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Nidhi Company: Compliance Norms Reinforced by Government

Nidhi Company: Compliance Norms Reinforced by Government

Saturday March 28, 2020,

9 min Read

The characteristic that differentiates the Nidhi Company from other companies or NBFCs etc. is that the Nidhi deals with the deposits from and loans to its members, i.e. shareholders only. Moreover, it works for the mutual benefits of its members. Consequently, certain exemptions have been offered to these companies in respect of the annual compliances and taxation.

In India, Nidhi Companies are formed, governed, and regulated by Section 406 of the Companies Act of 2013, the Companies (Nidhi Companies) Rules, 2014, and the Chapter XXVI of the Companies Rules, 2014.

The aim of incorporating a Nidhi Company is to boost savings as well as prudence amongst its members. In order to fulfil this objective of cultivating the practice of saving and frugality amongst its members. Nidhi companies are permitted to take a deposit from their members and lend to their members only. In other words, the funds paid to a Nidhi company come only from its members, i.e. shareholders and are to be used only by the concerned shareholders of the Nidhi Company. The name “Nidhi” in the Nidhi Company means “treasure”, and it invents from the Hindi vocabulary.

Further, Nidhi Company is a certain class of NBFC (Non-Banking Financial Services). Though not directly regulated and governed by the RBI (Reserve Bank of India), still RBI has powers and autonomy to issue directives for them concerning their deposit acceptance activities. Furthermore, because these Nidhi companies deal with their shareholder-members only, they have been granted exemption from the core provisions of the RBI (Reserve Bank of India) Act, 1934 and other directions applicable to these NBFCs. Hence, Nidhi Company is a perfect legal organisation to take a deposit from and lend to a detailed group of people.

Key Points to remember before Incorporating a Nidhi Company

Requirement before the Incorporation a Nidhi Company –

  1. Minimum number of shareholders- 7
  2. Minimum number of Directors -3
  3. The minimum capital requirement is of Rs. 5 lakhs
  4. DIN for Directors

Requirement after the Incorporation a Nidhi Company –

  1. The minimum number of shareholders required for incorporation must be 200 at the end of the first year
  2. The Net owned fund must be more than Rs. 10 lakhs
  3. The ratio for the Net Owned Funds to deposit must be more than 1:20
  4. Unencumbered deposits must be more than 10 per cent of the outstanding deposits

Advantages in starting a Nidhi Company

The ultimate goal behind establishing a Nidhi Company is to boost its members, i.e. shareholders, to save so that they can easily meet their financial requirements and necessities arising from time to time smoothly. By being prudent, they become self-sufficient and would be able to meet all the future expenses that may come up. And the privileges and benefits of incorporating a company registered as Nidhi do not end there.

There are many more advantages attached to the formation of a Nidhi Company. Some of them are listed below -

  1. Liability is Limited - Liability of the Directors and shareholders of a Nidhi Company is limited. If in case the concerned company suffers from any kind of loss or faces financial distress in the course of its business activity, then the personal assets of any of the members or director s are not at risk of being seized by the banks, creditors, and government.
  2. Fewer Regulations - Nidhi companies are governed and regulated by the provisions mentioned under the Nidhi Rules, 2014. The Central Government acts as an apex regulating authority for controlling its activities and operations. The guidelines imposed by the Reserve Bank of India on Nidhi's are very few.
  3. Better Credibility - Nidhi companies enjoy better credibility as opposed to any other members-based organisations such as the Trusts, Cooperative Societies or NGOs.
  4. Better Option for Savings - The main aim behind the incorporation of a Nidhi Company is to boost the habit of saving among the members of the concerned Company. This is how the Nidhi company accomplishes the other goal of its registration of being mutually beneficial. Further, the Nidhi Companies are to established to lend and borrow money to and from its shareholders or members only.
  5. Easy Access of the Public Funds - The loans offered by the Nidhi Company come at a cheaper rate as compared to the loans offered by banks and other NBFCs (Non-Banking Financial Institution). For its shareholders, the process of acquiring the loan and customised services are much more easy, convenient and quicker.
  6. Ease of Fund - Nidhi Company, is the safest and the cheapest way out of attracting deposits from the general public. The concerned company just need to take them as registered members.
  7. Micro Banking – The Nidhi company, provides banking services to the rural and remote public of India which still is based in the far-off locations and is, henceforth, devoid of accessing finance from the national banks and NBFCs.
  8. Better Credit Co-operative Society - Nidhi Company, is a close substitute for the credit co-operative society. And, thus, it is more preferred by the small financer. Further, once a Nidhi company has been duly registered, all the members can easily avail of all the benefits of the credit co-operative society.
  9. Simple Processing - Borrowing and lending to the known persons, belonging to the same cluster, is comparatively less complicated than dealing with the banks, where the procedure is set, impersonal and fixed.
  10. Easy Registration Process - The process to register Nidhi Company with Enterslice is comparatively simple and transparent in comparison to others. As, in this case, the concerned company does not require any license from the Reserve Bank of India. The concerned person is just required to incorporate his company as a public limited one with the Ministry of Corporate Affairs.
  11. Single Regulatory Body - After the Amendment in the Companies Act, 2013, Nidhi Companies are now overseen and regulated by Nidhi Company Rules.
  12. Low Capital Requirement – the Ministry of Corporate Affairs (MCA) directs that the minimum capital requirement for incorporating a Nidhi Company is of Rs. five lakhs. And, within the period of one year, the said capital has to be raised up to at least Rs. ten lakhs. Further, the Fees, DIN, DSC and Other Expenses cost approx. Rs. 25, 000 -30,000. These are inclusive of Government fees that differ from one State to another State.
  13. Fulfilling the necessities of Lower and Middle-income groups - Nidhi Companies play a significant role in meeting the needs and demands of the lower and middle-income groups by offering them financial help without any complex formalities and documentation.
  14. Easier Eligible - People earning minimum wages and belonging to the lower strata are generally unable to acquire loans from the traditional banks because of their highly set eligibility criteria. For them, the option of a Nidhi Company is good in order to obtain finance because of fewer compliances and conditions.
  15. No External Involvement - Nidhi Companies obtain funds from their members, i.e. shareholders and further offer loans and help to their members only. All the transactions concerned are done within this group only. So, there is no scope of any external factor which will affect the working of these companies. The investors or members themselves oversee and regulate the operations of the Nidhi Company.
  16. Separate Entity - Nidhi Company enjoys the status of a separate legal entity that means it can easily acquire assets and incur debts in its own name.

12 Things to know about the Nidhi Rules 2014

As per rule 6 of the regulations cited in the Nidhi company rules, 2014, the following listed activities are prohibited -

  1. Carry on the business of leasing finance, acquisition of securities or chit fund
  2. To issue preference shares, debentures or any other debt-related instruments
  3. Open a current account with its members, i.e. shareholders
  4. Acquire another company just by purchasing securities of the concerned company
  5. Carry on any other business activities other than the borrowing and lending to its members
  6. Accept deposit from any other person who is not its member
  7. Lending or accepting the deposit from a company
  8. Enter into a partnership business for the borrowing or lending activities
  9. Issue advertisements for the soliciting deposits
  10. Pledging the assets of its members in order to keep them as a security
  11. Pay commission or incentive for the mobilisation of the deposits

Compliance Norms Reinforced by Government

Investors asked to verify the status of Nidhi company

The Ministry of Corporate Affairs (MCA) has tightened and reinforced the compliance norms concerning Nidhi companies, a type of non-banking financial companies (NBFCs), which are established to borrow and lend money only among its members, as per a report in the leading news portal named Financial Express. The ministry has advised the investors to verify the status of a concerning Nidhi company from the notification issued in the official gazette by the Centre Government before making any kind of investment or deposit. Further, the central government has also amended the provisions concerning to the Nidhi companies under the Companies Act, 2013 which now needs Nidhi firms to apply to the Central government for the updating their standing and declaration as a Nidhi company in the Form NDH-4. Lastly, the time frame for this concerned exercise is constrained to one year starting from the date of incorporation or within nine months of the Nidhi Amendment Rules, 2014 whichever is later.

The Companies incorporated as Nidhi under the Companies Act, 2013 on or after the August 15, 2019, will have to apply within the period of 60 days of the expiry of the first year from the date of incorporation or the extended period.

Mandatory Compliance for Nidhi Company

Following are the mandatory compliances concerning Nidhi Company –

  1. NDH 1 - The Nidhi Company is needed to submit the list of members within the period of ninety days from the end of every financial year.
  2. NDH 2 - The Company can now request the Ministry of Corporate Affairs (MCA) for the extension in the case Nidhi Company is not able to add two hundred members in a year.
  3. NDH 3 - Together with the above forms, a half-yearly return is also needed to be filed in the Form NDH 3.
  4. Registrar of Companies’ Annual Returns - It is obligatory for a Nidhi Company to file its annual return with the MCA (Ministry of Corporate Affairs) by way of Form MGT-7.
  5. Profit Loss and Balance sheet - The financial statements and all the other related documents are needed to be submitted in the Form AOC-4.
  6. Income tax Returns (ITR) - Nidhi Company is needed to file annual returns by the 30th September of the following financial year.