specify the probable date of commencement of the chit agreement. Clause .7(3) : The words 'within a period of three months' were incorporated with a view to ensure that the foreman did not take unduly long time to start the chit and did not misappropriate the subscribers' money. Clause 8 : Instead of the figure 20 percent, 10 percent was suggested as the amount to be transferred to the Reserve Fund Clause 11(2) : A period of one year was incorporated for complying with the requirements of Clause 11(1) to avoid any hardship being caused to such persons carrying on business on the commencement of the proposed legislation. Clause 13 : The Committee considered the aggregate amount of chit to be conducted by an individual foreman, partnership foreman and foreman-Company. The Committee felt that in order to ensure that the foreman has sufficient stake in the chit business conducted by him, recommended an increase of the amount from Rs. 10,000 to Rs. 25,000 in the case of individual foreman, from Rs. 40,000 to Rs. 1 lakh in case of partnership foreman. As regards the foreman-Company, the Committee recommended for the words 'net assets' the words 'net owned funds' to be substituted and that should be made applicable also to co-operative Societies. This recommendation was because of the fact (hat the concept of net owned funds will be in tune with the Reserve Bank of India directions to financial Companies which would mean the aggregate of the paid-up capital and free reserves reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets, if any, as per the latest audited balance sheet of the Company. Clause 14 : The representation for extension of the period of 2 years was rejected as the Committee felt that the period of three years was sufficient for securing the money invested by the person carrying on chit business in any other business. The Committee was also of the view that the State Government's power to extend the period of two years should be limited to one year only and proviso to Sub-clause (2) was accordingly amended. Clause 15 : by substitution of a new clause it was provided that chit agreement shall not be altered, added to or cancelled except with the consent in writing of the foreman and all the subscribers in the chit. The Committee felt that since the foreman was a party to the agreement, his consent must be obtained before altering the agreement. Clause 16 was suitably amended by the Committee in order to ensure that there was no mischief in conducting the chits by making it obligatory for the Chairman to issue notices to all the subscribers and the draw should be held in the presence of at least two subscribers. Clause 18 : 21 days' time was granted to the foreman to file the returns instead of 14 days. Clause 19 : A new Sub-clause (3) was added to enable the subscribers to know the State where the new business is opened by approaching the Registrar of that State instead of the Registrar of that State where the main office is situated for making any complaints with regard to the conduct of chit business at the new place of business. Clause 20 : Sub-clause (1) was amended as the committee was of the view that in order to ensure that the foreman docs not utilise the subscriptions so collected for the purpose of depositing the security and also to ensure further that the financial position of the foreman is sound to conduct the chit, he should be required to furnish security before he applies for previous sanction of the State Government under Clause (4) of the Bill. Clause 21: The provisions of Sub-clause (1)(a) was amended since the Committee was of the view that where a foreman has subscribed to more than one ticket, he should be allowed to get more than one chit amount in a chit without discount. Clause 22 : Sub-clause (2) was amended since the Committee felt that the existing clause would cause hardship to the foreman and therefore, he may be required to make deposit of the Prize money in respect of the drawn only if it remains unpaid before the date of the next succeeding instalment in a separate account in an approved Bank. A new proviso to Sub-clause (2) was added to avoid any hardship to the foreman by such contingencies by allowing the foreman to hold another draw in respect of the instalment if the prize amount is not drawn by the prized subscriber for a period of two months from the date of draw. Clause 23 : The Committee made the necessary amendment, on the representation that inspection of records of the foreman by the Registrar should be made permissible not only at the registered office of business but also at the place where the foreman is carrying on business, so that the Registrar in such cases will be able to exercise proper control and supervision over the business carried on by the foreman. Clause 40 : Clause (b) of this clause was amended by the Committee since the Committee was of the view that termination of a particular chit, as contemplated in Part (b) of this clause, should be with the consent of all the non-prized, unpaid prized subscribers and the foreman who is also a party to the chit. Clause 66 : The Committee was of the view that allowing the disputes to be taken to the Civil Courts will cause considerable delay in the settlement of dispute because of the long procedure in the Courts and this would particularly go against the interest of the subscribers and hence, Sub-clause (3) of the Bill was omitted. Clause 77 : The Committee felt that a provision for punishing the commission of second and subsequent offences should be included and the penalty of imprisonment and fine should be provided for. Accordingly, a new Clause 77 was added. These clauses in the Bill correspond to the respective sections in the Act. The other amendments proposed by the Committee are of a clarificatory nature and are only consequential, therefore, there is no need to refer to them. This Report of the Select Committee but for a lone dissenting member who was totally opposed to the continuance of chit business, was unanimous.

22. The Report 01 me Select Committee was brought to our notice and we thought it fit to look into it and the reports of the expert bodies with a view to satisfy ourselves that when Parliament enacted the Act, it had given its careful consideration to the various suggestions made by the State Governments, by the financial institutions, by the Companies, by the Cooperative Societies and by individuals; to the interests of the subscribers; to the risks of the foreman and to his difficulties in complying with certain regulatory measures, as found in the Bill; and passed the impugned Act. Almost all the recommendation of the Select Committee were incorporated in the impugned Act. Most of the appellants/petitioners had to opportunity of presenting their views before the Select Committee as could be seen from its report. Therefore, we have to examine whether the onus cast of the State to sustain the constitutional validity of the various provisions of the Act is discharged by it.

23. The impugned provisions of the Act, it was contended, were violative of Article 19(1)(g) of the Constitution of India. This appears to be the main contention of the appellants/petitioners in all these matters. According to some of them their Companies are registered under the Companies Act and the Companies Act provides sufficient regulatory measures over their business by prescribing provisions for running the day-to-day business through Board of Directors who are responsible to the shareholders, maintenance of various statutory returns which have to be submitted to the Registrar of Companies from time to time for enabling the Registrar of Companies to have an effective control over the business of the appellants/petitioners and annual statutory audit proceeded by internal audits. Therefore, it is submitted that an additional control by the Registrar of Societies under the Act makes a serious inroad into their rights to carry on their business and it would, therefore, be violative of Article 19(1)(g) of the Constitution. They have complained that the provisions of Section 3 of the Act has an over-riding effect. It imposed unreasonable restrictions on the existing rights of the appellants/petitioners to carry on chit fund business. It will be noticed that Section 3 of the Act which overrides other laws, memorandum or articles of association or bye-laws, or any agreement concerning the chit fund business, s a result, to the extent to which it is repugnant to the provisions of this Act, become void. The Act itself is one of the socio-economic legislations which had been enacted primarily and predominantly to safeguard the interests of the chit subscribers who are gullible and unwary public and who have been subjected to exploitation by chit foremen. The Act is intended to regulate and to bring in financial discipline in the chit business, as the foremen deal in and dabble with the funds of the subscribing public. In this context it will be noticed that the banks, financial institutions and non-banking financial institutions, who accept deposits or deal with moneys of the public are disciplined and regulated by the various legislations. Banking Regulations Act, 1949 is applicable to commercial banks, both in the public sector and private sector registered under the Companies Act, 1956. Banking activities of the Regional Rural Banks (Banks in rural sector) are regulated under the regulatory mechanism of Regional Rural Banks Act, Non-Banking Financial Companies (Reserve Bank) Directions, 1977 apply to the deposit-taking activities of non-banking financial companies like loan, investment, hire purchase finance and equipment leasing companies. Misc. Non-Banking Companies (Reserve Bank) Directions, 1977 apply to deposit acceptance by conventional chit companies but do not cover their chit subscription activities. The deposit acceptance activities by the remaining financial companies are regulated by the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. These directions have been issued under the provisions of Chapter III B of the Reserve Bank of India Act, 1934, as amended. Section 45S of Chapter III C of the Reserve Bank of India Act deals with acceptance of deposits from the public by unincorporated bodies such as individuals, firms and associations of persons. Acceptance of deposits by non-banking non financial companies, like trading and manufacturing companies, are regulated by the Companies (Acceptance of Deposits) Rules, 1975 framed under Section 58A of the Companies Act, 1956.

24. The Chit Fund Companies are financial intermediaries and the State Acts (which were enacted in some of the States) were not uniformally observed and were not found to be adequate to meet the nefarious activities of the foremen. In order to protect the interests of chit subscribers and having regard to volatile and vulnerable nature of chit
Jeshma Mohandas KP
Advocate, Kozhikode
567 Answers
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if you go through these decisions nicely you will get solution to all your questionsKarnataka High Court
Sri Visalarn Chit Fund Ltd. And ... vs Union Of India, New Delhi And Ors. on 29 April, 
The Constitutional validity of the Chit Funds Act, 1982 (Act No. 40 of 1982) (in short the Act) is challenged in this batch of writ petitions.so if you read this you can find merits and demerits
Constitutional validity of the Act.The Chit Funds Act, 1982, is within the leigislative competence of the Parliament. It was declared that Secs.4 (3), 6(3), 7,8,12,16,(2), 17(1), 19,20,21,70,76,77 and 84 of the Act challenged through writ-petitions are constitutionally valid and are not violative of Arts. 14 and 19 (1) (g) of the Constitution.
Jeshma Mohandas KP
Advocate, Kozhikode
567 Answers
1 Consultations
3.5 on 5.0
You may file PIL on your points of view which according to you are against the interest of public.
S.P. Srivastava
Advocate, New Delhi
703 Answers
13 Consultations
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1. File a PIL claiming the change you sought in your query,

2. You can change the law but you can not punish the law makers for enacting faulty Acts.
Krishna Kishore Ganguly
Advocate, Kolkata
12043 Answers
228 Consultations
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1) chit funds have been held to be constitutionally valid .

2)  K.P. Subbarama Sastri and Ors. v. K.S. Raghavan and Ors. wherein a contract providing for payment of money in instalments and stipulating that on default in payment of any of the instalments all the future instalments shall be payable at a time with interest was held not penal in nature in the case of kuri transaction under the Kerala Chitties Act, 1975. While upholding the transaction a Bench of this Court approved the decision of the earlier Full Bench decision of the Kerala High Court in the case P.K. Achuthan (supra) wherein the Kerala High Court had upheld such a transaction and held it, to be of not a penal nature. 

3)the consistent view of all the High Courts has been that it is not a moneylending transaction and that there is no relationship of debtor and creditor for the purpose of it being treated as a money lending transaction.. 

3)the provision of 5%commission payable to foreman as commission , renummeration for running the scheme has been held to be constitutuionally valid by SC in case of M/S. Shriram Chits & Investment ... vs Union Of India And Others on 13 July, 1993
Equivalent citations: AIR 1993 SC 2063, 1994 79 CompCas 298 SC, (1994) 2 CompLJ 430 SC, JT 1993 (4) SC 399, 1993 (3) SCALE 125, 1993 Supp (4) SCC 226, 1993 Supp 1 SCR 54
Ajay Sethi
Advocate, Mumbai
23123 Answers
1214 Consultations
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Hello,
You are totally justified in your just annoyance as according to you some of the sections of the Chit Fund Act, especially sections 28,29 and 30 are biased towards the non prized subscriber.
While most of the rulings still continue to justify the Act and partcualrly the provision of 5%commission payable to foreman as commission; in case for the welfare of the subscriber if you wish to do something the only way ahead is to file a Public Interest Litigation in the High Court.
Once an order has been  passed in favour of the subscriber this will pave way for amendmends in the Act as well.
S J Mathew
Advocate, Mumbai
1949 Answers
65 Consultations
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nothing left to add,
Nadeem Qureshi
Advocate, New Delhi
3522 Answers
129 Consultations
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