Company Model

[Nowfal N]

Hi,

Need your views on a client's proposed business model.

A Pvt. Ltd. company proposes to run multiple groups, with each group consisting of 20 members. Each member will contribute ₹5,000 per month. Every month, one member from the group will be selected through a lucky draw and will receive benefits worth a total of ₹1.5 lakh, comprising gold worth ₹50,000 immediately and ₹1 lakh in cash (₹2,000 per month for 50 months).

The balance funds collected by the company will be invested in other businesses.

Can this model be operated through a Private Limited Company? Which laws/regulations should be examined? Will it fall under the Chit Funds Act, RBI/SEBI regulations, the Banning of Unregulated Deposit Schemes Act, or any other legislation? Has anyone dealt with a similar structure in practice?

Regards,

CA Nowfal

Partner

RMVN & CO, Chartered Accountants

Mob : 8867316796

[FCA Chandrasekaran Ramadurai]

 

Dear CA Nowfal and fellow members,

Thank you for sharing the proposed model for views.

**Summary of the structure (as understood)**  
- Pvt. Ltd. company runs multiple groups of 20 members each.  
- Every member contributes ₹5,000 per month.  
- One member is selected each month by lucky draw and receives benefits aggregating ₹1.5 lakh (₹50,000 gold immediately + ₹1 lakh cash staggered at ₹2,000 × 50 months).  
- The company retains/invests the balance collections in other businesses.

**Regulatory assessment – high risk**

1. **Prize Chits and Money Circulation Schemes (Banning) Act, 1978**  
   The model has strong elements of a “prize chit”: periodical subscriptions collected from a fixed group of members, determination of the recipient by lot/draw, and distribution of prizes/gifts (cash + kind) while the promoter retains surplus. Such arrangements are expressly banned. Participation or promotion attracts penal consequences.

2. **Banning of Unregulated Deposit Schemes Act, 2019 (BUDS Act)**  
   Section 6 deems any prize chit or money-circulation scheme banned under the 1978 Act to be an Unregulated Deposit Scheme. Acceptance or solicitation of deposits under an UDS is prohibited. The company would be treated as a “deposit taker” and exposed to attachment of assets, prosecution, and restitution orders.

3. **Chit Funds Act, 1982**  
   A pure conventional chit (all subscribers eventually receive the net chit amount in turn, determined by lot/auction/tender, with the foreman entitled only to a fixed commission) can be conducted by a company after obtaining prior sanction from the State Government, registration of the chit agreement, maintenance of prescribed capital/reserve, and ongoing compliance.  
   The present model diverges significantly: only one member per cycle receives a fixed “benefit” package, the company freely invests the surplus, and there is no clear mechanism ensuring every subscriber eventually gets an equivalent return. It is therefore unlikely to qualify as a regulated chit and would fall outside the safe harbour of the 1982 Act.

4. **Other statutes**  
   - Companies Act, 2013 – possible issues under acceptance of deposits (Chapter V) if the contributions are characterised as deposits.  
   - RBI / SEBI – residual risk if the activity is viewed as a collective investment scheme or non-banking financial activity without registration.  
   - State-specific money-circulation / lottery laws may also apply.

**Practical view**  
I have not come across any sustainable, fully compliant private-company structure that mirrors this exact “lucky-draw + partial payout + company retains surplus” model. Attempts to run similar schemes have historically attracted regulatory action under the 1978 Act and, post-2019, under the BUDS Act.

**Recommendation**  
Advise the client strongly against implementing the model in its present form. If the commercial objective is a regulated rotating savings arrangement, the only viable path is a fully compliant chit under the Chit Funds Act, 1982 (with State Government sanction, registered agreements, prescribed capital, audited accounts, etc.). Even then, the payout structure would need to be redesigned so that every subscriber eventually receives the net chit amount.

Happy to discuss further offline if useful. on a professional engagement basis

Thanks & regards  
CA Chandrasekaran Ramadurai  
FCA, FCMA, ACS  
Chartered Accountant & Insolvency Professional  
Membership No. 027220  
Firm Regn No. 018861S  
Insolvency Professional – IBBI/IPA-001/IP-P-02699/2022-2023/14150  

 

Thanks & regards

CA Chandrasekaran Ramadurai FCA, FCMA, ACS 

Chartered Accountant, Insolvency Professional 

Membership No. 027220 Firm Regn No. 018861S,

Insolvency Professional - IBBI/IPA-001/IP- P/00834/2017-18/11392 

Sole Proprietor: C Ramadurai & CO | Chartered Accountants,

JP Nagar, Bangalore 560078

 

Areas of Specialization: Taxation- Structuring, Compliance & Litigation, Commercial Contracts and Due Diligence  

 

Mobile: 779 505 0177| Phone: +91 80 4202 3319 

 https://www.linkedin.com/in/fca-chandrasekaran-ramadurai-undefined-2450a2385/

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[Umesh Vyas]

Dear Sir,

Very nice explanation.

Thank You.

With Best Regards,

Umesh Vyas.

B.Com., LL.M., FCS

Umesh Vyas & Associates

Practising Company Secretaries

A-204,Shreeji Residency, Nr.Chandlodia Rly.Line,

Gota-Chandlodia Road,Ahmedabad-382481

Contact:+91-9427630539

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