These are challenging times for chit fund operators. A scam involving the Saradha group allegedly conning customers under the guise of a chit fund, has raised serious questions for the industry. With a reported 10,000 chit funds in the country handling over Rs 30,000 crore annually, chit fund proponents maintain that these funds are an important financial tool. The scam has also sparked responses from both the centre and states: the Finance MinistryMinistry of Corporate Affairs and SEBI have all promised to act and the West Bengal Assembly has passed The West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013, with Odisha and Haryana considering similar legislation. What is a chit fund? A chit fund is a type of saving scheme where a specified number of subscribers contribute payments in instalment over a defined period.  Each subscriber is entitled to a prize amount determined by lot, auction or tender depending on the nature of the chit fund.   Typically the prize amount is the entire pool of contribution minus a discount which is redistributed to subscribers as a dividend. For example, consider an auction-type chit fund with 50 subscribers contributing Rs 100 every month. The monthly pool is Rs 5,000 and this is auctioned out every month.  The winning bid, say Rs 1000, would be the discount and be distributed among the subscribers. The winning bidder would then receive Rs 4,000 (Rs 5,000 – 1,000) while the rest of subscribers would receive Rs 20 (1000/50).  Winners cannot enter the auction again and will be liable for the monthly subscription as the process is repeated for the duration of the scheme.  The company managing the chit fund (foreman) would retain a commission from the prize amount every month.  Collectively, the subscribers to a chit fund are referred to as a chit group and a chit fund company may run many such groups. What are the laws governing chit funds? Classifying them as contracts, the Supreme Court has read chit funds as being part of the Concurrent List of the Indian Constitution; hence both the centre and state can frame legislation regarding chit funds.  States like Tamil Nadu, Andhra Pradesh and Kerala had enacted legislation (e.g The Kerala Chitties Act, 1975 and The Tamil Nadu Chit Funds Act, 1961) for regulating chit funds. Chit Funds Act, 1982 In 1982, the Ministry of Finance enacted the Chit Funds Act to regulate the sector.  Under the Act, the central government can choose to notify the Act in different states on different dates; if the Act is notified in a state, then the state act would be repealed[i].  States are responsible for notifying rules and have the power to exempt certain chit funds from the provisions of the Act.  Last year the central government, notified the Act in Arunachal Pradesh, Gujarat, Haryana, Kerala and Nagaland. Under the Act, all chit funds require previous sanction from the state government.  The capital requirement for establishing chit funds is Rs 1 lakh and at least 10% of profits should be transferred to a reserve fund.  The amount of discount (i.e. the bid) is capped at 40% of the total chit fund value.    States may appoint a Registrar who would be responsible for regulation, inspection and dispute settlement in the sector. Any grievances over decisions made by the Registrar can be subject to appeals directed to the state government. Chit fund managers are required to deposit the entire value of the chit fund (can be done in 50% cash and 50% bank guarantee) with the Registrar for the duration of the chit cycle. Prize Chits and Money Circulation Schemes (Banning) Act, 1978 The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 defines and prohibits any illegal chit fund schemes (e.g. schemes where auction winners are not liable to future payments).  Again, the responsibility for enforcing the provisions of this Act lies with the state government. Reports suggest that the government is discussing amendments to this Bill in the wake of the chit fund scam. West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013 Last month the West Bengal Assembly passed the West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013. This was a direct response to the chit fund scam in West Bengal. While not regulating chit funds directly, the Act regulates and restricts financial establishments to curb any unscrupulous activity with regards to deposits.  Chit funds are specifically included under the definition of deposits. The state government will appoint a competent authority to conduct investigations. What is the role of RBI and SEBI? The Reserve Bank of India (RBI) is the regulator for banks and other non banking financial companies (NBFCs) but does not regulate the chit fund business. While chit funds accept deposits, the term ‘deposit’ as defined under the Reserve Bank of India Act, 1934 does not include subscriptions to chits. However the RBI can provide guidance to state governments on regulatory aspects like creating rules or exempting certain chit funds. As the regulator of the securities market, SEBI regulates collective investment schemes.  But the SEBI Act, 1992 specifically excludes chit funds from their definition of collective investment schemes. In the recent case with Sarada Group, the SEBI investigation discovered that Sarada were, in effect, operating a collective investment scheme without SEBI’s approval.


[i] The central act repeals the Andhra Pradesh Chit Funds Act, 1971; the Kerala Chitties Act, 1975, the Maharashtra Chit Funds Act, 1974’, the Tamil Nadu Chit Funds Act, 1961 (applicable in Chandiragh and Delhi), the Uttar Pradesh Chit Funds Act, 1975,  Goa, Daman and Diu Chit Funds Act, 1973 and Pondicheery Funds Act, 1966.

Yesterday, the Governor of Karnataka promulgated the Karnataka Protection of Right to Freedom of Religion Ordinance, 2022.  The Ordinance prohibits forced religious conversions.  A Bill with the same provisions as the Ordinance was passed by the Karnataka Legislative Assembly in December 2021.   The Bill was pending introduction in the Legislative Council. 

In the recent past, Haryana (2022), Madhya Pradesh (2021), and Uttar Pradesh (2021) have passed laws regulating religious conversions.  In this blog post, we discuss the key provisions of the Karnataka Ordinance and compare it with existing laws in other states (Table 2). 

What religious conversions does the Karnataka Ordinance prohibit?

The Ordinance prohibits forced religious conversions through misrepresentation, coercion, allurement, fraud, or the promise of marriage.  Any person who converts another person unlawfully will be penalised, and all offences will be cognizable and non-bailable.  Penalties for attempting to forcibly convert someone are highlighted in Table 1.  If an institution (such as an orphanage, old age home, or NGO) violates the provisions of the Ordinance, the persons in charge of the institution will be punished as per the provisions in Table 1.   

Table 1: Penalties for forced conversion 

Conversion of

Imprisonment

Fine (in Rs)

Any person through specified means

3-5 years

25,000

Minor, woman, SC/ST, or a person of unsound mind

3-10 years 

50,000

Two or more persons (Mass conversion)

3-10 years 

1,00,000

Sources: Karnataka Protection of Right to Freedom of Religion Ordinance, 2022; PRS.

Re-converting to one’s immediate previous religion will not be considered a conversion under the Ordinance.   Further, any marriage done for the sole purpose of an unlawful conversion will be prohibited, unless the procedure for religious conversion is followed.  

How may one convert their religion?

As per the Ordinance, a person intending to convert their religion is required to send a declaration to the District Magistrate (DM), before and after a conversion ceremony takes place.  The pre-conversion declaration must be submitted by both parties (the person converting their religion, and the religious converter), at least 30 days in advance.  The Ordinance prescribes penalties for both parties for failing to follow procedure.

After receiving the pre-conversion declarations, the DM will notify the proposed religious conversion in public, and invite objections to the proposed conversion for a period of 30 days.  Once a public objection is recorded, the DM will order an enquiry to prove the cause, purpose, and genuine intent of the conversion.  If the enquiry finds that an offence has been committed, the DM may initiate criminal action against the convertor.  A similar procedure is specified for a post-conversion declaration (by the converted person).  

Note that among other states, only Uttar Pradesh requires a post-conversion declaration and a pre-conversion declaration.

After the religious conversion has taken place, the converted person must submit a post-conversion declaration to the DM, within 30 days of the conversion.  Further, the converted person must also appear before the DM to confirm their identity and the contents of the declaration.   If no complaints are received during this time, the DM will notify the conversion, and inform concerned authorities (employer, officials of various government departments, local government bodies, and heads of educational institutions).  

Who may file a complaint?

Similar to laws in other states, any person who has been unlawfully converted, or a person associated to them by blood, marriage, or adoption may file a complaint against an unlawful conversion.   Laws in Haryana and Madhya Pradesh allow certain people (those related by blood, adoption, custodianship, or marriage) to file complaints, after seeking permission from the Court.  Note that the Karnataka Ordinance allows colleagues (or any associated person) to file a complaint against an unlawful conversion.

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*In Chirag Singhvi v. State of Rajasthan, the Rajasthan High Court framed guidelines to regulate religious conversions in the state.