A Chit fund is a kind of savings scheme.
"Chit" means a transaction, by which the foreman enters into an agreement with a number of subscribers that every one of them shall subscribe a certain sum for a certain period and each subscriber in his turn as determined by lot or by auction, shall be entitled to a prized amount.
40 subscribers agree to subscribe an amount of Rs.2,500/- for 40 months i.e. for a total chit value of Rs.1,00,000/-, each subscriber will get his chit amount in his turn as determined by draw of lot or by auction. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month. During auction all non-prized subscribers bid by allowing percentage of subscription to be forgone. The highest bidder i.e. who allows maximum percentage to subscribers is given the chit amount. The amount, foregone by the subscriber is distributed as dividend amongst all the subscribers in every draw, after deducting 5% commission/remuneration to be paid to the foreman of the company. Maximum bid is normally between 20% and 40% and the duration of chit is normally between 12 months and 50 months. In case there are more than one highest bidder in an auction, then draw of lots is made and chit amount given to the successful subscriber. Thus each member gets an opportunity to receive the prize amount once during the tenure of the scheme. All members contribute towards the periodic subscription till the end of the duration of the chit scheme.
These 40 subscribers constitute a ‘Chit Group’ and the Chit fund company can run many such groups. For each group approval of bye-laws and commencement certificate from the office of the Registrar, Chit Funds, is a must. The share of a subscriber in a chit is also known as ticket.
‘Foreman’ means a person who under the chit agreement is responsible for the conduct of the chit and includes any other person discharging the duties of the Foreman. Besides being an organizer, he is also a subscriber in every chit group. He is also entitled to obtain one chit amount into the chit group without deduction of the amount. This is to run the scheme smooth under all circumstances.