Updated on: February 5th, 2020 4:04 PM

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. [caption id="attachment_2001" align="aligncenter" width="898"] Chit Fund Company Structure

Chit Fund Business Model

Chit fund companies operate chit fund schemes 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 to operating the chit fund scheme.

To start a chit, a chit fund company usually advertises a chit fund scheme and enrols 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 members requires to contribute a fixed amount for each period.

[caption id="attachment_2003" align="aligncenter" width="898"] Chit Fund Business Model

Let us assume; a chit fund 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, every month, the members receive the chit amount at Rs. 96,000 (10% chit company fee and 10% discount). If any one member would like to receive the auction, then he/she can receive the entire chit auction amount. If more than one person would like to receive the chit auction, then it selects the lucky member randomly. If no member wants to receive the chit auction, then if offering the chit amount without any discount at Rs.120,000 and it causes a reverse auction. The person offering the lowest amount will get the award of 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 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 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 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 alone, but not all, of the subscribers, get the prize amount without any liability to pay 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 NBFC where the regulators regulate the funds 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. After the incorporation of a private limited company, the company can apply with 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.

Chit fund business registration will not for the below following:

• 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 has defaulted in the payment of fees or the filing of any statement or  require record for the payment and filing process under this Act or had violated any of the provisions of this Act or the rules made thereunder; or
• any person or entity had 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.

To start a Chit Fund Company, visit IndiaFilings.com