Section 8 of the Chit Funds Act, 1982: Minimum Capital and Reserve Fund Requirements
Section 8 lays down financial safeguards specifically for a company carrying on chit business. It prescribes a minimum paid-up capital, requires creation and maintenance of a reserve fund, and restricts withdrawals from that reserve fund without the prior approval of the Registrar.
Updated legal reference: Chit Funds Act, 1982, including the Chit Funds (Amendment) Act, 2019 changes effective from 1 January 2020.
What Section 8 regulates
| Provision | Requirement |
|---|---|
| Section 8(1) | A company cannot commence or carry on chit business unless it has paid-up capital of at least Rs. 1 lakh, subject to the Act. |
| Section 8(2) | Transitional provision for companies that were already carrying on chit business when the Act commenced and had paid-up capital below Rs. 1 lakh. |
| Section 8(3) | A company carrying on chit business must create and maintain a reserve fund and transfer at least 10% of the annual profit balance to it before any share of discount on its shares is declared. |
| Section 8(4) | Money cannot be appropriated from the reserve fund without the prior approval of the Registrar, obtained through the prescribed application. |
Section 8(1): Minimum paid-up capital
Sub-section (1) begins with a non-obstante clause referring to the Companies Act, 1956 and makes the Chit Funds Act controlling for this requirement. A company must have paid-up capital of not less than Rs. 1 lakh before it commences or carries on chit business.
In practical terms, "paid-up capital" refers to the amount of share capital for which payment has actually been received by the company. Section 8 creates a sector-specific threshold for companies conducting chit business.
Section 8(2): Transitional requirement for existing companies
Sub-section (2) dealt with companies that were already carrying on chit business when the Act commenced but had paid-up capital below Rs. 1 lakh. Such companies were required to raise their paid-up capital to the statutory minimum within three years. The State Government could extend that period, in the public interest or to avoid hardship, by further period or periods not exceeding two years in the aggregate.
The second proviso restricted such a company from starting a new chit whose duration would extend beyond the permitted transition period unless the company first increased its paid-up capital to at least Rs. 1 lakh.
Section 8(3): Creation and maintenance of reserve fund
Every company carrying on chit business must create and maintain a reserve fund. Out of the balance of profit for each year, as disclosed in the profit and loss account, the company must transfer to the reserve fund a sum equal to not less than 10% of that profit.
The transfer must be made before any share of discount on the company's shares is declared. The expression "share of discount" replaced the earlier word "dividend" through the Chit Funds (Amendment) Act, 2019 with effect from 1 January 2020.
Section 8(4): Use of the reserve fund
A company cannot appropriate any amount from the reserve fund at its own discretion. Prior approval of the Registrar is required. For that approval, the company must apply in the prescribed form and explain the circumstances requiring the proposed appropriation.
Why Section 8 matters
The provision establishes a basic capital base and requires part of annual profits to remain within a protected reserve. Read with the registration, commencement, security, accounting and regulatory provisions of the Act, Section 8 forms part of the financial safeguards governing corporate foremen conducting chit business.
Official legal references
Related provisions
Section 8 should be read with Section 7 on filing and registration of the chit agreement, Section 9 on commencement of a chit, and the other provisions governing the foreman, security, accounts and conduct of chit business.