Section 4 of the Chit Funds Act, 1982: Prior Sanction and Registration of Chits
Section 4 is the basic statutory gatekeeping provision for commencement and conduct of a chit. It requires both previous sanction from the competent State authority and registration of the chit in accordance with the Chit Funds Act, 1982.
What Section 4 means
In practical terms, a foreman cannot lawfully commence or conduct a chit merely by entering into arrangements with subscribers. Section 4 requires compliance with the statutory approval and registration process before the chit is operated. The provision also regulates the validity period of the sanction, grounds on which sanction may be refused, the right to be heard before refusal, and an appeal where an empowered officer refuses sanction.
Section 4 - Prohibition of chits not sanctioned or registered under the Act
Sub-section (1): No chit shall be commenced or conducted without obtaining the previous sanction of the State Government within whose jurisdiction the chit is to be commenced or conducted, or of an officer empowered by that Government, and unless the chit is registered in that State in accordance with the Act.
The sanction lapses if the chit is not registered within twelve months from the date of sanction. On an application, the State Government may allow a further period or periods, but the total extension cannot exceed six months.
Sub-section (2): The foreman must apply for previous sanction in the form and manner prescribed under the applicable rules.
Sub-section (3): Previous sanction may be refused where the foreman has specified disqualifications, including conviction and imprisonment for an offence under the Act or another law regulating chit business; default in statutory fees, statements or records, or violation of the Act or rules; or conviction and imprisonment for an offence involving moral turpitude, subject to the five-year period stated in the provision.
Before sanction is refused, the foreman must be given a reasonable opportunity of being heard.
Sub-section (4): An order of the State Government issuing or refusing previous sanction is final. An order of an empowered officer is subject to the appeal provided by sub-section (5).
Sub-section (5): A person aggrieved by refusal of previous sanction by an empowered officer may appeal to the State Government within thirty days from communication of the refusal. The State Government's decision on that appeal is final under the section.
Key compliance requirements under Section 4
- Previous sanction: Obtain sanction from the State Government or an officer empowered by it before commencing or conducting the chit.
- Registration: The chit must also be registered in the relevant State under the Act.
- Time limit: Registration should follow within twelve months of sanction unless a permissible extension is granted.
- Application by foreman: The foreman is responsible for applying in the prescribed form and manner.
- Natural justice: A reasonable opportunity of being heard must be given before sanction is refused.
- Appeal: Refusal by an empowered officer can be appealed to the State Government within thirty days from communication of the refusal.
Meaning of important terms
Chit
Section 2(b) defines a "chit" broadly as a transaction, whether called chit, chit fund, chitty, kuri, fraternity fund, Rotating Savings and Credit Institution or by another name, under which persons agree to subscribe a certain sum or quantity of grain by periodical instalments for a definite period and each subscriber, in turn and as determined by lot, auction, tender or the manner specified in the chit agreement, becomes entitled to the prize amount.
Foreman
Under Section 2(j), the "foreman" is the person who, under the chit agreement, is responsible for conducting the chit. Section 4 places the obligation to make the sanction application on the foreman.
Previous sanction and registration
These are separate statutory requirements. Section 4 requires previous sanction and registration, while the later provisions of Chapter II deal with matters including the chit agreement, filing, commencement and related compliance.
Related provisions
Section 4 should be read with Section 2 (definitions), Section 3 (overriding effect), Section 5 (invitation for subscriptions), Section 6 (form of chit agreement), Section 7 (filing of chit agreement), Section 8 (minimum capital requirements), and Section 9 (commencement of chit).
Official legal source
The authoritative Central legislation can be checked on India Code - Chit Funds Act, 1982. The Chit Funds (Amendment) Act, 2019 is also available from India Code.
Legal update checked: 15 September 2026. State rules, notifications and the identity of the competent registering authority may vary by State. Users should verify the applicable State rules and current notifications for procedural requirements.