Case: Shriram Chits and Investment (P.) Ltd.   Vs. Union of India (UOI) and Ors.

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 outstanding amount payable to the subscribers. It was submitted that when there is no liability to the subscribers, the Registrar is not entitled to retain the accrued interest or benefits accrued to the securities. 37. It was submitted on behalf of the Union of India that the Reserve bank of India has advised the State Governments to amend their Chit Rules stipulating payment of interest accrued on the remaining unpaid to the foreman while releasing the securities. The circular dated 28th February, 1990 issued by the Reserve Bank India is extracted below:- RESERVE BANK OF INDIA DEPARTMENT OF FINANCIAL COMPANIES CENTRAL OFFICE CELL BOMBAY 400 023 DFO(COC) No. 352/50(1)/89-90 February 28, 1990 Phalguna 9, 1991 (saka) To, All State Governments/Union Territories. Dear Sir, Chit Funds Act, 1982 (Central Act 40 of 1982) Rules to be made thereunder. _____________________________________ The State Government are aware that a batch of writ petitions challenging the validity of the provisions of Chit Funds Act before the Karnataka High Court. Bangalore was dismissed by the Division Bench of that Court in April, 1988. The Division Bench has inter alia observed that with the view of providing relief to a foreman Section 20 of the Act dealing with the security to be obtained from a foreman may he amended so as to provide for payment of interest on the securities lodged by a foreman. (This judgments reported in AIR (1989) Kar page 125 - (1990) 67 Comp Cas p.203). The matter was examined in consultation with the Central Government and it has been decided not to amend Section 20 of the Chit Funds Act, 1982 but only to amend the rules framed thereunder (which deal with the release of securities) to comply with the directions of Karnataka High Court. A copy of the draft amendment to Rule 24 of the Model Rules dealing with the release of security is enclosed (Draft) for your consideration. It is requested that the State Government may please arrange to incorporate the same in Rule 24 ibid if the Rules have been framed on the lines of the Model Rules furnished by the Reserve Bank of India; otherwise a suitable amendment may be made to reflect compliances of the directives of the Karnataka High Court. For your information an extract of Rule 16 as it is at present and the new Rule 16 of the Chit Funds (Karnataka) Rules, 1983 as proposed to be amended is enclosed for reference and notify the 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 installment 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 on any default in the payment of installments and to such other amounts as may be payable to him under the provisions of the chit agreement; 39. We find no 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 does not appear to be legitimate because any 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 recommendation two per cent commission whereas the Act provided for 5 per cent commission. We do not find any thing unreasonable in respect of the commission. 40. Again objection to Section 25 is meaningless. This is a normal duty of the foreman which has been converted into a statutory duty. We do not find anything unreasonable. The provision is in subscribers interest. SECTION 48 41. The objection to the vires of Section 48 as to the circumstances in which chits are to be wound up is merely staled to be rejected. 42. All the provisions are in the interest of the 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 foreman and attested by at least two witnesses and the particulars that has to be stated in the said agreement have also been provided in Section 6 of the Act. This clearly shows that a contract has to be entered into between the subscribers and the foreman and in view of the definitions provided in Sections 2(b), 2(c), 2(d), 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 VIIth Schedule of the Constitution of India and it cannot be termed as money lending business. It is clear that the foreman does not lend his money to any of the subscribers. The foreman 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 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 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. The pith and substance of the Act is that it provides for a special contract. The legislation provides for a special kind of contract and thus squarely falls within Entry 7 of List III of Schedule VII. If any support thereof is required the reference may be made to the decision of this Court in Srinivasa Enterprises case (supra). That decision was involved with the power of the Parliament to enact the Prize Chits and Money Circulation Schemes (Baning) Act, 1978 and this Court held that the legislation fell within Entry 7 of List III of the VIIth Schedule 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. AIR1972Mad99 .15. We were referred to the decision of this Court in K.P. Subbarama Sastri and Ors. v. K.S. Raghavan and Ors. : [1987]2SCR767 wherein a contract providing for payment of money in installments and stipulating that on default in payment of any of the installments all the future installments shall be payable at a time with interest was held not penal in nature in the case of kuri transaction under the Kerala Chitties Act, 1975. While upholding the transaction a Bench of this Court approved the decision of the earlier Full Bench decision of the Kerala High Court in the case P.K. Achuthan (supra) wherein the Kerala High Court had upheld such a transaction and held it, to be of not a penal nature. In this context Eradi, J. (as His Lordship then was) speaking for the Full Bench observed that a subscriber truly and really becomes a debtor for the prized amount paid to him. It will be noticed that the later Full Bench decision of the Kerala High Court in Janardhana Mallan and Ors. (supra) was not brought to the notice of this Court and the Court was referred to the over-ruled decision of the Kerala High Court. The fact remains that the question involved before us as to the true nature of transaction for the purpose of finding out the relevant entry in the Constitution into which it may fall, was not involved in that case.16. It appear to us, but for the discordant note struck by the other Full Bench of the Kerala High Court in the aforesaid case of P.K. Achuthan (Supra), the consistent view of all the High Courts has been that it is not a moneylending transaction and that there is no relationship of debtor and creditor for the purpose of it being treated as a money lending transaction.19. The judgment of this Court in Srinivasa Enterprises (supra) fairly covers the present Act as well. The prized chit is covered by entry 7 of List III as observed by the Court in that case. 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. They are not money lending business. Applying the ratio laid down in the case of Srinivasa Enterprises (supra) it has to be held that the Chit Funds Act, in pith and substance, deals with special contract and consequently falls within Entry 7 of List III of the Third Schedule. It must, therefore, be held that the Chit Funds Act is within the legislative competence of the parliament.22. The Report 01 me Select Committee was brought to our notice and we thought it fit to look into it and the reports of the expert bodies with a view to satisfy ourselves that when Parliament enacted the Act, it had given its careful consideration to the various suggestions made by the State Governments, by the financial institutions, by the Companies, by the Cooperative Societies and by individuals; to the interests of the subscribers; to the risks of the foreman and to his difficulties in complying with certain regulatory measures, as found in the Bill; and passed the impugned Act. Almost all the recommendation of the Select Committee were incorporated in the impugned Act. Most of the appellants/petitioners had to opportunity of presenting their views before the Select Committee as could be seen from its report.This appears to be the main contention of the appellants/petitioners in all these matters. According to some of them their Companies are registered under the Companies Act and the Companies Act provides sufficient regulatory measures over their business by prescribing provisions for running the day-to-day business through 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 for enabling the Registrar of Companies to have an effective control over the business of the appellants/petitioners and annual statutory audit proceeded by internal audits.They have complained that the provisions of Section 3 of the Act has an over-riding effect. It imposed unreasonable restrictions on the existing rights of the appellants/petitioners to carry 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 regulatory mechanism of Regional Rural Banks Act, Non-Banking Financial Companies (Reserve Bank) Directions, 1977 apply to the deposit-taking activities of non-banking financial companies like loan, investment, hire purchase finance and equipment leasing companies. Misc. Non-Banking Companies (Reserve Bank) Directions, 1977 apply to deposit acceptance by conventional chit companies but do not cover their chit subscription activities. The deposit acceptance activities by the remaining financial companies are regulated by the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. These directions have been issued under the provisions of Chapter III B of the Reserve Bank of India Act, 1934, as amended. Section 45S 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 associations of persons. Acceptance of deposits by non-banking non financial companies, like trading and manufacturing companies, are regulated by the Companies (Acceptance of Deposits) Rules, 1975 framed under Section 58A of the Companies Act, 1956.24. The Chit Fund Companies are financial intermediaries and the State Acts (which were enacted in some of the States) were not uniformly observed and were not found to be adequate to meet the nefarious activities of the foremen. In order to protect the interests of chit subscribers and having regard to volatile and vulnerable nature of chit transactions, authorities sought expert opinions and Expert Committees went into the matter and submitted the various reports, which we have noticed earlier. The report of the Banking Committee, which considered the types of chit funds, had indicated that conventional chit funds might be permitted to be conducted by public limited companies. The Commission opined that the individuals should not be allowed to conduct chits. The recommendations of the Banking Commission and Dutta Committee were examined and a model Bill was prepared by the Reserved Bank of India. At that stage Raj Committee was appointed. The Model Bill was also referred to Raj Committee for opinion. Raj Committee discussed Chit Funds in Chapter 6 of its report and recommended a uniform Central Legislation for regulating the conventional chit funds. The Committee also considered the model Bill and suggested some modifications. The Bill duly amended 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 legislated 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.26. In its sitting at Ahmedabad on 2.7.1981 the Select Committee of the Lok Sabha was informed that the subscribers in various States had been cheated of their hard-earned money by Chit Fund Companies by adopting dubious means and the subscribers were not being paid their prize money or dues back. The subscribers requested the Committee to do something to enable them to get their money back (page 55 of the Lok Sabha Select Committees Report).28. 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 grant previous sanction. Clause (b) like Clause (a) gives guidance to the State authorities conferred on them discretion to grant or refuse to grant the sanction. We notice that the provisions is discretionary and merely gives guidelines 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.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 Constitution of India.31. This Section creates a bar for a Company carrying on chit to desists from carrying on any other business. Similar provisions in regard to the 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 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. It was pointed out that certain State Enterprises like Kerala State Financial Enterprises Ltd., were, in addition to chit business, engaged in other types of activities. The Datta Committee and banking Commission had suggested that the public section enterprises may be encouraged to do chit fund 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 to pay the dues to the subscribers. Some of the 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, the chit fund 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.33. The main challenge to Section 13 is in regard to the criteria fixed for chit business for individual firms on the one hand and co-operative societies and companies on the other. Whereas in the case of individuals the maximum permissible chit business is Rs. 25,000, in the case of firms for each partner Rs. 25,000 subject to the limit of rupees one lakh; in the case of companies the maximum business is linked with its net owned funds which has been defined in the explanation thereto. At the outset it may be noticed that the main purpose for laying down the ceiling on the limited amounts of chits, that may be conducted by the foreman, is to ensure that the foreman does not overtrade to the detriment 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 conducted by individual or partnership concerns and as a multiple of net owned funds in the case of limited companies, came to be fixed. 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 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 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 Rs. 25,000 in the case of individual and Rs. 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 chit business in a limited way. Unlike companies, the individuals and partners are not precluded from carrying 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 sufferance of the subscribers in case there were to be a collapse of chit fund business of the individuals and partnership firms. The offences under the Act, in terms of Section 81, are compoundable. The various rules relating to compounding are set out in Rule 62 of the Tamil Nadu Chit Funds Rules, 1984; Rule 63 of the Chit Fund (Pondicherry) Rules, 1906. In the Lok Sabha Select Committee tenth sitting at Ahmedabad held on 2nd July, 1981 it was stated as under :-3. During the course of evidence, the Committee was informed that the subscribers in various States had been cheated of their hard earned money of Chit Fund Companies by adopting dubious means and the subscribers were not being paid their prize money or dues back. The subscribers requested the Committee to do something to enable them to get their money back.34. We do not find that the limits put are violative of Article 19(1)(g) of the Constitution. In any case they are in the interests of the subscribers. However, we have no doubt that in view of the inflation in the country, the appropriate authorities, in case a demand is so raised, from time to time increase the limits. However, we do not find it necessary to give any direction in this behalf.35. These provisions are again regulatory and are with a view to avoid fraud on the subscribers by delaying their payments.SECTION 2038. 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.39. We find no 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 does not appear to be legitimate because any 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 recommendation two per cent commission whereas the Act provided for 5 per cent commission. We do not find any thing unreasonable in respect of the commission.40. Again objection to Section 25 is meaningless. This is a normal duty of the foreman which has been converted into a statutory duty. We do not find anything unreasonable. The provision is in subscribers interest.SECTION 4841. The objection to the vires of Section 48 as to the circumstances in which chits are to be wound up is merely staled to be rejected.42. All the provisions are in the interest of the 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.