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TMI Blog1993 (7) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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-be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees 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 actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas 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 starte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subscrip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, exceed ₹ 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 ₹ 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regulator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded was introduced in the Lok Sabha on 23.2.1979 (Bill No. 5 of 1979) but lapsed. The Bill was re-introduced in the Lok Sabha on 20.11.1980 as Bill No. 186 of 1980. Bill No. 186 of 1980 was referred to the Select Committee of the Lok Sabha. The Select Committee gave wide publicity to the Bill, invited suggestions, received as many as 529 representations/memoranda from chit companies, Associations, Federations, State Governments, Co-operative Banks, individuals etc., examined 101 witnesses and had 25 sittings at important centers. The Select Committee submitted its report on 24.11.1981 and in the light of the representations suggested certain modifications in the Bill. The amendments, as suggested by the Select Committee, were incorporated in the Bill and the Bill was passed by the Lok Sabha on 19.7.1982. The Bill as passed by the Lok Sabha was introduced in the Rajya Sabha on 2.8.1982 and was referred to a Select Committee of the Rajya Sabha. The Select Committee of the Rajya Sabha submitted its report on 5.8.1982 and suggested some amendments. The amendments were incorporated in the Act. 25. It will thus be seen that it is not a hasty legislation. It was conceived and legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to grant sanction as per various clauses and is regulatory in nature and not violative of Article 19(1)(g) of the Constitution. Section 6(3) of the Act reads thus : 6. (3) The amount of discount referred to in Clause (I) of Sub-section (1) shall not exceed thirty per cent of the chit amount. 29. It was submitted that the ceiling of the discount is highly arbitrary and imposes unreasonable restriction on the business of the petitioners. It appears to us that the ceiling of discount is on the higher side and the subscribers, who are in need of money, per force, have to give the discount to that extent and cannot be expected to take care of their own interest when they bid at the tie of chit auction. The restriction is neither arbitrary nor unreasonable. 30. Section 9(1) of the Act provides for commencement of chit. It contemplates that the foreman shall, after all the tickets specified in the chit agreement are fully subscribed, file a declaration to that effect with the Registrar. It will be noticed that this provision too is merely regulatory and is in the interest of the subscribers and cannot seriously be challenged under the provisions of Article 19(1)(g) of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und companies, had come to grief and consequently defaulted in the payment of dues to the subscribers i.e. subscribers were left high and dry to suffer in silence in view of the prohibitive cost and time consuming nature of litigations. In regard to policy guidelines for exemption i.e. permission to carry on other business the highest authority in Administration has been given the power to determine and the guidelines, of course, are public interest and the interest of the subscribers to the chit . The provisions of the Act gives sufficient guidelines to ensure subscribers' interest. This Section, therefore, is again regulatory and is not hit by Article 19(1)(g) of the Constitution. Section 13 Section 13 of the Act reads thus : 13. Aggregate amount of chits.-(1) No foreman, other than a firm or other association of individuals or a company or a co-operative society, shall commence or conduct chits, the aggregate chit amount of which at any time exceeds twenty-five thousand rupees. (2) Where the fore man is a firm or other association of individuals, the aggregate chit amount of the chits conducted by the firm or other association shall not at any time exceed (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir net means or individual's worth since it would be very difficult to assess and monitor such net worth and even if such assessment could be made, the position could change rapidly. On the other hand in the case of companies it is not difficult to arrive at the net worth having regard to the balance sheet position of the company. Hence it was thought desirable to fix the aggregate chit amount of chits which may be conducted by the limited companies with reference to their net owned funds while in the case of individuals, partnership firms etc., the amounts were fixed in absolute terms. As regards the fixing of limit of ₹ 25,000 in the case of individual and ₹ 1 lakh in the case of a firm having not less than four partners, we have already noticed that the Dutta Committee and the Banking Commission had recommended that only public limited companies should be allowed to do chit business (para 17.49). The Raj Committee, however, suggested (para 6.18(c) ) that individuals/sole proprietorship concerns/partnership firms may be allowed to conduct chit business on a limited scale. In the light of the above it was thought fit to allow individuals/partnership firms to do ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nducted in his presence or in the presence of any person deputed by him. 17. Minutes of proceedings. - (1) The minutes of the proceedings of every draw shall be prepared and entered in a book to be kept for that purpose immediately after the closure of the draw and shall be signed by the foreman, the prized subscribers, if present, or their authorised agents, or their authorised agents, and at least two other subscribers who are present, and where a direction has been made under Sub-section (3) of Section 16, also by the Registrar or the person deputed by him under that Sub-section. 35. These provisions are again regulatory and are with a view to avoid fraud on the subscribers by delaying their payments. SECTION 20 36. It was contended that there is no provision in Section 20 of the Act to pay interest to the Foreman on the bank deposits/Government or approved securities that he is required to keep in the name of the Registrar of Chits. In law, the beneficial owner would be entitled to the refund of the securities/cash deposited with the Registrar or with the Bank as also the accrued interest thereon, if any, and undrawn on the Registrar being satisfied that there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same in the Gazette. Six copies of the notification may please be furnished to us for our records in due course. Your faithfully, Sd/- (B. Subramanian) Joint Chef Officer 38. In view of this submission on behalf of the Union of India no further discussion is required in regard to the objection of the appellants/petitioners on non-payment of interest. SECTIONS 21(1)(a), (1)(b) and (1)(c) Sections 21(1)(a), (1)(b) and (1)(c) read thus:- 21. Rights of foreman - (1) The foreman shall be entitled. - (a) in the absence of any provision in the chit agreement to the contrary, to obtain the chit amount at the first instalment without deduction of the discount specified in the chit agree-merit, subject to the condition that he shall subscribe to a ticket in the chit: Provided that in a case where the foreman has subscribed to more than one ticket, he shall not be eligible to obtain more than one chit amount in a chit without discount; (b) to such amount not exceeding five per cent of the chit amount as may be fixed in the chit agreement, by way of commission, remuneration or for meeting the expenses of running the chit: (c) to interest and penalty, if any, payable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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