NIDHI COMPANY VS CHIT FUND
WHAT IS CHIT FUND?
A rotating savings and credit association system known as a “chit fund” is used in India, Bangladesh, Sri Lanka, Pakistan, and other Asian nations. Chit fund schemes can be set up formally among friends, family, or neighbours or informally by financial institutions.
The rotating savings programme known as a “chit fund” has been a component of India’s financial system for more than a century. Chit, Chitty, and Kuree are other names for it. A chit fund is a great financial tool for both borrowing and saving money. It provides a fair return on investment as a savings vehicle, and as a borrowing strategy, it can be a dependable source of funds for both routine and unplanned expenses.
HOW DOES CHIT FUND WORK?
The number of investors (members or subscribers) periodically contributes to the chit value of a chit fund. The recipient of the collected amount is determined by a draw (lottery system) or an auction.
If the money is allocated through an auction, the lowest bidder (for whom the lowest amount is asked) wins. In reverse auctions, the bidders bid against each other. After deducting the foreman’s commission and other costs, the winning bidder’s lost share is divided equally among the remaining members. Dividends are amounts received by the members. The winning bidder must continue to invest even if it claims the amount.
At the appointed time, the chit fund runs for the number of months equal to the number of investors. Subscribers pay a subscription into the pot each month. An open auction is then held where members can bid on the value of the chit fund. The subscriber who is willing to contribute the lowest amount is declared the winner and receives the chit fund for that month.
HOW NIDHI COMPANY IS DIFFERENT FROM CHIT FUNDS?
Chit Fund Companies and Nidhi Companies differ in the sense that a Nidhi Company is an NBFC that only accepts deposits, whereas a Nidhi Company is a committee that accepts instalments paid by subscribers over a specified period of time, and neither accepts nor lends the whole amount. The following essential differences are as follows:-
| NIDHI COMPANY | CHIT FUND |
|---|---|
| A Nidhi Company is a specific class of organisation in the Indian non-banking financial sector authorised under Section 406 of the Companies Act, 2013, whose primary activity is inter-member borrowing and lending. | Miscellaneous Non-Banking Companies, or MNBCs, are in charge of managing chit money. |
| As public limited companies, Nidhi firms are required to abide by two sets of regulations: the Nidhi Rules of 2014 and the Companies Act of 2013. | In accordance with the Registrar of Firms (ROFs), Societies, and Chits, organised chit funds must be legalised. |
| An entity recognised under Section 406 of the 2013 Companies Act as falling under the non-banking finance system is referred to as a “Nidhi firm.” | A “chit fund firm” is a company that controls behaviour in accordance with the Chit Funds Act of 1982. |
| Only its members manage the Nidhi Company. | Chit funds are managed by a third party chosen by the members after consultation. |
| Shareholders of the Nidhi Company may charge interest on loans they make to other members of the company. | Members of the Chit Fund may withdraw a set amount of money through raffles, auctions, and other methods. |
| A Nidhi firm operates similarly to an NBFC, allowing its members to make deposits (perhaps on a recurrent basis) and issue loans. | A committee that permits its members to contribute predefined monthly instalments for a predetermined duration is known as a “Chit Fund.” |
