Sri Visalam Chit Fund Ltd. and Others Vs. Union of India and Others - Court Judgment

Excerpt:
- land acquisition act, 1894.[c.a. no. 1/1894]. section 28: [n.k. patil, j] statutory benefits executing court declining to grant statutory benefits held, the executing court is not competent to decide the redressal of the grievances. petitioners are to make necessary applications either before the l.a.o., or before the deputy commissioner. it is needless to clarify that the petitioners are entitled for rent or damages for use of the lands by the beneficiary or the competent authority. it is for the petitioners to establish that the possession of lands had been taken much earlier to the issue of preliminary notification. - all the members of the partnership firm are alleged to be financially sound with good financial background and necessary experience in chit fund business. that association is formed with the object of fostering and encouraging friendly feeling, unity, mutual help and co-operation among the cloth merchants in mysore city and to safe guard their trading interest by combined action. some of them have their registered offices outside the state like kerela, tamil nadu, etc. our analysis and observations are based on published material data collected by the reserve bank of india, memoranda received from various chit fund companies as well as material submitted by the representatives of some of the leading chit funds to the banking commission. in case of defaults, he has often to make good the deficit out of his own resources. according to the memoranda submitted by some chit funds to the banking commission, the foreman requires finance from banks as well as moneylenders and others private souces. of the subscribers fail to pay their subscriptions after getting the prize amount. wherever legislation is in force, no foreman can start a chit fund until the registrar is satisfied about the bye-laws of the fund and the security offered by the foreman. , subserve the national interest and serve more effectively as an adjunct to the regulation of the monetary and credit policies of the country besides affording a degree of protection to the depositors' monies. (h) the manner in which the loopholes, if any, in the existing directions taken advantage of by private limited companies in the context of certain concessions enjoyed by such companies under the provisions of the companies act, 1956, could be plugged; the committee, in order to ensure that the foreman has a sufficient stake in the chit business conducted by him, recommended an increase of the amount from rs. as regards the foreman- company, the committee recommended that for the words 'net assets',the words 'net owned funds' be substituted and that should be made applicable also to cooperative societies. the appellant, having become unsuccessful before the high court, has now approached this court assailing the order of detention on several grounds. a contention based on the delay of 40days in the disposal of the representation was advanced before the high court which for the reasons mentioned in paragraph 3 of its judgment based on the explanations given in the subsequent return dated august 5, 1988, filed by the under secretary ministry of finance government of india, had rejected the same though it was not satisfied with the earlier return of the detaining authority. rashid v state of west bengal 1973crilj656 while dealing with the constitution requirement of expeditious consideration of the petitioner,s representation by the government as spelt out from article 22(5) of the constitution observing thus (at page 826 of air 1973 sc) :the ultimate objective of this provision can only be the most speedy consideration of his representation by the authorizes concerned for, without its expeditious consideration with a sense of urgency the basic purpose of affording the earlier opportunity of making the representation is likely to be defeated. if the government enacts a law like the present act empowering certain authorizes to make the detention order and also simultaneously makes a statutory provision of affording the earlier opportunity to the detenu to make his representation against his detention, to the government and not the detaining authority of necessity the state government must gear up its own machinery to see that in these cases the representation reaches the government as quickly as possible and it is considered by the authorities with equal promtitude.bopanna, j.1. the constitutional validity of the chit funds act, 1982 (act no. 40 of 1982) (in short 'the act'), is challenged in this batch of writ petitions. 2. in writ petition no. 17110 of 1984, the petitioner is a chit fund company registered in tamil nadu under the tamil nadu chit funds act. but, it is carrying on business in banglore through through its branch office. the business in banglore is part of the total business carried on in tamil nadu and no separate balance sheet or audit report for the banglore branch is prepared and drawn up for the purpose of the companies act, 1956. 3. the petitioner in writ petition no. 8744 of 1986 is a registered partnership firm and it has averred that its main object is to promote the business to chit for the benefit of the common people. all the members of the partnership firm are alleged to be financially sound with good financial background and necessary experience in chit fund business. 4. the petitioner in writ petition no. 15062 of 1985 is a private limited company registered under companies act, 1956, and it carries on chit business only, within the frame work of the companies act and claims that its business is subject to inspection by the reserve bank of india and also by the register of companies. its accounts are audited regularly by a chartered accountant and it has been complying with all the provisions of the companies act. it claims that so far there is no complaint from any quarter and it is also paying income-tax regularly. 5. the petitions in writ petition no. 16016 of 1986 is a registered association of piece goods merchants carrying on business in the city of mysore. the second petitioner in this writ petition is a member of the first petitioner/association. that association is formed with the object of fostering and encouraging friendly feeling, unity, mutual help and co-operation among the cloth merchants in mysore city and to safe guard their trading interest by combined action. it was conducting chits confined to the members of the association continuously from 1953 to 1985 without any difficulty or disputes either amongst the members or between the members and the association. it is averred that it is not carrying on any other business and it has not experienced any difficulty in realising the amounts due from the successful bidders of the chit. however, consequent upon the coming into force of the act in the state, it has been asked to comply with the requirements of the act and on account of the threats held out by the third respondent, register of co-operative societies, it is stopped its business from september, 1985, thus subjecting its members to various financial constraints. its contention is that, since the chit business is conducted by the association only for the benefit of its members and it is not thrown open to the general public, the provisions fot he impugned act and the rules framed the render are not applicable to it and, if they are appplicable, they are constitutionally invalid, and, therefore, they are liable to be struck down. 6. the petitioner in writ petition no. 13393 of 1987 is also a registered association of jewellers carrying on business in the district of mysore. this association is conducting chit business among its members only for their mutual financial benefit and outsiders or non-members are not permitted to the members to the chit group by participating in the same. its grievance is similar to the grievance of the petitioner, the peace goods merchants' association. 7. the petitioner in writ petition no. 4835 of 1985 is a pawn brokers'association formed with the object of safeguarding the interest of pawn brokers and to render mutual help and assistance and co-operation amongst its members. no outsiders are permitted to become members of the chit group and the income derived by conducting the chit is utilised for the maintenance and development of the association. 8. the facts in the other writ petitions are not very relevant. it may be noted that the petitioners therein either private limited companies or public limited companies registered under the companies act or proprietary concerns or partnership concerns carrying on chit fund business in this state. some of them have their registered offices outside the state like kerela, tamil nadu, etc., and they are carrying on chit fund business through their branch office in this state. 9. in all these petitions, the constitutional validity of the provisions of the impugned act is challenged on various grounds viz., that they are violative of the provisions of article 19(1)(g) read with article 301a of the constitution and that some of them are also violative of the provisions of article 14 of the constitution. the impugned act came into force on january 2, 1984. there was no act is the state for regulating chit fund business and as a result, some of the chit fund companies which came under the regulatory measures of the tamil nadu act, kerala act, maharashtra act and andhra pradesh act shifted their business to this state without being hampered by the regulatory measures of the respective enactments in other states. when the impugned act was brought into force, the petitioners were asked to comply with a number of requirements under the act by respondent no. 3; therefore, complaining of violation of their constitutional right to carry on business, they have filed these petitions challenging the vires of the act. 10. before we go into the individual contentions of the petitioners in these petitions, it would be necessary to trace the genesis of the impugned legislation and our task in this regard is made easy by the report of the banking commission prepared in the year 1972, report of the study group on non-banking financial intermediaries, dated august 10, 1971. constituted by the banking commission, the report of the study group of non-banking companies headed by the chairman, j.s. raj (otherwise know as raj committee report) dated july 14, 1975, and the report of the select committee. these reports have gives us an insight into the origin of chit fund business in this country, the mechanism of chit fund transactions, the benefits that accrued to the needy public who are not in a position to avail themselves of the credit facilities from financing banks, the evils that flow from such chit fund transactions on account of the unscrupulous and unethical methods employed by person who run and control chit fund business and the need for legislation in order to protect the interests of the subscribers to the chit fund from unscrupulous promoters and foremen. we will first consider the earliert report dated august 10, 1971, submitted by the study group of the non-banking financial intermediaries appointed by the banking commission. chapter vi of this report is devoted to chit funds. the introduction to this report reads as: 'in this chapter, it is proposed to study the working and role of one of the oldest of the indigenous non-banking financial institutions, viz., chit funds. we have, in particular, examined the role of chit funds as a saving and lending institution. our analysis and observations are based on published material data collected by the reserve bank of india, memoranda received from various chit fund companies as well as material submitted by the representatives of some of the leading chit funds to the banking commission. the annual reports of a few chit funds have also been made use of. the study group received in all twelve memoranda (listed in appendix ii). the banking commission had issued a questionnaire to commercial banks and the replies received in response thereto pertaining to their chit fund business have been analysed and used for our discussion,'.(emphasis * supplied) 11. paras 6.4 to 6.29 of the report deal with various aspects of chit fund business. paras 6.2 and 6.3 of the report deserve to be excerpted since they tell use about the origin of this financial institution in india. the read as: 'chit fund is perhaps the oldest indigenous financial institution in india. the origin of chitty or kuri or chit fund is traceable beyond more than a century in the rural parts of southern india. periodically, a fixed measure of grain could be deposited with a trustee and received back when a sufficiently large quantity was collected. the needy person was ascertained through draw of lots. the word `chit' suggests its origin. chit means a written note on a small piece of paper. since the winner of the chit amount was to be ascertained through draw of lots, it involved writing of names of eligible members on separate chits, as in a lottery. the scheme thus came to be know as `chit funds'. its equivalent in malayalam, `kuri', is derived from `kurippu' which is a synonym for chit. the trustee's reputation for honesty attracted more savers to him. in the earlier stages, when the idea of modern banking had not reached the people, chit fund institution developed quickly and spontaneously. it was an expression of co-operative efforts of mustering savings through instalments and advancing the pooled savings as loan to the members with facilities for repayment in instalments. with the growing importance of commerce and industry and the consequential rise in the population of towns and cities, chit fund was brought to urban areas.' 12. in para 6.7, 6.8 and 6.9, the working of chit business is considered and we are concerned with this type of chit business. they read as: 'in this case, there is a promoter called foreman who enrols a number of subscribers and drawn up the terms and conditions of the scheme in the form of an agreement. every subscriber has to pay his subscription in regular instalment. the foreman charges, for his service, a commission on which there is a ceiling fixed by law in some states. he also reserves the right to take the entire chit amount at the first or second instalment as prize. depending on the terms of the agreement, a fixed amount is also sometimes set aside for distribution among the non-prized members. after making provision for the above deductions, the balance is put to auction ( except at the last instalment) and given as prize to the member who is prepared to forgo the highest discount. the amount of discount is distributed as dividend either among all the members or only among the non-prized members. in some states, a ceiling has been fixed on the discount that a member can offer. in case more than one person is prepared to offer the same discount or when there are no bidders, lots are drawn to choose the prize-winning member. the number of subscribers in a chit series equals the number of instalments so that every member is assured of the opportunity of getting the prize. sometimes, with a view to catering to as many subscribers as possible, chitty comprises a series expressed in terms of a sub-division or fraction of a full ticket (ticket means the share of a subscriber which entitles the holder thereof to the prize amount at any one instalment). in such cases, the number of subscribers can exceed the number of instalments. income cases, only auctions are held to determine the prize winner while there are chit funds in which prize-winning tickets are determined both by lots and by auction. the prize winner can get the prize only on furnishing security acceptable to the foreman for the payment of the remaining instalments. in the event of default by subscribers in payment of instalments on due dates, penalties are imposed in various forms, eg., forfeiture of dividends or levy of penel interest. the above are the essential features of a business chit scheme although there are any number of variants. a chit fund can thus be described as a mutual recurring deposit scheme under which every member is entitled to receive the prize amount as loan from the chit fund; for the last prize winner, however, the prize amount as loan from the chit fund; for the last prize winner, however, the prize amount cannot be considered as loan. although no rate of interest is specifically mentioned, the deduction on account of discount and the foreman's commission make the loan in a majority of the cases, an interest-bearing one, the interest rate depending on the specific terms and conditions under which the scheme operates. for the foreman, however, no interest rate is involved on his loan'.' 13. para 6.13 to 6.18 deal with the role of the foreman, his actions, legal and illegal, and the risks and responsibilities in his intrepid role. they read as under: 'at this stage, it would be useful to study the foreman's role in the chit transactions. subject to law, he decides practically everything about the chit the number of members, the amount of instalments, the chit amount, his commission, the instalment at which he himself would retain the prize, the penalties to be imposed on defaulting members, etc. it is easy for him to exercise his powers because the number of subscribers is in many cases large and they are usually scattered over many places. some foremen, in addition to carrying on the business of chits, also accept deposits from third parties. these are utilised as working funds and lent at high rates of interest to subscribers and perhaps to others. according to a reserve bank survey, the amount of deposits of 106 reporting chit fund companies at the end of march, 1968, was about 1.1 crores. in terms of the reserve bank's directions, a chit fund company cannot accept deposits repayable after a period of less than 12 months from the date of receipt of such deposits nor can the amount of such deposit exceed 25 per cent. of its paid-up capital and free reserves. it may be noted that the subscriptions received from the members of chit funds in terms of contract are not treated as `deposits' for the purpose of the reserve bank's directions. according to available information, one-third of the outstanding loans and advances as on 31st march, 1967, given by the foremen of 100 chit fund companies were personal loans; 27 per cent. were meant for the commercial sector and 15 per cent. were professional loans. `industry' and `agricultural' got a negligible proportion, these advances accounting respectively for 0.5 per cent. and 0.1 per cent. of the total. 14. the foreman derives his income in different ways, both legal and illegal. in the former category can be included items such as admission fee from members, penal interest or penalty free from defaulting members and forfeiture of their divident, interest on loans to non-prized chit holders, fees for transfer of shares in the chit, deduction from the subscription paid by a member who wants to resign, dividends on the chit reserved for himself, interest on chit prize taken without deduction, interest on the chit prize which the prized member may not be in a position to collect immediately, and subscriptions paid by members who discontinue in the middle of the scheme but do not care to claim refund. 15. the unscrupulous among the foremen resor to so many unfair methods to secure illegal gains. a few of these methods are briefly mentioned below: (i) enrolment of fictitious members to complete the required number of member in a chit series. if a real and needy non- prized member is not able to come forward to offer a high discount at the auction, one of these benami members is show to get the prize thereby depriving the real members of the opportunity, (ii) similarly, it is possible to exploit a needy non-prized member of a new member so that he gets the prize only at the maximum discount. (iii) the prized member is supposed to get the amount soon after the draw or auction is over of course on furnishing security. but, the foreman adopts tactics which delay the actual payment for a considerable time. meanwhile, he uses the money interest-free. if he succeeds in delaying the payment till the succeeding draw, the earlier prize winner is given the prize out of the collections of the succeeding draw. thus, one instalments is perpetually in the hands of the foreman to be utilised in anyway he likes. 16. the above are only examples to illustrate the way in which some foreman maximize their profits. they do not take into account the cases where the foreman and his associates disappear from the scene and are untraceable. the police have many such areas on their record. during 1962-66, as many as 255 chitties collapsed in several districts of kerala on account of such malpractices. 17. it may be noted that the foreman has to undertake some responsibilities and risks. he is responsible for regular collections of subscriptions from a widely scattered body of members. he has to conduct the draws or the auction and maintain accounts. he is under obligation to pay the prize amount on the due date whether or not all the members have paid their subscriptions. in case of defaults, he has often to make good the deficit out of his own resources. if the prized member defaults in his instalments, litigations follows to recover the amount. if the defaulter is a non-prized member, the foreman has to find out a suitable substitute or, in the alternative, has to take over the chit himself and continue the business. according to the memoranda submitted by some chit funds to the banking commission, the foreman requires finance from banks as well as moneylenders and others private souces. some companies have also pointed out that their profits are not very large in relation to the risks involved. according to memoranda submitted to the study group, 15 to 18 per cent. of the subscribers fail to pay their subscriptions after getting the prize amount. (emphasis * supplied) 18. paras 6.23 to 6.34 deal with the pecuniary aspects of the chit fund from the point of view of the subscribers. some basic issues highlighted in the report require to be noted. they are found in paras 6.30 and 6.31. they read as: 'as emphasised earlier, the rate of return on the savings of a subscriber to a chit fund and the interest rate that is involved for a subscriber joining the chitty as a borrower, will vary according to the terms and conditions of the chit fund. in fact, examples can be worked out on the basis of certain assumptions where the rate of return to prized subscribers at late stages will be quite high and the interest rate involved for a prize winner will be compartively low. the essential point is that the rate of interest involved in chit funds is discriminatory and varies from person to person so that there is an irrational distribution of gains and losses. ordinarily, the more needy a person, the higher will be the discount that he would be prepared to offer for winning a prize. therefore, the more urgent his need, the higher the rate of interest that a borrower has to pay. another point is that there are institutions which offer savings schemes which are superior to the one involved in a chit fund. the savings are fixed deposits, recurring deposits, monthly income deposit schemes, cash certificate schemes, annuity or retirement schemes, insurance-linked deposit schemes, small savings, provident funds and insurance schemes having features which are superior to those in chit funds. the popularity of chit funds can be explained by the fact that a subscriber is entitled to borrow from it. also, long standing social habits and the gaming element involved in the scheme, which perhaps provide an added attraction to some subscribers are also factors accounting for popularity of this institution. so far as the end-use of the prize is concerned, there are conflicting views. it would appear that the likelihood of productive use of the prize money is small. a prospective producer would not depend on the uncertainties involved in a chit fund. the rates of interest generally involved for a prize winner in a chit fund are so high that an inference can be drawn that the prize money is mostly used for consumption or speculative purposes. some person join chit funds and are prepared to pay high rates of interest by way of large discount for the purpose of hoarding certain scarce commodities. they are not only able to recover the interest but also earn a profit on account of the difference between the relatively low prize at which they buy the goods and the high prize at which they sell them later. (emphasis * supplied) 19. the study group, in paras 6.52 to 6.54, considered the legislative measures to be introduced for eliminating the malpractices usually prevalent in chit funds. it observed follows: 'we considered the above two suggestions, viz., starting of chit funds in the public sector and the commercial bank entering the chit fund business with a view to eliminating, through competition, the malpractices, usually prevalent in private chit funds. it may be noticed that most of the unhealthy practices arise from the lack of integrity of the foreman. it was, therefore, natural that the regulation of chief fund business assumed high priority in the states where the business is concentrated, ie., in the southern states. at present state legislation regulates the running of chit funds in the areas where such legislation is in force. the tamil nadu chit funds act of 1961, seeks to regulate the chit fund business in the state of tamil nadu. with appropriate changes, this act was adopted, with effect from july 15, 1964, in the union territory of delhi. the union territory of pondicherry has the pondicherry chit funds act, 1966, which came into force from august 1, 1967. in kerala, the travancore chitties act, 1964 and cochin kuris regulations, 1932, are in force in some areas of the state. the question of introducing a uniform enactment in kerala has been under the consideration of the government for sometime. some states are in the process of amending or enacting laws to regulate chit fund activity. in andhra pradesh, a bill on the lines of the legislation in the neighbouring state is under consideration. mysore and certain other state governments are also contemplating passing of legislation for regulating chitties. the punjab government is contemplating the starting of chit funds in the public sector on the lines of the kerala government. in uttar pradesh, chit funds, lotteries, etc., are regulated by the provisions of the manual of government orders. according to these regulations, publication of advertisements in newspapers of any proposals regarding lotteries not authorised by the government is an offence under the indian penel code. also, local authorities have been asked not to accord sanction for holding lotteries nor should they authorise advertisements regarding such undertakings. the object of legislation is to regulate the conduct of chit funds by requiring the foreman to obtain the permission of competent authorities before a chit fund can be started, stipulating security to be provided by the foreman to the register, detailing his rights and obligations and providing for punishment for infringement of law. wherever legislation is in force, no foreman can start a chit fund until the registrar is satisfied about the bye-laws of the fund and the security offered by the foreman.' (emphasis * supplied) 20. this report of the study group was incorporated in the report of the banking commission dated january 31, 1972. the banking commission emphasised the need for legislation in para 17.43 of its report thus: 'a few states have legislation on chit funds the object of which is to safeguard the interests of the members. the commission feels that it is essential to have a uniform chit fund legislation applicable to the whole country. depending upon the constitutional position, whether chit funds come under the union list, concurrent list or the state list, either an all india chit funds act may be enacted or a model law may be framed which may be adopted by all the states with such modifications as may be necessary. it will be desirable to provide in the legislation that only public limited companies can run chit funds. pending such uniform legislation, existing state laws regulating chit funds registered within the state should be made applicable to their branches in states having no legislation. this will essentially be an interim measure because only the members of those chit funds which are registered in states where chit fund laws have been enacted will get protection.' (emphasis * supplied) 21. the same view is expressed by the raj committee report on non- banking companies in its report dated july 14, 1975. the terms of reference of the raj committee should be noticed to appreciate its recommendations regarding chit business. they are: 'i. to examine the relative provisions of the reserve bank of india act, 1934, the non-banking financial companies (reserve bank) directions, 1966, and the miscellaneous non-banking companies (reserve bank) directions, 1973, with a view to assessing their adequacy in regulating the conduct of business by non-banking companies covered by the said directions in the context of the monetary and credit policies laid down by the reserve bank from time to time; to suggest measures for further tightening up the provisions so as to ensure that the activities of such companies, in so far as they pertain to the acceptance of deposits, investments, lending operations, etc., subserve the national interest and serve more effectively as an adjunct to the regulation of the monetary and credit policies of the country besides affording a degree of protection to the depositors' monies. in this connection, the study group may examine and make recommendations for regulating the conduct of the business of non-banking companies governed by the above sets of directions generally, and in particular, in regard to: (a) the norms which may be adopted in respect of the capital structure and debt-equity ratio that may be maintained by the various classes of non-banking companies covered by the said direction; (b) the extent to which and the periods for which such companies may borrow by way of deposits/unsecured loans and the distinctions, if any, to be made between public and private companies; (c) the maintenance of cash reserves and/or a percentage of their deposit liabilities in the form of liquid assets by such companies; (d) the norms which may be adopted in respect of the rates of interest payable by such companies on their borrowings by way of deposits/unsecured loans and also those which may be charged on loans and advances made by them; (e) the extent to which any of the activities carried on by these companies through their subsidiaries can or should be controlled; (f) the need for the imposition of a ceiling on risk assets to be acquired or loans to be granted by the companies; (g) the restrictions if any, on the grant of loans to directors and their friends and relations and companies in which they are interested; (h) the manner in which the loopholes, if any, in the existing directions taken advantage of by private limited companies in the context of certain concessions enjoyed by such companies under the provisions of the companies act, 1956, could be plugged; and (i) the need to empower the bank to apply for compulsory winding up of non-banking financial companies under certain circumstances. ii. to make recommendations on any other related topic which the study group may consider germane to the subject matter of the enquiry.' 22. the committee discussed the terms of reference with various individuals of eminence and learning and also the representatives of companies, associations all over india in bangalore. 23. in paras 6.17, 6.18 and 6.19, the raj committee observed as follows: 'it will be seen from the foregoing that chit fund legislation has been enacted only in a few states/union territories. there is also a diversity of the regulatory provisions made in the various enactments. it is not, therefore, unlikely that unscrupulous promoters or chit companies might exploit the situation by conducting chits in such of the states as have no chit legislation or in states where the provisions of such legislation are less regorous. in fact, it was brought to the notice of the group during the course of its discussions in new delhi that a number of chief fund companies had shifted their registered offices from the delhi area to the nearby places in harayana (where there is no chit legislation) with a view to avoiding compliance with the provisions of the tamil nadu chit funds act, 1961 as extended to the union territory of delhi. in the circumstances, the need for enctment of a uniform legislation applicable to chit fund institutions throughout the country cannot be under-estimated. 24. in the context of the recommendations of the banking commission in regard to regulating the activities of non-banking financial intermediaries, the central government has, inter alia, decided that a model law to regulate chit business may be formulated for adoption by all the states which have no such legislation. it has also decided that the question of making it a requirement of law that only public limited companies should run chit funds should should be examined. pursuant to the above decisions, the reserve bank has, at the instance of the central government, drafted a model bill which was referred to the group for its comments in october, 1974. the draft bill is generally on the lines of the andhra pradesh chit funds act, 1971 (which itself follows the pattern of the tamil nadu chit funds act, 1961), and the kerala chittis bill, 1972, as reported by the select commoittee. besides the usual provisions found in the existing state enactments, certain additional provisions have been made therein. we have examined the provisions of the model bill and after taking into account the opinion expressed by the representatives of some of the state government which have enacted legislation regulating chit funds in their respective states as also certain individuals having intimate knowledge of the running of chits, our views in this regard have already been conveyed to the reserve bank by a letter dated june 30, 1975, addressed by the chairman of the group to shri s.s. shrialkar, deputy governer of the reserve bank of india. it will be seen therefrom that the main recommendations of the study group are as under: (a) since the legal opinion is that parliament is competent to enact the chit legislation in view of the provision contained in entry 7 of list iii (concurrent list) of schedule vii to the constitution of india, the proposed bill should be enacted as a central legislation such a step would, besides ensuring uniformity in the provisions applicable to chit fund institutions throughout the country, also prevent such institutions from taking undue advantage either of the absence of any law governing chit funds in any state or exploit the benefits of any lacuna or relaxation in any state law by extending their activities to such state ; (b) while the bill should be enacted as a central act, its administration should be left to the state governments concerned which, in turn, may seek the advice of the reserve bank on policy matters. (for the purpose of tendering advice to the central or state governments, the reserve bank may have to inspect chit fund institutions on a selective basis to have an idea of their working including their methods of operation. chit funds are `financial institutions' as defined in clause (c) of section 451 of the reserve bank of india act, 1934. hence, it would be open to the reserve bank to undertake inspections of chit fund institutions whenever deemed necessary in exercise of the powers vasted in it under section 45n, ibid.) ; (c) as regards the question whether only public limited companies should be allowed to conduct chit funds, the group is of the view that there should be no objection, in principle, to chits being conducted by private limited companies also, and on a limited scale, even by unincorporated bodies such as individuals/ sole proprietorships/ partnership firms. it might be of relevance to note in this connection that the enactments regulating chit funds in force in certain states do not prohibit chit funds being conducted by unincorporated bodies ; and (emphasis *supplied) (d) having regard to the nature of their business, there is no necessity for chit fund institutions to borrow from the public by way of deposits and as such they may be prohibited from accepting deposits except as advance payment of subscription or deposits from prized subscribers by way of security towards payment of their future instalments. 25. the views of the group on certain other issues which arose for consideration are given in the annexure to the above letter dated june 30, 1975. these are summarised below : (i) conduct of other business by chit fund institutions : chit fund institutions may be prohibited from conducting any other type of business except chit business or granting of loans to subscribers against their paid up subscriptions. (ii) utilisation of funds : chit fund institution should utilise their surplus funds only for giving loans or advances to non- prized subscribers against the security of the subscriptions paid by them or investing in trust securities or in deposits with approved banks. (iii) restriction on the opening of new places of business : chit fund companies should obtain the prior approval of the director of chits within whose jurisdiction their registered offices are situated. the director of chits should take certain criteria into account before granting permission for the opening of offices. unincorporated bodies should not be allowed to conduct business at more than one place. (iv) maximum duration of chits : the duration of chits should not ordinarily exceed five years ; but chits of a longer duration up to ten years may be started in very special cases only by chit fund companies/ banks with the prior approval of the state government concerned which should take into account factors such as the financial position and methods of operation of the company in question, interests of the prospective subscribers, requirements as to security, etc. (the security deposit to be kept by the foreman of company in the case of chits of longer duration may be proportionately higher). (v) mode of settlement of disputes : the machinery for settlement of disputes arising between the foreman and the subscribers relating to the adequacy of security offered by prized subscribers to the foreman for payment of future instalments, substitution of subscribers in case of default, etc., should be self-contained, cheap and expeditious on the lines of the machinery prescribed under the state co-operative laws for settlement of disputes by arbitration. (vi) ceilings in respect of the aggregate amount of chits that may be conducted at any point of time : the aggregate amount of chits conducted by a chit fund company at any point of time may not exceed 50 per cent. of the net worth of company, i.e., the paid-up capital plus free reserves less the balance of accumulated loss and other intangible assets such as deferred revenue expenditure and goodwill, if any. in the case of commercial banks conducting chit funds, no ceiling on the aggregate amount of chits that may be conducted at any point of time need be prescribed since these chits are subject to close scrutiny by the reserve bank. as regards chit funds conducted by unincorporated bodies such as individuals, sole proprietorships and partnerships, the aggregate amount of chits should not, at any point of time, exceed rs. 10,000. (vii) minimum capital requirements and the creation of a reserve fund : the minimum paid-up capital of chit fund companies incorporated under the companies act, 1956, whether private or public, should be rs. 1 lakh. companies having paid-up capital of less than rs. 1 lakh may be allowed time up to three years to increase their paid-up capital to the minimum referred to above. the state government concerned may be authorised to grant extension of time for a period not exceeding two years in appropriate cases. these companies should also be required to credit 20 per cent. of their annual net profits to a reserve fund.' 26. keeping these recommendations of these expert bodies in view, parliament enacted the impugned act on august 19, 1982, and the same was brought into force in this state on january 2, 1984. the scheme of the act briefly stated is : chapter ii of the act deals with registration of chits, commencement and conduct of chit business. chapter iii deals with the rights and duties of foreman. chapter iv deals with the rights and duties of non-prized subscribers. chapter v deals with the rights and duties of prized subscribers. chapter vi deals with the restrictions on transfer of rights of foreman, ect. chapter vii regulates the meetings of the general body of subscribers. chapter viii provides for continuation of chits in certain cases and termination of chits. chapter ix provides for inspection of documents. chapter x provides for winding up of chits. chapter xi provides for appointment of officers and levy of fees the purpose of discharging the duties imposed on the registrar under the act, chapter xii deals with disputes touching on the management of chit business by arbitration. chapter xiii provides for miscellaneous provisions, viz., advisory role of reserve bank, appeals from the orders of the registrar, power of registrar to give extension of time for filing documents, penalties, offences by companies, etc. though the petitioners have challenged the vires of the entire act, in the course of their arguments, they have confined their challenge only to a few provisions of the act which are section 3,4,5,6,(0),7,8,12,16,19 and 20. 27. it should be noted that many of the petitioners did not challenge the legislative of parliament to pass the act. but, since learned counsel for a couple of petitioners having questioned the legislative competence, the same should be considered first. 28. legislative competence : the impugned act regulates the chit fund business. chit is a contract between parties, though an element of luck is also there in that the winner of the prize is decided by lots. so, the relevant entry is entry 7 in list iii to schedule vii to the constitution of india which reads as under : 'contracts including partnership, agency, contracts of carriage, and other special forms of contracts, but not including contracts relating to agricultural land.' 29. the petitioners have not placed any material to show that chit transactions are not contracts and as such they do not come within the ambit of entry 7 in list iii. 30. the legislative competency of parliament to pass the impugned enactment is no more open to challenge in the light of the decision of the supreme court in srinivasa enterprises v. union of india : [1981]1scr801 . if the prize chit fund is covered by entry 7 in list iii as observed by the supreme court in that case conventional chits are also matters of contract, with an added element of chance by the drawing of lots to choose the successful bidder. further, the other argument that the impugned act is bad because it covers both bad and good chit funds is also no more tenable in the light of the very same decision of the supreme court. a similar argument advanced in that case was rejected by the supreme court with the following observations (page 472 of 51 comp cas) : 'we may not be taken to mean that every prize chit promoter is a blood-sucker. indeed, shri venugopal persuasively presented the case of his client to make us feel that responsible business was being done by the petitioner. may be but when a general evil is sought to be suppressed, some martyrs may have to suffer, for the legislature cannot easily make meticulous exceptions and has to proceed on broad categorisations, not singular individualisations.' (emphasis *supplied) 31. while examining the legislative competence of an enactment, the rule of interpretation of pith and substance of the enactment has to be applied. even otherwise, no provision in the act is brought to our notice which falls outside the purview of entry 7 of list iii of schedule vii. 32. the act provides for the regulation of chit funds and matters connected therewith. the chit comes into existence as a result of an agreement between the parties concerned with the chit. thus it is a matter of contract. the contracts relating to agricultural lands are excluded from the purview of entry 7 of list iii of schedule vii. the contracts relating to chits do not relate to, and have nothing to do with, agricultural lands. thus, the act squarely falls under entry 7 of list iii of schedule vii. as such, the act does not suffer from lack of legislative competence of parliament to enact it. 33. before we consider the contentions of the petitioners in detail, the report of the select committee which considered the chit funds bill, 1980, should be briefly noticed, because the impugned act incorporates almost all the recommendations of the select committee. 34. the committee held as many as 25 sittings after issuing notices to the state governments, chit companies, public bodies and organisations, individuals, etc., interested in the subject matter of the bill and also decided to hear oral evidence on the provisions of the bill from interested parties. the committee also issued a press communique fixing february 21, 1981, as the last date for receipt of memoranda and requests for oral evidence. wide publicity was given on three successive days by broadcasting the matter from all stations of all india radio and telecast from all doordarshan kendras. several requests were received from various parties for being heard by the committee and accordingly several sittings were held at madras on 28th, 29th and 30th of may, 1981, at bangalore on 1st and 2nd of june, 1981, and at trivandram on 4th and 5th of june, 1981. oral evidence was taken from the representatives of various chit companies, associations, federations, individuals, etc., and the committee also heard the representative of the state governments of tamil nadu, karnataka, kerala and the union territory of pondicherry. since the committee felt that sufficient number of subscribers were not forthcoming for tendering oral evidence, they decided to extend the time for receiving memoranda and receiving oral evidence up to june 30, 1981. further, a series of sittings were held at ahmedabad, hyderabad, calcutta and new delhi and the committee, in all, examined 101 witnesses who appeared before the committee for giving oral evidence. the bill was considered clause by clause and the report of the committee was adopted on november 18, 1981. the recommendations of the committee in respect of the following clauses in the bill are : clause 4 : the period of 12 months was substituted for the period of six months in the proviso to the said clause since the committee felt that the period of 6 months was not sufficient for registering the chit from the date of sanction. under clause 6(i)(c) , the words 'interest or penalty' were included for any default in the payment of instalments. likewise, in clause 6(i)(d), amendment was proposed to specify the probable date of commencement of the chit agreement. clause 7 (3) : the words 'within a period of three months' were incorporated with a view to ensure that the foreman did not take an unduly long time to start the chit and did not misappropriate the subscribers' money. clause 8 : instead of the figure 20 per cent, 10 per cent, was suggested as the amount to be transferred to the reserve fund. clause 11(2) : a period of one year was incorporated for complying with the requirements of clause 11(1) to avoid any hardship being caused to such persons carrying on business on the commencement of the proposed legislation. clause 13 : the committee considered the aggregate amount of chit to be conducted by an individual foreman, partnership foreman and foreman- company. the committee, in order to ensure that the foreman has a sufficient stake in the chit business conducted by him, recommended an increase of the amount from rs. 10,000 to rs. 25,000 in the case of individual foreman, from rs. 40,000 to rs. 1 lakh in case of partnership foreman. as regards the foreman- company, the committee recommended that for the words 'net assets', the words 'net owned funds' be substituted and that should be made applicable also to cooperative societies. this recommendation was made because of the fact that the concept of net owned funds will be in tune with the reserve bank of india directions to financial companies which would mean the aggregate of the paid-up capital and free reserves reduced by the amount of accumulated balance of loss, deferred revenue expenditure and other intangible assets if any, as per the latest audited balance-sheet of the company. clause 14 : the representation for extension of the period of 2 years was rejected as the committee felt that a period of three years was sufficient for securing the money invested by the person carrying on chit business in any other business. the committee was also of the view that the state government's power to extend the period of two years should be limited to one year only and proviso to sub-clause (2) was accordingly amended. clause 15 : by substitution of a new clause, it was provided that a chit agreement shall not be altered, added or cancelled except with the consent in writing of the foreman and all the subscribers in the chit. the committee felt that since the foreman was party to the agreement, his consent must be obtained before altering the agreement. clause 16 was suitably amended by the committee in order to ensure that there was no mischief in conducting chits by making it obligatory on the foreman to issue notices to all the subscribers and that the draw should be held in the presence of at least two subscribers. clause 18 :21 days' time was granted to the foreman to file the returns instead of 14 days. clause 19 : a new sub- clause (3) was added to enable the subscribers to know the state where a new business is opened by approaching the registrar of that state instead of the registrar of the state where the main office is situated for making any complaints with regard to the conduct of the chit business at the new place of business. clause 20 : sub-clause (1) was amended as the committee was of the view that in order to ensure that the foreman does not utilise the subscriptions so collected for the purpose of depositing the security and also to ensure further that the financial position of the foreman is sound to conduct the chit, he should be required to furnish security before he applies for previous sanction of the state government under clause (4) of the bill. clause 21 : the provisions of sub-clause 1(a) were amended since the committee was of the view that where a foreman has subscribed to more than one ticket, he should be allowed to get more than one chit amount in a chit without discount. clause 22 : sub-clause (2) was amended since the committee felt that the existing clause would cause hardship to the foreman and, therefore, he may be required to make deposit of the prize money in respect of any draw only if it remains unpaid before the date of the next succeeding instalment in a separate account in an approved bank. a new proviso to sub-clause (2) was added to avoid any hardship to the foreman by such contingencies by allowing the foreman to hold another draw in respect of the instalment if the prize amount is not drawn by the prized subscriber for a period of two months from the date of draw. clause 23 : the committee made the necessary amendment, on the representation that inspection of records of the foreman by the registrar should be made permissible not only at the registered office of business but also at the place where the foreman is carrying on business, so that the registrar in such cases will be able to exercise proper control and supervision over the business carried on by the foreman. clause 40 : clause (b) of this clause was amended by the committee since the committee was of the view that termination of a particular chit, as contemplated in part (b) of this clause, should be with the consent of all the non- prized, unpaid prized subscribers and the foreman who is also a party to the chit. clause 66 : the committee was of the view that allowing disputes to be taken to civil courts will cause considerable delay in the settlement of dispute because of the long procedure in the courts and this would particularly go against the interests of the subscribers and hence, sub-clause (3) of the bill was omitted. clause 77 : the committee felt that a provision for punishing the commission of second and subsequent offences should be included and the penalty of imprisonment and fine should be provided for. accordingly, a new clause 77 was added. these clauses in the bill correspond to the respective sections in the act. the other amendments proposed by the committee are of a clarificatory nature and are only consequential, and, therefore, there is no need to refer to them. this report of the select committee, but for a lone dissenting member who was totally opposed to the continuance of chit business, was unanimous. 35. we have made a reference of these recommendations made by the select committee and to the reports of th expert bodies with a view to satisfy ourselves that when parliament enacted the impugned act, it had given its careful consideration to the various aspects of chit fund business, to the various suggestions made by the state governments, by financial institutions, by companies, by co-operative societies and by individuals, in the interests of the subscribers, to the risks of the foreman and the difficulties in complying with certain regulatory measures, as found in the bill and passed the impugned act. almost all the recommendations of the select committee were incorporated in the impugned act as passed by parliament. most of the petitioners had the opportunity of presenting their views before the select committee as could be seen from the report of the select committee to which we have made a brief reference. therefore, we have to examine whether the onus cast on the state to sustain the constitutional validity of the various provisions of the act is discharged by it. 36. the detaining authority, on the material placed before him, arrived at the conclusion tha the detenu (appellant) was indulging in receiving and making payments in india unauthorisedly under instructions from a person residing abroad in violation of the provisions of the foreign exchange regulation act, 1973 and reached his subjective satisfaction that the said unauthorised and illegal transactions carried on by the detenu had affected the foreign exchange resources of the country adversely and hence it was necessary to direct the detention of the detenu by the impugned order. the appellant, having become unsuccessful before the high court, has now approached this court assailing the order of detention on several grounds. but, learned counsel for the appellant confined his argument only on the ground of undue delay caused by the central government in disposing of the representation of the detenu in violation of article 22(5) of the constitution of india. according to learned counsel, the detenu had forwarded his representation dated june 16, 1988, through the superintendent of the central prisons bombay to the detaining authority and the central government and he received the order of rejection dated july 19, 1988 on july 26, 1988 i.e after a period of 40 days from the date of making his representation. a contention based on the delay of 40days in the disposal of the representation was advanced before the high court which for the reasons mentioned in paragraph 3 of its judgment based on the explanations given in the subsequent return dated august 5, 1988, filed by the under secretary ministry of finance government of india, had rejected the same though it was not satisfied with the earlier return of the detaining authority. the explanation given in the subsequent return recites that the representation forwarded by the detenu was received the cofeposa section of the ministry of finance on june 27, 1988, and that after receiving the comments from the sponsoring authority on july 11, 1988 the file was forwarded to the central government. meanwhile the representation forwarded to the detaining authority was rejected on july 11, 1988 itself. the saud fuke was received in the office of minister of state (revenue) on july 12, 1988, but the minister of state was on tour and on his return the representation was forwarded to the finance minister on july 17, 1988, and the file was received back in the cofeposa section on july 19, 1988, and the order of rejection was communicated to the detenu who received it on july 26, 1988. this explanation has been accepted by the high cout. learned counsel for the appellant has vehemently argued before us that there has been undue and explained delay of 11 days between the date of submission of the representation by the detenu to the superintendent of central prisons bombay for transmission to the central government and the date of receipt of the representation by the ministry of finance and this unexplained delay has vitiated the order of detention. 37. it is seen from the impugned judgment that a similar contention was also raised before the high court but that contention has not been properly disposed of. when this contention was urged before us , learned counsel for the respondent sought time for filing an affidavit from the jail superintendent showing the date of communication of the representation o the government. accordingly an affidavit dated march 17, 1989 sworn by the superintendent of prisons, bombay was filed attempting to explain the day that has occasioned in transmitting the representation. the explanation reads thus : 'i say that june 16, 1988, is the date of receipt of the detenu's representation and the said representation was forwarded to the ministry on june 22, 1988. further, i have to submit that on 19th june 1988, there was a holiday being sunday.' 38. from the above explanation it is clear that though the detenu has handed over the representation to the superintendent of central prisons on june 16, 1988, later has callously ignored it and left the same unattended for a period of 7 days and forwarded the same to the government at his pleasure on june 22 1988. the superintendent of central prisons has not given an satisfactory and conniving explanations as to why he has kept the representation with himself except saying the during the period of seven days there was a sunday. 39. this court in abdul karim v. state of west bengal : 1969crilj1446 : 'the right of representation under article 22(5) is a valuable constitutional right and is not a mere formality.' 40. this view was reiterated in sk. rashid v state of west bengal : 1973crilj656 while dealing with the constitution requirement of expeditious consideration of the petitioner,s representation by the government as spelt out from article 22(5) of the constitution observing thus (at page 826 of air 1973 sc) : 'the ultimate objective of this provision can only be the most speedy consideration of his representation by the authorizes concerned for, without its expeditious consideration with a sense of urgency the basic purpose of affording the earlier opportunity of making the representation is likely to be defeated. this right to represent and to have the representation considered at the earliest flows from the constitutional guarantee of the right personal liberty - the right which is highly cherished in our republic and its protection against arbitrary and unlawful invasion.' 41. it is neither possible not advisable to lay down bay rigid period of time uniformly applicable to all cases within period the representation of detenu has to be disposed of with reasonable expedition but it must necessarily depend on the facts and circumstances of each case. the expression 'reasonable expedition' is explained in shabir ahmed v. union of india : [1980]3scr738 : 'what is reasonable expedition' is a question depending on the circumstances of the particular case. no hard and fast rule as to the measure of reasonable time can be laid down. but it certainly does not cover the delay due to negligence, callous inaction, avoidable red tapism and unduly protracted procrastination.' 42. see also vijay kumar v. state of jammu and kashmir : [1982]3scr522 and raisuddin alias babu tamchi v. state of uttar pradesh : 1983crilj1785 . 43. thus, when it is emphasised and re-emphasized by a series of decisions of this court that a representation should be considered with reasonable expedition, it is imperative on the part of every authority, whether in merely transmitting or dealing with it, to discharge that obligation with all reasonable promptness and diligence without giving room for any complaint of remissness, indifference or avoidable delay because the delay, caused by slackness on the part of any authority, will ultimately result in the delay of the disposal of the representation which, in turn, may invalidate the order of detention as having infringed the mandate of article 22(5) of the constitution. 44. a contention similar to the one pressed before us was examined by this court in vijay kumar's case : [1982]3scr522 wherein the facts were that the representation of the detenu therein dated july 29, 1981, was forwarded to the government by the superintendent of jails on the same day by post followed by a wireless message, but, according to the government, the representation was not received by them. thereafter, a duplicate copy was sent by the jail superintendent on being requested and the same was received by the government on august 12, 1981. considering the time lag of 14 days in the given circumstances of that case, although this court overlooked the same allowed the writ petition on the subsequent time lag, it made the following observation (at page 1028 of air 1982 sc) : 'the jail authority is merely a communicating channel because the representation has to reach the government which enjoys the power of revoking the detention order. the intermediary authorities who are communicating authorities have also to move with an amount of promptitude so that the statutory guarantee of affording the earliest opportunity of marking the representation and the same reaching the government is translated into action. the corresponding obligation of the state to consider the representation cannot be whittled down by merely saying that much time was lost in the transit. if the government enacts a law like the present act empowering certain authorizes to make the detention order and also simultaneously makes a statutory provision of affording the earlier opportunity to the detenu to make his representation against his detention, to the government and not the detaining authority of necessity the state government must gear up its own machinery to see that in these cases the representation reaches the government as quickly as possible and it is considered by the authorities with equal promtitude. any slackness in this behalf not properly explained would be denial of the protection conferred by the statue and would result in invalidation of the order.' 45. reverting to the instant cas, we hold that the above observation in vijay kumar's case : [1982]3scr522 will, squarely be applicable to the facts herein. indisputably the superintendent of central prisons of bombay to whom the representation was handed over by the detenu on june 16, 1688 for mere onward transmission to the central government has callously ignored and kept it in cold storage unattended for a period of 7 days and as a result of that, the representation reached the government 11 days after it was handed over to the jail superintendent. why the representation was retained by the jail superintendent was not at all been explained in spite of the fact that this court has permitted the respondent to explain the delay in this appeal, if not before the high court. 46. in our view, the supine indifference, slackness and callous attitude on the part of the jail superintendent who unreasonably in transmitting the representation as an intermediary, had ultimately caused undue delay in the disposal of the appellant's representation by the government which received the representation 11 days after is was handed over to the jail super indent by the detenu. this avoidable and unexplained delay has resulted in rendering the continued of the appellant illegal and constitutionally impermissible. 47. we, therefore, allow this criminal appeal by setting aside the judgment of the high court, quash the impugned detention order and direct the detenu to be set at liberty forthwith.