Things to consider before starting a Nidhi Company

Nidhi Company is a non-banking financial business structure that performs the functions of lending and borrowing of money within its members. Before registering a Nidhi Company it is important for you to understand certain important facts about it.

With increasing complexities in the investment sectors, the small households find it hard to invest their money and borrow money. To assist these households, the concept of Nidhi Company was introduced. The word Nidhi traditionally means treasure. They are the non-financial business vehicle that is incorporated with objectives of accepting and lending money to its members only.

This business structure is more popular in southern areas of India and is also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds,and Mutual Benefit Company etc. The basic motive behind the formation of Nidhi Company is to develop the habit of thrift and savings among their members. With this article, we will discover some essential facts about the Nidhi Company.

What is Nidhi Company?

Nidhi Company is a business structure incorporated under section 20A of the Companies Act, 1956 (Section 406 of the new Companies Bill 2012, as passed by Lok Sabha) and is regulated by Ministry of Corporate Affairs (MCA). This company is exclusively formed for developing the habit of thrift of savings amongst its members only for their mutual benefit. The main source of funding for a Nidhi company isa contribution from the members. In order to provide benefits of membership the loans are granted at relatively reasonable rates for purposes such as house construction or repairs and are generally secured. As the concept of Nidhi Company is quite distinct from many other companies there are certain essential points that should be kept in mind before becoming its member. Below we have listed out some of those facts-

Incorporation

• Nidhi Company is incorporated as a Public Limited Company.

• The objectives of Nidhi Company can only be of cultivating the habit of thrift and savings amongst its members, receiving deposits from and lending to its members only for their mutual benefit.

• It is mandatory for Nidhi Company to have at least 200 members, within one year of its incorporation.

• Further, within 1 year of its incorporation, the Net Owned Funds of Rs 10 lac or more. The ratio of Net Owned Fund to Deposit of not more than 1:20.

Restrictions on Nidhi Company

A Nidhi is prohibited from undertaking any of the activities stated below-

• To undertake the business of chit fund, hire purchase, leasing finance, insurance or acquisition of securities.

• To issue preference share or debentures.

• To open current account of the member.

• To accept deposit or lend money to any person other than its members.

• To issue any kind of advertisement.

• To enter into any agreement or pay brokerage to solicit any kind of deposits.

• Pledging any of the assets submitted by its own members as security.

Conditions to Deposit

The conditions that every Nidhi is required to comply with for granting loans are as follows-

The number of deposits accepted by Nidhi company should not exceed 20 % of its net owned funds.

The amount of fixed deposit can be accepted for minimum 6 and maximum 60 Months while the recurring deposits can be accepted for minimum 12 month and maximum 60 months.

The interest rate on deposit shall never exceed 2 % above the rate offered by the nationalized bank.

Branches

• The branches of Nidhi Company can only be opened when it has earned a net profit after tax continuously during three preceding years.

• After the period of three years is elapsed the Nidhicompany can open up to 3 branches in the district.

• Nidhi Company can only open its branches when it has duly submitted a financial statement and the annual return with the Registrar.

Loans

For granting the loans followings limits are prescribed against the deposit made-

• Loan amount 2 lakh – If the deposit is 2 Crore

• Loan amount 75 lakh – If the deposit is more than 2 Crore but less than 20 crore

• Loan amount 12 lakh – If the deposit is more than 20 Crore but less than 50 crore

• Loan amount 15 lakh – If the deposit is more than 50 Crore.

This is a complete list of some of the aspects of Nidhi Company. However, if you still have any doubts, feel free to get in touch with us.

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