What are Nidhi Companies? How are Nidhi, NBFC and RBI related? What are the challenges faced by Nidhi companies in India? Read further to know more.
To achieve the goals of openness & investor friendliness in the business environment of the nation, the Central Government recently modified the regulations related to Nidhi corporations under the Companies Act, 2013, and the Rules.
Nidhi firms were founded to encourage members to practise thrift and save money, as well as to accept deposits and lend money to them only for their mutual advantage.
What are Nidhi Companies?
- A Non-Banking Financial Company (NBFC) recognised under section 406 of the 2013 Companies Act is the Nidhi Company. It was established to lend and borrow money from its members.
- Nidhis are also categorised as Non-Banking Financial Companies because they mostly operate in the unorganised money market.
- They are also referred to as Mutual Benefit Companies, Benefit Funds, Mutual Benefit Funds, and Permanent Funds. They are governed by the Ministry of Corporate Affairs, which has the authority to provide them with instructions about their deposit acceptance operations.
- Before the Corporations Act of 2013, Nidhi already existed. These businesses primarily operate in the southern region of the nation. Tamil Nadu is home to 80% of Nidhi businesses.
- Its name should end with “Nidhi Limited” since it is registered as a public business.
- Nidhi corporations can only have individual members, and they are not permitted to lend money to other businesses.
- Some examples of Nidhi companies include Maben Nidhi Ltd, Mini Muthoot Nidhi kerala Ltd etc
Restrictions for Nidhi Company
A Nidhi Company shall not:
- Conduct chit fund, hire purchase, leasing, insurance, or securities acquisition operations by any body corporate.
- Issue debt instruments or preference shares.
- Open any current account with its participants.
- Acquire any company by way of purchase of securities or controlling the composition of directors unless approval has been taken from the regional director.
- Engage in any activity other than the name-giving business of borrowing and lending.
- Other than its members, accept deposits from and lend to anyone else.
- Accept deposits from or extend credit to any corporation.
- Engage in any type of cooperation agreement when it comes to borrowing or lending.
- Send out a solicitation for the deposit in an advertisement.
- Pay any commission or incentive for obtaining member deposits or for approving loans.
- Impose a fee for the issuance of its shares or only issue up to 10 shares per depositor.
- Grant loans to members who exceed the cap by the 2014 Nidhi guidelines.
- Interest rates that are higher than 7.5 per cent.
- Not declare a dividend that is higher than 25%.
Nidhi Vs NBFC Vs RBI
The NBFC Company is a business that was created under the Companies Act of 2013 to offer consumers long-term and specialised credit facilities. When it comes to supplying the financial needs of businesses and the less fortunate members of society, NBFC functions much like a bank. Without acquiring an NBFC registration from the RBI, NBFC cannot start its business.
Nidhis are under one kind of NBFC, hence RBI has the authority to provide them with instructions on their deposit acceptance activities. However, the RBI has exempted the notified Nidhis from the basic requirements of the RBI Act and other directives applicable to NBFCs in recognition of the fact that these Nidhis only interact with its shareholder-members.
Mandatory requirements to form/incorporate a Nidhi company
- In contrast to other forms of financial companies like NBFC, which need an RBI licence to launch, Nidhi company registration is less complicated and more straightforward.
- Should have a minimum paid-up capital of Rs. 5 lacs and be a public company.
won’t be issuing preference shares.
- Shall include “Nidhi Limited” in its name as a final word.
- A minimum of three directors must be Nidhi Company members.
- 7 shareholders are required.
- The Nidhi Rules, 2014 govern Nidhi institutions. As a result of its incorporation as a public limited company, they are required to abide by two sets of rules: the Nidhi rules of 2014 and the public limited company requirements under the Companies Act of 2013.
- The RBI has specifically exempted this category of NBFC in India from complying with its basic provisions, including registration with the RBI, hence no clearance from the RBI is required to register the company.
- Every Nidhi organisation must make sure that it has 200 members or more within a year of its founding.
New Amended Rules
The government has altered the regulations governing Nidhi enterprises to safeguard the public’s interests, making certain firms’ prior declarations necessary before they begin receiving deposits.
- Registration: The entity must initially register as a public limited company, which has higher disclosure obligations than a private limited company, to become a Nidhi.
- Declaration: A public company that has a share capital of one million must first apply to the Union government to be recognised as a Nidhi.
- The Central Government may proclaim a company a Nidhi company in the official gazette after receiving an application from a public corporation that is certain the company has complied with all rules.
- According to Section 406 of the revised Firms Act and the Nidhi regulations, Nidhi companies must submit Form NDH-4 requests to the Central Government for updates to their status as Nidhi Companies.
- Membership: This can be accomplished by applying within 120 days of the organization’s creation that demonstrates a minimum membership of 200 and net owned funds of 2 million.
- The promoters and directors of the company must adhere to the regulations’ definition of a fit and proper person.
- Concept of deemed approval: In other words, approval would be assumed granted if the company does not get word of the application’s outcome within 45 days of applying.
- No Loans to companies: It is only permitted to have individual members and cannot lend money to businesses.
- Very Easy formation: The process of forming a Nidhi firm is relatively straightforward, and it is considerably less complex than forming an NBFC or another type of financial institution.
- Cost-Efficient Registration: The cost of signing up with Nidhi Company is reasonable. You can invest the Rs 5,00,000 lakh required as minimum capital for Nidhi Company registration within two months of registering your Nidhi Company.
- No RBI Regulations – less compliance: Nidhi Company is not required to adhere to strict compliances by the RBI.
- More Certainty in Nidhi company: Everyone in India enjoys saving money, from men in their 60s to toddlers as young as six. Additionally, the company’s major goal is to encourage its members to save regularly, therefore it is certain to remain in business as long as its members continue to do so.
- Less level of Risk – Non-payment loans: It is the most secure method of loan distribution, and the rates charged on loans to members are extremely cheap when compared to those charged by other lenders, further increasing member savings.
- Net owned fund- Invest one gets twenty: The owner’s capital investment in the company to raise funds is referred to as the net owned fund. You invest one rupee and raise the deposit of twenty, according to the net owned fund ratio of 1:20.
Challenges in India
- Member specificity: As previously mentioned, Nidhi Companies can only accept deposits from and lend money to its shareholders and members.
- No outsider can deposit money: This will restrict the amount of money a Nidhi Company can raise. The amount received by Nidhi Companies from their members, if less, restricts the Company’s ability to lend money to its members because Nidhi Companies does not accept deposits from parties other than its members and shareholders.
- limited lending capacity: If a Nidhi Company’s lending capability is constrained, the entire purpose of the Nidhi Company’s establishment is defeated.
- No advertisement: Nidhi Companies are prohibited from publicising their depositing plans, unlike other financial institutions. Only among its members are Nidhi Companies permitted to run advertisements.
- Single ownership: Nidhi Companies are only allowed to conduct lending and borrowing activities under their names only.
- Time boundness: A Nidhi is only permitted to operate its deposit plans for a maximum of five years.
Nidhi Companies as well as some limits connected with it, it may be determined that Nidhi Companies’ advantages unquestionably outweigh their disadvantages. Nidhi Companies have recently been popular in the financial markets due to the range of advantages they offer.
Even those with middle-class incomes can afford the capital needed to form a Nidhi. Furthermore, compared to other financial institutions, the registration process for a Nidhi Company is extremely simple and necessitates less paperwork.
Article written by Aseem Muhammed