What are Nidhi Companies ?

Section 406 of the Companies Act 2013 and the  Companies (Nidhi Companies) Rules, 2014 which governs The Law and the  Procedure for Nidhi Company. They borrow and lend money to their members and also provide with the Fund Benefits and Mutual Fund Benefits.

Nidhi” means a company which has been incorporated  with the object of:

-Cultivating the habit of thrift and also of savings among its members,

– receiving of the deposits from, and also lending to, its members only, for their mutual benefit, and Which also complies with the rules of Chapter XXVI of Companies Rules, 2014.

The companies that are doing Nidhi business, viz. borrowing from its members and also lending to its members only, are thus known under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds, and the  Mutual Benefit Company.

Nidhi company is, however, more popular in South India and they are highly localized single office institutions. They are the mutual benefit of the societies because their dealings are however restricted only to the members, and thus its membership is also limited to the individuals. The principal source of funds is thus the contribution of the members. The loans are also given to the members at relatively reasonable rates for purposes such as house construction or repairs and thus they are generally secured. The deposits that are mobilized by Nidhi’s are not much when it is compared to the organized banking sector.

Since Nidhi’s come under one class of NBFCs, RBI is thus empowered to issue the directions to them in the matters that are relating to their deposit acceptance activities. However, in recognition of the fact that these Nidhi’s deal with their shareholder-members only, RBI has also exempted the notified Nidhi from the core provisions of the RBI Act and also other directions that apply to the NBFCs. As of date (February 2013), RBI also does not have any specified regulatory framework for Nidhi’s.

The following are some of the restrictions that Nidhi companies are subject to under Nidhi Rules, 2014. Thus as per Rule 6 of the Nidhi Rules, 2014, a Nidhi Company shall NOT:

• carry on the business of any chit fund, hire purchase finance, leasing finance, insurance, or the acquisition of securities which are  issued by any body corporate;
• issuing of either preference shares, debentures, or any other debt instrument either  by any name or in any form whatsoever;
• open any of the current accounts with its members;
• acquire another company by the purchase of securities or to  control the composition of the Board of Directors of any other company in any manner whatsoever or either enter into any arrangement for the change of its management, unless it has passed  a special resolution in its general meeting and also that is has obtained the previous approval of the Regional Director which have its  jurisdiction over such Nidhi;
• to carry on any business other than the business of borrowing or lending in its own name: Provided that Nidhi’s which have adhered to all the provisions of these rules may also provide locker facilities on its rent to its members and it is subject to the rental income from such facilities which do not exceed twenty percent of the gross income of the Nidhi at any point of time during a financial year.
• To accept the deposits from or lend to any person, other than its members;
• To pledge any of the assets that are lodged by its members as security;
• To take deposits from or to lend money to anybody corporate;
• To enter into any partnership or any arrangement in its borrowing or of the lending of the activities;
• Also to issue or to cause to be issued any of the advertisement in any form for soliciting or deposit: Provided that a private circulation of the details of the fixed deposit schemes among the members of the Nidhi carrying the words “for private circulation to members only” shall not be considered to be an advertisement for soliciting deposits.
• Pay any brokerage or an incentive for the mobilizing of deposits from its members or for the deployment of funds or the granting loans.

Nidhi Companies Registration

To complete Nidhi Company Registration in India, the first step is thus to incorporate a Private Limited Company, under the Companies Act, 2013. Hence, a minimum of three Directors, and also seven shareholders would be required to start the Limited Company incorporation process. During the process of incorporation of the Nidhi company, some care must be taken to ensure that the object of the Limited Company which is mentioned in the Memorandum of Association is thus that of cultivating the habit of thrift and savings among its members, receiving of deposits from, and also lending to, its members only, for their mutual benefit.

However, post-incorporation of the Limited Company, within a period of one year from the commencement, the Nidhi Companies must thus  meet all of the following criteria which is:

• not having to less than two hundred members (shareholders);
• Having Net Owned Funds (NOF) of ten lakh rupees or more;
• Having unencumbered term deposits of not less than ten percent of the outstanding deposits; and
• Also of having a ratio of the  Net Owned Funds to deposits of not more than 1:20.

If Nidhi Companies, however, satisfies the above conditions that are required for operating as  Nidhi Companies, the company shall within ninety days from the close of its first financial year after its incorporation and where it is applicable, the second financial year, file a return of the statutory compliance in Form NDH-1 which is duly certified by a practicing CA/CS/CWA along with the requisite fees.

Thus, in the case at the end one year from the commencement of the Nidhi Companies they however not able to meet the above requirement, the Company may within thirty days from the close of the first financial year, apply to the Regional Director in the  Form NDH-2 for the extension of time.

If even after the second financial year the Nidhi Companies are not able to meet the requirements for  Nidhi Companies, then the Nidhi Companies shall thus not accept any of the further deposits from the commencement of the second financial year till it, however,  complies with the provisions of operating as  Nidhi Companies and thus be liable for any penal consequences.

Nidhi however in the Indian context/language means “Treasure”. However, in the Indian financial sector, it refers to any mutual benefit of the society that is notified by the Central / Union Government as  Nidhi Companies. They are thus created mainly to cultivate the habit of thrift and savings among its members.

For more information regarding Nidhi company registration, you can visit Company registration Online.

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