A number of chit fund companies operating in Kerala may face closure in a time-bound manner. This is because of the new regulations brought in by the Central Chit Funds Act as per an order by the Supreme Court last year.

According to the Act, called Chit Funds Act, 1982, any chit fund company having 20 per cent subscribers domiciled in Kerala have to get registered within the State. This apart, the chit fund companies will have to deposit a sum equivalent to the total chit fund amount in public-owned banks or securities.

Those companies unable to furnish the required security may opt out. Chances are that some of them may defraud investors as had happened in the past, according to experts. There have been instances of chit fund companies fleeing from business, unable to honour the payment due to the investors.

The relevant verdict was given in May, 2012, which repealed the Kerala Chitties Act, 1975, in a case filed by chit fund companies. The Central Act was in force in most of the States even before the SC pronounced the verdict. Kerala had its own Act, which was stringent, and many chit fund companies got their companies registered in Haryana or Jammu & Kashmir where neither central nor State rules on chitties were in force.

The State government has notified Kerala Chitty Rules, 2012, after the Supreme Court gave verdict in May 2012 in compliance with the SC order. The Chit Funds Act, 1982, formulated by the Union government, was in force in states except Andhra Pradesh, Kerala, Maharashtra, Tamil Nadu, Goa, Daman, Diu and Pondicherry (Puducherry) where the States had brought their own Act. Haryana and J&K had neither the Central nor the State Act.

In order to comply with the new regulations, the chit fund companies, which have registered elsewhere but operating in Kerala, will have to invest heavily as surety. The companies claim that the apex court had given a relief period and has allowed them to continue with the present term of the ongoing chitties, which is contested by legal circles.

T. J.Mathew, president of All Kerala Association of Chit Funds, said the chit fund companies will have to abide by the clauses of the notified Act when a new round of chit fund activity is launched. There are about 5,000 members in the organisation, but only about 300 have been registered in Kerala, according to him.

But P. Rajendran, Managing Director of Kerala State Financial Enterprises, a State government-supported firm which runs chit funds, said the Supreme Court order had made it clear that the chit fund companies which were not registered under the Kerala Act prior to the SC order would not get legal protection. The clauses of Repeal and Saving Act, which ensures continuity in a system when a new law was applied, would not be applicable to the erring chit funds, he said.

Hundreds of chit fund companies operating in Kerala were registered in J&K and Faridabad in Haryana. Such companies have already become illegal and the court order provides succour to only those who had been registered under the Kerala Chitty Act, he said.

The chit fund companies running money lending business with separate licences, a practice followed by many companies, is also illegal according to the KSFE official. Under the new law, no chit fund company can run business other than the chit fund unless the government gives permission for it, he said.

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