# SHRIRAM CHITS AND INVESTMENT (P) LTD v. UNION OF INDIA AND ORS - **Citation:** [1993] Supp. 1 S.C.R. 54 - **Court:** Supreme Court of India - **Decided:** 1993-07-13 - **Case number:** Civil Appeal No. 448 of 1989 - **Bench:** J.S. Verma, Yogeshwar Dayal, N. Venkatachala - **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shriram-chits-and-investment-p-ltd-v-union-of-india-and-ors-11974 - **Pages:** 46 ## Headnote Chit Funds Act, 1982 : Sections 2(b ), 2(c), 2(d), 2(e), 2(j) and 6-Constitutionol validity of the Act-Legislative competence of Parliament to enact the Act-Held: C Valid-Predominant purpose of the Act is to regulate the chit and control activities of the foreman-Chit Fund transaction not some as money-Lending-Legislation squarely foils within Entry 7 of List III of Schedule VII of the Constitutiorr-Hence Parliament competent to enact the legi.slotion-Chit of agreement-Nature of D E 4(3)(b), 6(3), 9(1), 12, 13, 16(2), 17(1), 20, 21(1)(0), 21(1)(b), 21(1)(c), 25 and 48-Constitutionol validity of-Restrictions on Chit business-Whether violative of Alticle 19( l)(g)-Held: Provisions ore merely regulatory in nature and safeguard the interest of subscribers-Hence not violative. Constitution of India, 1950: Article 19(1)(g) and Entry 7 of List III of Schedule VII....:.Chit Funds Act, 1982 and certain provisions thereof-Validity of · F On the recommendations of various Expert Bodies, Parliament enacted the Chit Fund Act, 1982, regulating the Chit Funds business. The Act was brought into force in various States on different dates. Consequent on the coming into force of the Act in the State of Karnataka, on 2nd January, 1984 the Appellant-Companies were asked for_ G the State to comply with the requirements of the Act. Therefore, they filed writ petitions before the High Court complaining of violation of their .constitntional rights to carry on the Chit Fund business and challenging the vires of the Act. Accepting the contention of the Union of India that the legislation in question fell within Entry 7 of List ill (Concurrent List) H of Seventh Schedule of the Constitution oflndia, the High Court dismissed 54 ' r . JI. SHRIRAM CHITS v. U.0.1. 55 the writ petitions . A The appellants/Petitoners, Public/Private Limited Companies incorporated under Companies Act, 1956/Proprietory or Partnership concerns/Individual organisers filed appeals and writ petitions before this Court, challenging vires of the various provisions, and also the legislative B competence of Parliament to enact the Act. It was contended that the Parliament had no legislative competence on the subject matter as the Act dealt with money-lending and the same fell within Entry 30 of List II (State List) of VII Schedule of the Constitution, that Sections 4(3)(b), 6(3), 9(1), 12, 13, 16(2), 16(3),.17(1), 20, 21(1)(a), 21(l)(b), 2l(l)(c), 25 and 48 were violative of Article 19(1) (g) of the Constitution; that their Companies were C registered under the Companies Act and the Companies Act provided sufficient regulatory meas,ilres over their busines by prescribing provisions for running the day-to-day business through Board of Directors, who were responsible to the shareholders, maintenance of various statutory returns which had to be submitted to the Registrar of Companies from time to D time for enabling him to have an effective control over the business of the appellants/petitions and annual statutory audit proceeded by internal audits; and, therefore, an additional control by the Registrar of Societies under the Act made a serious inroad into their rights to carry on their business, that the provisions of Section 3 of the Act had an overriding. effect and imposed unreasonable restrictions on the existing rights of the E appellants/petitioners to carry on chit fund business, that the. ceiling on the discount provided in Section 6(3) was highly arbitrary aud imposed an unreasonable restriction on the business of the petitioners, that under Section 13 different criteria had been fixed for chit business for individual firms on the one had, and co-operative societies and companies on the p other, whereas in the case of individuals, the maximum permissible chit business w.is Rs.25,000, in the case of firms for each partner it was Rs. 25,000 subject to the limit of rupees one lakh; and in the case of companies, the maximum business was linked with its 'net owned funds' which had be ## Text _Characters 0–39,878 of 108,723. This is a partial read: ask again with offset=39878 for what follows._ • A B SHRIRAM CHITS AND INVESTMENT (P) LTD. v. UNION OF INDIA AND ORS. JULY 13, 1993 [J.S. VERMA, YOGESHWAR DAYAL AND N. VENKATACHALA, JJ) Chit Funds Act, 1982 : Sections 2(b ), 2(c), 2(d), 2(e), 2(j) and 6-Constitutionol validity of the Act-Legislative competence of Parliament to enact the Act-Held: C Valid-Predominant purpose of the Act is to regulate the chit and control activities of the foreman-Chit Fund transaction not some as money-Lending-Legislation squarely foils within Entry 7 of List III of Schedule VII of the Constitutiorr-Hence Parliament competent to enact the legi.slotion-Chit of agreement-Nature of D E 4(3)(b), 6(3), 9(1), 12, 13, 16(2), 17(1), 20, 21(1)(0), 21(1)(b), 21(1)(c), 25 and 48-Constitutionol validity of-Restrictions on Chit business-Whether violative of Alticle 19( l)(g)-Held: Provisions ore merely regulatory in nature and safeguard the interest of subscribers-Hence not violative. Constitution of India, 1950: Article 19(1)(g) and Entry 7 of List III of Schedule VII....:.Chit Funds Act, 1982 and certain provisions thereof-Validity of · F On the recommendations of various Expert Bodies, Parliament enacted the Chit Fund Act, 1982, regulating the Chit Funds business. The Act was brought into force in various States on different dates. Consequent on the coming into force of the Act in the State of Karnataka, on 2nd January, 1984 the Appellant-Companies were asked for_ G the State to comply with the requirements of the Act. Therefore, they filed writ petitions before the High Court complaining of violation of their .constitntional rights to carry on the Chit Fund business and challenging the vires of the Act. Accepting the contention of the Union of India that the legislation in question fell within Entry 7 of List ill (Concurrent List) H of Seventh Schedule of the Constitution oflndia, the High Court dismissed 54 ' r . JI. SHRIRAM CHITS v. U.0.1. 55 the writ petitions . A The appellants/Petitoners, Public/Private Limited Companies incorporated under Companies Act, 1956/Proprietory or Partnership concerns/Individual organisers filed appeals and writ petitions before this Court, challenging vires of the various provisions, and also the legislative B competence of Parliament to enact the Act. It was contended that the Parliament had no legislative competence on the subject matter as the Act dealt with money-lending and the same fell within Entry 30 of List II (State List) of VII Schedule of the Constitution, that Sections 4(3)(b), 6(3), 9(1), 12, 13, 16(2), 16(3),.17(1), 20, 21(1)(a), 21(l)(b), 2l(l)(c), 25 and 48 were violative of Article 19(1) (g) of the Constitution; that their Companies were C registered under the Companies Act and the Companies Act provided sufficient regulatory meas,ilres over their busines by prescribing provisions for running the day-to-day business through Board of Directors, who were responsible to the shareholders, maintenance of various statutory returns which had to be submitted to the Registrar of Companies from time to D time for enabling him to have an effective control over the business of the appellants/petitions and annual statutory audit proceeded by internal audits; and, therefore, an additional control by the Registrar of Societies under the Act made a serious inroad into their rights to carry on their business, that the provisions of Section 3 of the Act had an overriding. effect and imposed unreasonable restrictions on the existing rights of the E appellants/petitioners to carry on chit fund business, that the. ceiling on the discount provided in Section 6(3) was highly arbitrary aud imposed an unreasonable restriction on the business of the petitioners, that under Section 13 different criteria had been fixed for chit business for individual firms on the one had, and co-operative societies and companies on the p other, whereas in the case of individuals, the maximum permissible chit business w.is Rs.25,000, in the case of firms for each partner it was Rs. 25,000 subject to the limit of rupees one lakh; and in the case of companies, the maximum business was linked with its 'net owned funds' which had been defined in the explanation thereto, that there was· no provision in Section 20 of the Act to pay interest to the Foreman on the bank G deposits/Government or approved securities that he was required to keep in the name of the Registrar of Chits; that in law, the beneficial owner would be entitled to the refund of the securities/cash deposited llith the Registrar or with the Bank as also the accrued interest thereon, if any, and undrawn, on the Registrar being satisfied that there was no outstanding H 56 SUPREME COURT REPORTS (1993] SUPP. I S.C.R. A amount payable to the subscribers; and that when there was no liablity to the subscribers, the registrar was not entitled to retain the accrued interest or benefits accrued to the securities. It was submitted on behalf of the Union of India that it was found that some of the Companies which were carrying on chit business in B association with other businesses had diverted chit funds by way of advan· ces to allied firms of the foreman or financing activities unconnected with chit business; many of those advances had become irrecoverable which, in turn, affected the liquidity of the chit fund companies and as a result, the chit fund companies failed lo pay the dues to the subscribers; some of the C companies had utilised the funds for shipping business, producing cinemas and also utilised the funds for venturing into fields with high degree of risk; some of those ventures had flopped, and the chit fund companies, had come to grief and conset1uently 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 D litigations; in regard to policy guideline for exemption i.e. permission to carry on other business, the highest authority in Administration had been given the power to determine and the guidelines, of course, or' 'public interest' and 'the interest of the subscribers to the chit'; the provisions of the Act, gave sufficient guidelines to ensure subscribers' interest; Section E 12, therefore, was again regulatory and was not hit by Article 19(1)(g) of the Constitution, and that the Reserve Bank of India had advised the State Governments to amend their Chit Rules stipulating payment of interest accrued on the securities/ Deposits remaining unpaid to the foreman while releasing the securities, vide Circular of 28th February, 1990. F Dismissing the appeals and writ petitions, this Court HELD: 1.1 The pith and substance of the Chit Funds Act, 1982 is that it provides for a special contract and thus squarely falls within Entry 7 of List III of Schedule VII, and is within the legislative competence of G the Parliament. [80-C] °l.2. Section 6 of the Act provides that the agreement should 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. TI1e particulars that have to be stated in the said agreement have also been prnvided in the Section. H This clearly shows that a contract has to be entered into between the '- ~ .I SHRIRAM CHITS v. U.0.1. 57 subscribers and the foreman and in view of the definitions provided in Sections 2(b), 2(c), 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 Vllth Schedule of the Constition of India and it cannot be termed as money lending business. [79-E-G] 13. The foreman does not lend his money to any of the subscribers. A B He 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 c 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 D 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. (79-G-H; 80-A-C] 1.4. 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. E [84-CJ F Srinivasa Enterprises and Ors. v. Union of India etc., [1981] 1 SCR 801; relied on. Chockanathan Chit Funds & Finance (P) Ltd., Pondicheny & Ors. v. Union Territory of Pondicheny & Or.<., AIR (1972) Madras 99; Janardhana Malian & 01>. v. Gangadharan & On., AIR (1983) Kerala 178; P.K Aclmtan G v. State Bank of Travancore, Calicut, AIR (1975) Kerala 47; Ramanatha lyyar v. Narayana Swami, AIR (1937) Madras 364; Dhoosa Narasimloo v. Ye/ala Rajanna & Anr., ILR (1958) Andhra Pradesh 49; Raghavan v. Annugham, (1934) 68 MW 283; Timmarsa Pai v. Subba Rao, AIR (1928) Madras 256; K.P. Subbarama Sastri & Ors: v. K.S. Raghavan & Ors., [1987] 2 SCC 424; H 58 SUPREME COURT REPORTS (1993] SUPP. 1 S.C.R. A Mayavaram Finance Corporation Ltd. v. Reserve Bank of India, (1971) 41 Company Cases 890; A.S.P. Aiyar & Anr. v. Reserve bank of India & Anr., (1984) 56 Company Cases 352 and P. Subramaniam and Anr. v. Reserve Bank of India and Ors., (1985) 57 Company Cases 755, referred to. B S.L.P. (Civil) No. 4015 of 1985, decided on 20th August, 1990 and Civil Appeal No. 2194 of 1985, decided on 16th January, 1990; referred to. 2.1. 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, as a result, to the extent to which it is repugnant to the C provisions of this Act, become void. The Act itself is one of the socioeconomic legislations which had been enacted primarily and predominantly to safeguard the interests of the chit subscribers who are gnillible and unwary public and who have been subjected to exploitation by chit foreman. 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 subscribD ing public. The banks, financial institutions and non-banking financial institntions, who accept deposits or deal with moneys of the public are disciplined and regulated by the various legislations. Section 45 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 E associations of persons. Acceptance of deposits by non-banking non-finan· cial companies, like trading and manufacturing companies, are regulated by the Companies (Acceptance of Deposits) Rules, 1975 framed under Section SSA of the Companies Act, 1956. [88-H; 89-A-C; 89-F) 2.2. The Act is not a hasty legislation. It was conceived and legislated F after a lot of deliberations and discussions and is the outcome of the views of the Expert Committees and Select Committees and prevalent State legislations on chits were also taken into account. [90-G] 3.1. All the provisions of Act under challenge are in the interest of the G subscribers and are very material. In any case, if the order is unreasonable, a party has a right of appeal under Section 59 of the Act. [99-G) 3.2. Section 4(1) contemplates that no chit shall be commenced without the previous sanction of the State Government. Sub-section (3) gives guidance to the State Government for granting and/or refusing to H grant previous sanction. Clause (b) like clause (a) ·gives gnidance to the SHRIRAM CHITS v. U.0.1. 59 State authorities conferred on them discretion to grant or refuse to grant A . / the sanction. This provision is discretionary and merely gives guidelines .J to grant or refuse to grant sanction as per various clauses and is regulatory in nature and not violative of Article 19(1)(g) of the Constitution. (91-F-G] 33. The ceiling of discount laid down in Section 6(3) is on the higher side and the subscribers, who are in n~ed 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 time of chit auction. The restriction is neither arbitrary nor unreasonable. (92-B] 3.4. Section 9(1) of the Act provic!es for commecement 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. This provision too is merely regulatory and is in the interest of the subscribers and cannot seriously be chalfonged under the provisions of Article 19(1) (g) of the Constitution of India. (92-C] 3.5. Section 12 creates a bar for a Company carrying on chit to desist from carrying on any other business. Similar provisions in regard to the B c D ban are contained in Section 8 of the Banking Regulation Act, 1949 which restrain the banks from carrying on any other business. Sub-section (1) of E Section 12 of the Act, however, provides that 'with the general or special permission of the State Government' the chit company can carry on any business other than the chit business. This section is intended to leave discretion with the State Government to decide whether or not to allow the chit company to do any other business. (92-H; 93-A] 3.6. The main purpose for laying down the ceiling on the limited amounts of chits that may be conducted by the foreman, in Section 13, is to ensure that the foreman does not overtrade to the deteriment of the chit subscribers and at the same time to see that the foreman has a sufficient stake in the chit business. It is in the context of these factors that the aggregate chit fund which could be considered as reasonable in respect of the chit conductecd by individual or partnership concerns and as a multiple of'net owned funds' in the case oflimited companies, came to be fixed. F G In the case of individuals and partnership concerns or association of individuals, it is not unlikely that the individuals/partnership firms etc., may do other types of business and divert portion of chit business funds H 60 SUPREME COURT REPORTS [1993] SUPP. 1 S.C.R. A for such business. Moreover, it is also not feasible to lay down the aggregate chit amount of chits to be conducted by such bodies with reference to their net means or individuals worth since it would be very difficult to assess and monitor such net w11rth and even if such assessment could be made, the position could change rapidly. On the other hand, in the case of B c 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. (94-F; 95-A-B] 3.7. As regards the fixing of limit of Rs.25,000 in the case of individual and Rs.1 lakh in the case of a firm having not less than four partners, two of the Committees had recommended that only public limited companies should be allowed to do chit business. Another ComD mittee, however, suggested that individuals/sole proprietorship concerns/partnership firms may be allowed to conduct chit business on a limited scale. In the light of this it was thought fit to allow individuals/partnership firms to do chit business in a limited way. Unlike companies, the individuals and partners are not precluded from carrying E F on other business which will supplement their income. Again the risk in the case of partnership firms and individuals is in a way minimised as the chit fund business in these cases can be set out in absolute term. The risk factor related to the amounts involved and the vulnerability of individuals/partners disappearing from the mid-stream of the business would be to the detriment of the subscribers, more the quantum of amount, greater the sufferenace of the subscribers in case there were to be a , collapse of chit funds business of the individuals and partnership firms. The offences under the Act, in terms of Section 81, are compoundable. The limits on the aggregate amount of chits put by Section 13 are not violative of Article 19(1)(g) of the Constitution. In any case, they are in the interests of the subscribers. There is no doubt that in view of the intlation in the G country, the appropriate authorities, in case a dc~and is so raised, from time to tin1e increase the limits. However, it is not necessary to give any direction in this behalf. [95-C-E; 96-A] 3.8. The provisions in Section 16(2), 16(3) and 17(1) are again H regulatory and are with a view to avoid fraud on the subscribers by delying SHRIRAM CHITS "- U.O.l. 61 their payments. [96-G] A 3.9. In view of the Circular issued by the Reserve Bank of India advising the State Governments to amend their· Chit Rules stipulating payment of interest accrued on the securities remaining unpaid to the foreman \l'hile releasing the securities, i:io further discussion is required in regard to the objection of the appellants/petitioners on non-payment of B interest. [97-C; 98-F] 3.10. There is reason for the appellants/petitioners to have any objection to clause (a) or (c) of Section 21. As regards maximum commission of 5% of the Chit amount, the objection is not legitimate because any C foreman is not debarred from doing any other business and he is not supposed to incur the expenditure at the cost of the subscribers and then claim higher commission. Expert Bodies have only recommended two per cent commission whereas the Act provided for 5 per cent commission. There is nothing unreasonable in respect of the commission. (99-D] D 3.11. Again objection.to Section 25 regarding the liability of foreman to subscribers ·is not acceptable. This is a normal duty of the foreman which has been converted into a statutory duty. There is nothing unreasonable. The provision is in subscribers' interest. [99-E] 3.12. The objection to the vires of Section 48 as to the circumstances in which chits are to be wound up cannot be accepted. (99-F] CIVIL APPELLATE JURISDICTION : Civil Appeal No. 448 of 1989. From the Judgment and Order dated 29.4.1988 of the Karnataka High Court in W.P No. 1932 of 1986. (With C.A. Nos.474/89, 466-473/89, W.P. (C) Nos.18/91, 968/90, C.A. E F No.449-65/89, W.P. (CJ Nos.5176-80/85, 11922/85, 1133/91, 1116/91, 322/92, G 323/92, 1340/90, 777/89, S.L.P. (C) No.8882- 8907/89, I.A No.1-26/89 in W.P. (C) No.1092/91, 465/89, I.A. No.1/89, in C.A.448/89, W.P. (C) Nos.511/89 and 3~7/89 and W.P_ (C) No.362/89) R.N. Narasimhamurthy and R.P. Wadhwani for the Appellants in C.A. Nos.449-65 and for the Petitioners in W.P. 1092 of 1991. H 62 SUPREME COURT REPORTS [19931SUPP.1 S.C.R. · A Raju Ramachanuhmitted by the Study Group of the Non-Banking Financial Jntermemaries 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 thw working and role of one of the oldest of the indigenous NBF!s, 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 Resetve Bank of India, memorada received from van·ous chit fund companies as well as material submitted by the representatives of some of the leading chit fu11ds to the Banking Commission. The Annual reports of a few chit fu11ds have also bee11 made use of The Study Group received in all twelve memoranda (listed in Appendix II). The Banking Commission had issued a questionaire 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 old<;st 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. Chiemeans a W!itten note on a sarnll piece of paper. Since the winner of the Chit amount was to be ascertained though draw of lots, it involved writig of names of eligible ' SHRIRAMCHITS v. U.0.1.[DAYAL,J.] 65 members on separate chits, as in a lottery. The Scheme thus came A to be known as 'chit funds'. Its equivalent in Malayalam '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 institutios developed quickly and spontaneously. It was an expression of co-operative efforts of nustering savings through instalments and advancing the pooled savings as loan to the members with facilities of repayment in instalments. 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 to pay his subscription in regular instal_ments. The foreman charges, for his service, a co1nmission 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 B c D E set aside for distribqtion among the non-prized members. After making provisioin for the above deductions, the balance is put to F auction (except at the last nstalment) 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 G discount or when there are 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 comH 66 A B c D E F G H SUPREME COURT REPORTS [1993] SUPP.1 S.C.R. prises 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 due dates, panalties 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 \\1.nner, 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-b~aring one, the interest rate depening 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 nomber 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, • SHRIRAMCHITS v. U.O.l.[DAYAL,J.] 67 also accept deposits from third parties. These arc utilised as A working funds and lent at high rates of interest to subscribers and perhaps to others. According to Reserve Bank survey, the amou.nt of deposits of 106 reporting chit fund companies at the end of March, 1968, was about ]. 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 B 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. Accoding to available information, one-third of C the outstanding loans and advances as on 31st March 1967, given by the foremen of JOO chit fund companies were personal loans; 27 per cent were nieant for the conimerce 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. D 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 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 E the chit prize taken without deduction, interest on the chit prize which the prized member may not be in a position to collect F immediately, and subscriptions paid by members who discountinue in the middle of the scheme but do not care to claim refund. The unscrupulous among the foremen reso1t to so many unfair methods to secure illegal gains. A few of these methods are briefly G mentioned below: (i) Enrolement of fictious members to complete the required nu.1nber of n1en1bers in a chit selies. If a real and needy non-prized member is not able to come forward to offer a high discount at the H A B c D E F G H 68 SUPREME COURT REPORTS (1993] SUPP. 1 S.C.R. auction, one of these benanii n1en1bers is shown to get the prize thereby dep1iving the real members of the opp01tunity, (ii) Similarly, it is possible to e:iploit needy non-prized member or a new member so that he gets the prize only at the maximum discount. (iii) The p1ized member is supposed to get the amount soon after the draw or auction is over of course 011 furnishing the secwity. But the foreman adopts tacties·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 outof the collections of the succeeding draw. Thus, one instalment is perpehtally 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 fore1nan and his associates disappearfron1 the scene and are untraceable. The police have n1any such cases on their record. During 1962-66, as many as 255 chitties collapsed in several districts of Kera/a 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) SHRIRAM CHITS ,._ ll.O.L [DAY1V __ J.[ 69 Paras ti.23 to 6.34 deal with the pecuniary aspects of the Chit Fund A from the point of vic\v ot lhc sub:;cribl:rs. 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, v. 1ill 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 al late stages will be quite high and B the interest rate involved for a prize winner will be comparatively C low. The essential poit is that the rate of of interest involved in chit funds is discriminatory and varies front person to person so that there is an irrational distribution of gains and losses. Ordinarily, the niore needy a person, the higher will be the discount that he l~·ould be prepared to offer for winning a prize. Therefore, the n1ore ta:gent his D need the higher th.e rate of interest that a bo"oiver has to pay. Another point is that there arc 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, proviE dent 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 lo those in chit funds. The populaiity of chit funds can be explained by the fact that a subscirber is entitled to F bol70W fronz it. Also, 'ong standing social habits and the gaining e/en1ent involved in the schenie, ivhich perhaps provided a1L added attraction to son1e subscn.bers are also factors accounting for popularity of this institution. So far as the end-use of the prize is concerned, there are G conflicting views. It would appear that the likelihood of productive use of the prize money is small. A prospective producer would not depend on the uncertainties involved in a chit fund. 17ie rates of interest generally involved for a pn·ze ivinner in a chit fund are so high that an inference can be dra1v~1 that the prize money is 1nostly H A B c D E F G H 70 SUPREME COURT REPORTS [1993} SUPP. 1 S.C.R. used for co11sun1ptio11 or speculative pu17Joses. Sonic pc1Jons join chit funds and are prepared to pay high rates of imerest by way of lmge discoum for tl1e pw]Jo~e of hoarding ce1tai11 scarce com- ·nrodities. 77iey are not only able to recoi1er the interest but also ean1 a profit 011 account of the difference between tire 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 prevelant in Chit Funds. It observed as foll.owes: 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 concertrated 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 [st August, 1967. In Kerala, the Travancore Chitties Act of 1964, and Cochin Kuris Regulations 1932, are in force in some areas of the State.