NIDHI Companies

Description

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Context

Recently, Central Government amended Nidhi Rules, 2014 to safeguard the interest of general public.

About Nidhi Company

Nidhi Company is a type of Non-Banking Financial Company (NBFC) recognized under section 406 of the Companies Act, 2013. It is formed to borrow and lend money to its members.
It inculcates the habit of saving among its members and works on the principle of mutual benefit.
They are also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company. They are regulated by Ministry of Corporate Affairs, which is also empowered to issue directions to them in matters relating to their deposit acceptance activities.
Nidhi companies existed even prior to the existence of companies Act 2013. These companies typically operate in the southern part of the country. 80% of Nidhi companies are located in Tamil Nadu.
Nidhi companies are governed by Nidhi Rules, 2014. They are incorporated in the nature of Public Limited company and hence, they have to comply with two set of norms, one of Public limited company as per Companies Act, 2013 and another is for Nidhi rules, 2014.
No RBI approval is necessary to register the company, as RBI has specifically exempted this category of NBFC in India to comply its core provisions such as registration with RBI etc.
It is registered as a public company and should have “Nidhi Limited” as the last words of its name.
A public company incorporated as a Nidhi with a share capital of Rs 10 lakh should first get itself declared as a Nidhi by applying in form NDH-4 with a minimum membership of 200 and a Net Owned Fund (NOF) of Rs 20 lakh within 120 days of its incorporation.

Mandatory requirements to form/incorporate a Nidhi company

Should be a public Company with minimum paid up capital of Rs. 5 lacs.
Shall not issue preference shares.
Shall have last words “Nidhi Limited” as a part of its name.
Minimum 3 Directors which shall mandatorily be member of Nidhi Company.
Minimum 7 shareholders.

Mandatory requirements to be adhered after incorporation of Nidhi Company

Within a period of one year of incorporation, the Nidhi Company has to ensure the following compliances:

Minimum 200 members
Net owned funds (“NOF”) of at least Rs. 10 lakhs. (Net owned fund means the aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet)
Ratio of NOF to deposits of not more than 1:20.
Unencumbered term deposits of not less than 10% of the outstanding deposits (shall be discussed later in this article).

Restrictions for Nidhi Company

A Nidhi Company shall not:

Carry on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities by any body corporate.
Issue preference shares or debt instruments.
Open any current account with its members.
Acquire any company by way of purchase of securities or controlling the composition of directors unless approval has been taken from the regional director.
Carry on any business other than business of borrowing and lending its own name.
Accept deposits from and lend to anyone else, apart from its members.
Pledge any of the assets lodged by its members as security.
Take deposits from or lend money to anybody corporate.
Enter into any partnership arrangement in its borrowing or lending activities.
Issue advertisement for soliciting the deposit.
Pay any brokerage or incentive for mobilizing deposits from members or for granting loans.
Levy service charge for issue of its shares or issue less than 10 share per deposit holder.
Grant loans to members exceeding the ceiling as mentioned in the Nidhi rules, 2014.
Charge rate of interest exceeding 7.5%.
Not declare dividend exceeding twenty five per cent.

Deposits and its Acceptance

A Company shall accept deposits only on compliance with the following conditions:

Shall not accept deposits exceeding twenty times of its NOF.
Fixed Deposits shall be accepted for a period of minimum 6 months to maximum 60 months.
Recurring Deposits shall be accepted for a period of minimum 12 months to maximum 60 months.
Unnumbered Term Deposits: Every Nidhi Company shall invest and continue to keep invested, in unencumbered term deposits with a scheduled commercial bank (other than a co-operative bank or a regional rural bank), or post office deposits in its own name an amount which shall not be less than ten percent of the deposits outstanding at the close of business on the last working day of the second preceding month. Further, in case of any unforeseen emergency, the limit of 10% can be withdrawn only after prior approval of Regional Director.

Rules relating to Director

The Director shall not hold office for a term up to ten consecutive years.
Shall be eligible for re-appointment only after the expiry of two years from the date of expiry of ten years period.

New Amended Rules

To protect the interests of the public, the government has amended rules governing Nidhi companies whereby its prior declaration will be mandatory for certain entities before they start accepting deposits.
Now, public companies desirous to function as Nidhis must obtain prior declaration from the central government before accepting deposits.
On receiving an application of a public companyif fully convinced that the company has complied with all the requirements under the Rules, then the Central Government may declare the company as a Nidhi company in the official gazette.

Nidhi Vs NBFC

NBFC Company

NBFC Company is the company incorporated under the Companies act 2013 intending to provide a long term and specialized credit facilities to the customers. NBFC works similarly as the bank in meeting the financial needs of the corporate as well as the weaker section of the society. NBFC cannot commence the business without obtaining a NBFC registration from the RBI.

Requisites for NBFC

NBFC shall be incorporated under the Companies Act,2013 or any other previous Act.
Minimum net owned fund Rs 2 crore.
The business activity of NBFC should be defined under Section 45I(a) of the RBI Act,1934[1].