Nidhi Company

Is it Possible to Convert a Nidhi Company into a Full-Fledged NBFC Company?

calendar28 Jan, 2020
timeReading Time: 5 Minutes
NBFC Company

The concept of Nidhi Company is getting trendy these days as it is the cheapest way to start a Non-Banking Financial Company or NBFC. NBFC’s in India are governed by the Reserve Bank of India(RBI). A net worth of at least two crores is needed to start the NBFC Finance Business in India. However, with the capital of Rs.5 lakh, one can start a Nidhi Company. Many successful Nidhi Companies desire to upgrade and convert Nidhi Company into full-fledged NBFC (Non-Banking Financial Company). Here the question arises, whether a Nidhi Company can be converted into a full-fledged NBFC? The answer to this question is ‘no’. A Nidhi Company cannot be converted into an NBFC or Non-Banking Financial Company, because it is neither beneficial nor easily tenable. In this article, we have explained the procedure to upgrade your business into a full-fledge NBFC Company.

What is Nidhi Company and NBFC Company?

Nidhi Company

Nidhi Company is a type of NBFC governed by Section 406 of the Companies Act, 2013. The Reserve Bank of India (RBI) exempts Nidhi Company Registration and other related compliances. A  Nidhi Company is allowed to deal only with its members. It must comply with the Nidhi Rules, 2014. Since it is created for the mutual benefit of its members, it is also known as Mutual Benefit Finance Company. This mutual benefit arises from the borrowing and lending of the group.

NBFC Company

A Non-Banking Financial Company or NBFC is regulated by the Reserve Bank of India (RBI[1]). Its principal business is of receiving deposits under any scheme in one lump sum or in installments by way of contributions. NBFC’s are strictly monitored by RBI. RBI issues different rules and regulations from time to time for NBFCs.

Why can Nidhi Company not be upgraded into NBFC?

As prescribed under the Nidhi Rules, 2014, a Nidhi Company is not permitted to engage in any business activity other than the provisions provided in the rules. Hence, the Nidhi Rules clearly denies permission to Nidhi Company to enter into the business of other NBFC’s. Further, there is a basic difference between Nidhi Company and other NBFCs which will give a clear understanding as to why a Nidhi Company cannot be upgraded into full-fledged NBFC.

  • Capital Requirement
  • Registration Requirement
  • No issuance of preference shares
  • No Current Account
  • Can deal only with its members
  • No Branch before three years
  • No service charge or membership

Capital Requirement

The minimum net worth required for Nidhi Company is Rs. 5 lakh While for other NBFC’s it is minimum Rs. 2 crores.

Registration Requirement

A Nidhi Company, unlike other NBFC’s, does not require prior RBI Registration.

No issuance of preference shares

Nidhi Companies are restricted to raise funds by way of preference share capital or debentures because it is permitted to take deposits from the general public.

No Current Account

A Nidhi Company cannot open the current account with its members.

Can deal only with its members

Borrowing or lending money is made only with its members in a Nidhi Company.

No Branch before three years

A Nidhi Company cannot open branch until it has earned a profit for three consecutive years. This is a mandatory condition which cannot be compromised in any circumstances.

No service charge or membership

A Nidhi Company cannot charge service charge on the issuance of shares from the members. However, the Nidhi Rules has permitted it to charge processing fees on loans.

Read our article:What is Nidhi Company? Know it’s Incorporation Procedure

Can a Nidhi Company apply for RBI Registration if it fulfils all requirements for NBFC?

As discussed earlier, Nidhi Rules does not allow a Nidhi Company to enter any other business other than what it has been approved. The only possible way available is the discontinuation of the business of Nidhi Company permanently. However, Nidhi Company can be converted into NBFC after changing the names of the business, the objective of Memorandum of Association or MOA and fulfilling other legal obligations. It is practically neither advised nor is it feasible to convert or upgrade a Nidhi Company into an NBFC.

How can a Nidhi Company be upgraded or converted to a full-fledged NBFC?

The simple answer to this question is to form a new Company and leave the Nidhi Company untouched. It is advised to continue the business of Nidhi Company without any abruption. It is better to build an expansion plan and raise the standards.

The procedure to form and expand the existing Nidhi business is mentioned below:

  • Choosing the type of NBFC
  • Creating a New Company (Private or Public)
  • Minimum Investment and Technical parameters
  • Applying for NBFC license
  • Approval of RBI License

Choosing the type of NBFC

The first thing to do is to find out the type of NBFC business you want to enter. It is not possible to do everything with a single NBFC Company. There are numerous types of NBFC’s like Micro Finance Company, Investment and Credit Company etc. The Company type must be chosen wisely as every other step are based on the choice of Company.

Creating a New Company – It can be Private as well as Public

The second step is to create a new type of Company. An NBFC can be private as well as public. It must be decided based on the number of members and the capital to be invested in the business.

Minimum Investment and Technical parameters

After Registration of NBFC Company, invest a minimum capital amount as per the requirement of the chosen NBFC type. For Example, if you want to start a Micro Finance Company, then a minimum Rs. 2 crores should be invested. Apart from the capital part, an influential director’s profile must be created. Since the NBFC deals directly with the public, RBI takes all the cautions before issuing the license.

Applying for NBFC license

After fulfilling the minimum requirement, an application is filed before RBI for its approval in its regional office. The RBI may take around six months to reply.

Approval or rejection of RBI License

After the due time, RBI may approve or reject the application. In case of rejection, the reasons for refusal should be looked at, and the party applying must work on it. RBI approves the completed form.

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Nidhi Companies have several limitations. It also is seen as the soaring concept in India. However,  Nidhi Company is still a puzzle, and it is better to seek experts help before starting a Nidhi Company.

On the other hand, NBFC’s offer a wide range of financial services such as loans, chit funds etc. NBFC’s are termed as a game-changer for our country’s economy. Still, no procedure has been prescribed by the Government to convert a Nidhi Company into an NBFC. A Nidhi Company can lend only secured loan to its members, whereas NBFCs can provide secured as well as unsecured loans to its customers. There are various restrictions in the functioning of a  Nidhi Company. Hence it is suggested to the owner to opt for an NBFC rather than a Nidhi Company if they fulfil all the criteria to register as an NBFC.

Read our article:NBFC Registration – Know the Entire Incorporation Procedure

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