Chit funds are a type of rotating savings system that originated in South India as an alternative to banking where people like friends, family, and neighbors contribute money. Chit funds are governed by both central and state laws, with some states having their own Chit Funds Acts to regulate them. The central Chit Funds Act of 1982 allows states to regulate chit funds by notifying the rules and appointing a registrar. While the RBI does not regulate chit funds directly, it can provide guidance to states on regulation, and SEBI only regulates chit funds that operate as unapproved collective investment schemes. Recent scams by groups like Sarada have increased scrutiny of the industry from both central and state authorities.

1. CHIT FUNDS
Introduction
It is basically a concept of microfinance
organization alternate to banking system
originated from south India and also an
ancient saving system. A type of rotating
savings agreed between parties i.e.
friends , relatives, neighbours, family
members or now a days finance
institutions.

2. People used to raise money for special events like weddings,
education, house etc. We can say it BIG piggy bank.

3. 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state, then the state act would be repealed.
States are responsible for notifying rules and have the power to exempt
certain chit funds from the provisions of the Act. 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.

5. 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 case
with Sarada Group, the SEBI investigation discovered that Sarada
were, in effect, operating a collective investment scheme without
SEBI’s approval.

6. Current Scenario
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. The scam also sparked
responses from both the centre and states: the Finance
Ministry, Ministry of Corporate Affairs and SEBI all promised
to act and the West Bengal Assembly passed The West
Bengal Protection of Interest of Depositors in Financial
Establishments Bill, 2013, with Odisha and Haryana
considering similar legislation.
With a reported around 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..