Chit funds in India are governed by various State or Central laws. Organised chit fund schemes are required to register with the Registrar or Firms, Societies.
Chit funds are essentially saving institutions. They are of various forms and lack any standardised form. Chit funds have regular members who make periodical subscriptions to the fund. The periodic collection is given to some member of the chit funds selected on the basis of previously agreed criterion. The beneficiary is selected usually on the basis of bids or by draw of lots or in some cases by auction or by tender.
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In any case, each member of the chit fund is assured of his turn before the second round starts and any member becomes entitled to get periodic collection again.Chit funds are the Indian versions of found across the globe.Regulatory frameworkChit fund business is regulated under the Central Act of and the Rules framed under this Act by the various State Governments for this purpose. Central Government has not framed any Rules of operation for them. Thus,Registration and Regulation of Chit funds are carried out by State Governments under the Rules framed by them.Functionally, Chit funds are included in the definition of Non- Banking Financial Companies by RBI under the sub-head miscellaneous non-banking company(MNBC). But RBI has not laid out any separate regulatory framework for them.Cheating by Chit Fund company through fraudulent schemes is an offence under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.