Chit fund formation

sakthi marieswaran (accounts) (24 Points)

21 January 2015

I am having an idea of starting a chit fund in Tamilnadu. south region. I want to start it as a proprietor concern.

what are the formalities to start with all legal formalities? What about the registration process? Explain me the starting procedure in detail

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Chit Fund Company

A Chit Funds is a popular type of savings scheme in India – a main part of the unorganized money market industry. Chit funds provide access to savings and borrowings for people with limited access to banking facilities. Chit funds are run by Chit Fund Companies and in this article we look at chit fund companies, chit fund business model and chit fund business registration in India.

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 is referred to as a member. A chit fund company will usually have many different chit fund schemes, with each of the chit fund scheme having a set of members and a limited duration.

Chit Fund Company Structure

Chit Fund Business Model

Chit fund schemes are operated by chit fund companies with registration under the relevant chit fund act. Operating a chit fund usually involves floating of a chit fund scheme, finding potential members, enrolling members into a chit, collecting contributions, conducting chit auctions, distributing funds and maintaining books. Chit fund companies earn a fixed amount of the members contribution for operating the chit fund scheme.

To start a chit, a chit fund company usually advertises a chit fund scheme and enrolls interested members. All chit fund schemes have a period, contribution and a set of members. The number of members in the chit will equal to the period, and each of the member will be required to contribute a fixed amount for each period.

Chit Fund Business Model

Lets assume, a chit fund is started with 12 members, operating for 12 months with a monthly member contribution of Rs.10,000. The chit company would then collect Rs.120,000 every month and offer the amount in an auction, less the chit company fee and a discount. Thus, the chit would be offered each month to its members at Rs. 96,000 (10% chit company fee and 10% discount). If any one member would like to receive the auction, then he/she is allowed to receive the entire chit auction amount. If more than one person would like to receive the chit auction, then one person is randomly selected as a luck member. If no member wants to receive the chit auction, then the chit if offered without any discount at Rs.120,000 and a reverse auction is conducted. The person offering the lowest amount is then awarded the chit auction amount. In any case, every member of the chit receives the chit auction once, the chit discount is spread evenly amongst the members and the chit company only earns a fixed fee for operating the chit fund.

Chit Fund Registration

Chit fund business in India is regulated under the Chit Fund Act, 1982. As per the Act, a “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 a certain sum of money (or a certain 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. A transaction is not a chit if some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptttions or all the subscribers get the chit amount by turns with a liability to pay future subscriptttions.

Though chit fund companies are a category of Non-Banking Financial Companies (NBFC), chit funds are exempt from being registered with the Reserve Bank of India. Chit funds are a category of NBFC which are regulated by other regulators and thus exempt from the requirement of registration with RBI.

To start a chit fund business in India, it is recommended that the promoters of the chit fund company first start a Private Limited Company with the objective of operating a chit fund business. Once the private limited company is incorporated, the company can apply with the relevant Chit Fund Registrar of the State to obtain registration. A chit fund business can only be commenced after obtaining chit fund business registration from the relevant State Registrar.

Chit fund business registration will not be given to:

any person or entity convicted of any offence under the Chit Fund Act or under any other Act regulating chit business and sentenced to imprisonment for any such offence; or

any person or entity who had defaulted in the payment of fees or the filing of any statement or record required to be paid or filed under this Act or had violated any of the provisions of this Act or the rules made thereunder; or

any person or entity had been convicted of any offence involving moral turpitude and sentenced to imprisonment for any such offence unless a period of five years has elapsed since his release.