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M XXV Addl. Chief Metropolitan Magistrate, Bangalore. odintsov.info of Complainant: Sree Gokulam Chits & Finance Co. . Though the accused requested the complainant on the earlier dates to Copy of the terms and conditions applicable to the chit schemes to which the accused has subscribed. Click on Scheme to view the branches in which the scheme is currently available. odintsov.info Monthly Subs, No of Months, Chit Value, Total Members, Scheme. 1. Shriram Chits is the largest chit funds entity in India. The trusted household Savings & Investments service provider, a pioneer in Micro Finance in India.
Depending on the terms of the agreement, a fixed amount is also sometime set aside f or distribution among the non-prized members. After making provision for the above deductions, the balance is put to auction except at the last installment 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 are no bidders, lots are drawn to choose the prize winning member.
The number of subscribers in a chit series equals the number of installments 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 installment.
In such cases the number of subscribers can exceed the number of instalments. 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 installments. In the event of default by subscribers in payment of installment on due dates, penalties are imposed in various forms.
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: 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'. They read as 'under: Subject to law, he decides practically everything about the chit - the number of members, the amount of installments, the chit amount, his commission, the installment at which he himself would retain 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 a 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 report chit fund companies at the end of Marchwas about 1.
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 surety 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 given by the foremen of 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 property these advances account in respectively for 0. The foreman derives his income in different ways, both legal and illegal.
In the former category can be included items such as admission fee 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 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: 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 member is shown to get the prize there by depriving the real member of the opportunity, ii similarly it is possible to 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 succeeding draw.
Thus one installment is perpetually in the hands of foreman to be utilized in any way he likes. The above are only examples to illustrate the way in which some foreman maximizes their profits. They don't take into account the case where the foreman and his associates diaper from the sense and are untraceable.
The policy has many such cases on their record. During ,as many as 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 has often to make good the deficit out of his own resources. If the prized member defaults in his installments, 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 other 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.
Some basic issues highlighted in the Report require to be noted. They are found in paras 6. 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 prizewinner will be comparatively low.
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The essential point is that the rate of interest involved in chit fund is Discriminatory and varies from person to person so that there is an irrational distribution 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, posits 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 that 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 that the likelihood of productive producer not depend on the uncertainties involved, in a chit fund.
The rates of interest generally involve 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. Some 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.
The Study Group in paras 6. It observed as follows: It may be noticed that most of the unhealthy practices arise from 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 in the Southern States.
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At present State legislation regulates the running of chit funds in the areas where such legislation is in force. The question of introducing a uniform enactment in Kerala has been under the consideration of the Government for some time. Some States 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 neighboring State is under consideration. Mysore and certain other State Governments 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 start a chit fund until the Registrar is satisfied about the bye-laws of the fund and the security 'offered by the foreman" 6. This report of the Study Group was incorporated in the Report of the Banking Commission dated The Banking Commission emphasised the need for legislation in para 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 uniform chit fund legislation applicable to the whole country. Depending upon the constitutional position, whether chit funds come under the Concurrent list or the State list, either 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 I having no legislation. This will essentially be an interim measure because only the members of those chit funds which are registered in States where chit fund laws have been enacted will get protection.
The terms of reference of the Raj Committee should be noticed to appreciate its recommendations regarding chit business. To examine the relative provisions of the Reserve Bank of India Act, the Non-Banking Financial-Companies Reserve Bank Directions, and the Miscellaneous Non-Banking Companies Reserve Bank Directions,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.
To make recommendations on any other related topic which the Study Group may consider germane to the subject matter of the enquiry. 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,: In the circumstances the need for enactment of a uniform legislation applicable to chit fund institution throughout the country cannot be underestimated.
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 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, addressed by the Chairman of the Group to Shri S.
Shiralkar, Deputy Governor of the Reserve bank of India. It will be seen there from that the main recommendations of the Study Group are as under: 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 1governing 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 Actits 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 institutions 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 of the Reserve Bank of India Act, 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.
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 installments.
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, 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.
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.
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 he, opening of offices. Unincorporated bodies should not be allowed to conduct business at more than one place.
The security deposit to be kept by the foreman of company in the case of chits of longer duration may be proportionately higher. The machinery for settlement 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 installments, substitution of subscribers in case of default, etc. 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.
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 partnerships, the aggregate amount of chits should not, at any point of time, exceed, Rs.
The minimum paid-up capital of chit fund companies incorporated under the Companies Act ,whether private or public, should be Rs. Companies having paid-up capital of less than Rs.
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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 " 9.
Keeping these recommendations of these expert bodies in view, Parliament enacted the impugned Act on and the same was brought into force in this State on The Scheme of the Act briefly stated is: Chapter IV deals with the rights and duties of non-prized, subscribers.
Chapter V deals with the Rights and Duties of Prized subscribers. Chapter VIII provides for continuation of chits in certain cases 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. Though the petitioners have challenged the vires of the entire Act, in the course of their arguments, they have confined their challenge only to a few provisions of the Act which are: It should be noted that many of the petitioners did not challenge the legislative competence of the Parliament to pass the Act. But, learned counsel for a couple of petitioners having questioned the legislative competence, the same should be considered first.
The impugned Act regulates the chit fund business. Chit is a contract between the parties, though an element of luck is also there in that the, winner of the prize is decided by lots. The legislative competency of the Parliament to pass the impugned enactment is no more open to challenge in the light of the decision of the Supreme Court in Srinivasa Enterprises v.
Union pf India, etc. If the prize chit fund is covered by Entry 7 in List III as observed by the Supreme Court in that case, conventional chits are also matters of contract with and added element of chance by the drawing of lots to choose the successful bidder.
Further the other argument that the impugned Act is bad -because it covers both bad, and good chit funds is also no more tenable in the light of the very same decision of the Supreme Court.
A similar argument advanced in that case was rejected by the Supreme Court with the following observations: Indeed, Shri Venugopal persuasively presented the case of his client to make us feet that responsible business was being done by the petitioner. But when a general evil is sough to be suppressed some martyrs a have to suffer for he legislature cannot easily make meticulous exceptions and has to proceed on broad categorizations not singular, individualisations.
The Act provides for the regulation of chit funds and matters connected therewith. The chit comes into existence as a result of an agreement between the parties concerned with the chit. Thus it is a matter of contract. The contracts relating to chits do not relate to and have nothing to do with agricultural lands. As such the Act does not suffer from lack of legislative competence of the Parliament to enact it.
Before we consider the contentions of the petitioners in detail, the Report of the Select Committee which considered the Chit Funds Bill,should be briefly noticed because the impugned Act incorporates almost all the recommendations of the Select Committee. The Committee held as many as 25 sittings after issuing notices to the State Government, Chit Companies, Public bodies and organisations, individuals etc.
Wide publicity was given on three successive days by broadcasting the matter from all stations of All India Radio and telecast from all Dooradarshan Kendras.
Several requests were received from various parties for being heard by the Committee and accordingly several sittings were held at Madras on 28th29th and 30th of May,at Bangalore on 1st and 2nd of June, and at Trivandrum on 4th and 5th of June, Oral evidence was taken from the representatives of various chit Companies, Associations, Federation, 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 up to 30th June Further, a series of sittings were held at Ahmedabad, Hyderabad, Calcutta, and New Delhi and the Committee, in all, examined 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 The recommendations of the Committee in respect of the following clauses in the Bill are: 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.
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 no misappropriate the subscribers' money. Instead of the figure 20 per cent, 10 per cent was suggested as the amount to be transferred to the Reserve Fund.
A period of one year was incorporated for complying with the requirements of Cl. The Committee considered the aggregate amount of chit to be conducted by an individual foreman, partnership foreman and foreman Company. 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 that 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.
The represent- ation for extension of the period of 2 years was rejected as the Committee felt that the period: 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.
Sub-clause 1 was amended as the Committee was of the view that in order to ensure that the foreman does 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 Cl. The provisions of, sub-cl. 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 draw 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.
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 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. 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 interests of the subscribers and hence, sub-clause 3 of the Bill was omitted.
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 Cl 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.
We have made a reference to these recommendations made by the Select Committee and to the reports of the expert bodies with a view to -satisfy ourselves that when Parliament enacted the impugned Act it had given its careful consideration to the various aspects of chit fund business, to the various suggestions made by the State Government, by the financial institutions, by the Companies, by the Co-operative Societies and by individuals is, to the interests of the subscribers, to the risks of the foreman and the difficulties in complying with certain regulatory measures, as found in the Bill and passed the impugned Act.
Almost all the recommendations of the Select Committee we re incorporated in the impugned Act as passed by the Parliament. Most of the petitioners had the opportunity of presenting their views before the Select Committee as could be seen from the report of the Select Committee to which we have made a brief reference. Therefore, we have to examine whether the onus cast on the State to sustain the Constitutional validity of the various provision of the Act is discharged by it.
The next point for consideration is whether the impugned provisions of the Act are violative of Art. This appears to be the main contention of the petitioners in all these petitions. According to some of the petitioners, their companies are registered under the Companies Act and that Act provides elaborate regulatory measures over the business of the petitioners by prescribing provisions for running the day-to-day business through a 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 thus ensuring the Registrar of Companies to have an effective control over the business of the petitioners and annual statutory audit preceded by internal audits.
Therefore, it is submitted that an additional control over the business of the petitioners by the Registrar of Societies under the impugned Act makes a serious inroad into their rights to carry on their business and it would therefore be violative of Art.
They have complained that the provisions of S. Section 3 imposes unreasonable restrictions on the existing rights of the petitioners to carry on chit business in accordance with the Memorandum or Articles of Association. They have been carrying on their business over a number of years in accordance with the Memorandum and Articles of Association of the respective companies and bye-laws, but now they have to regulate their business in conformity with the provisions of the impugned Act.
Balachandran, appearing for some of the petitioners, submitted that the provisions of Ss. A trusted savings and investment institution, the company started from a small space with 50 members inand backed by innovation, enterprising solutions and fresh perspectives, has gone on to carve a trusted niche for itself in a market flourishing with similar schemes.
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