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Shailza Sharma
| Updated: 15 Feb, 2020 | Category: Company Registration, Nidhi Company

Operating Nidhi Company; Know about the Restrictions on Nidhi Company

Operating Nidhi Company

In simple words, Nidhi Company means Fund, Finance or Treasure. The main object of Nidhi company incorporation is to grow the habit of savings amongst its members. However, there is no separate Nidhi Company registration required to be done under RBI regulations, but RBI has imposed certain restrictions over Nidhi Company.

 Here, we will discuss restrictions imposed by RBI on Nidhi Company.

What is Nidhi Company?

According to subsection 1 of section 406 of companies act, 2013[1], “Nidhi Company means a company, incorporated as Nidhi with the object of doveloping the habit of savings and thrift among its members, collecting deposits from, and lending to its member-only, for their mutual benefits, which complies with such rules as are advise by the central government for regulation of such class of companies.”

What is the object of Nidhi Company?

Nidhi companies are having quit clear object that is to develop the habit of saving, receiving and lending amongst its members. Here it’s important to mention that such activities are only allowed between the members of Nidhi Company, no outsider/non –member or the general public is not allowed to participate.

How to add member in Nidhi Company?

Membership in Nidhi Company

A Nidhi shall: –

  • Not allow a corporate body or a Trust, or a minor as a member and ensure that its members shall not decrease to less than 200 at any time.
  • Allotment of minimum deposit holder minimum 10 shares of rupees 10 each, which are equal to Rs. 100 and at least 1 share of Rupees 10 to savings account holder.

By way of allotment of new shares:

According to the provisions of companies act, Nidhi Company can allot new shares to its new members. At present, there is an exemption by which section of the rights issue and private placement does not apply to Nidhi Company. Hence, the share can be directly allotted by the Board of Directors of the company, through passing a board of resolution. Further, this shall be noted that a number of shares allotted should not exceed authorised share capital of the company.

 By way of transfer of shares of existing members:

Being as a public limited company, Nidhi Company may transfer his shares to another person. Hence the person receiving shares becomes a member of Nidhi Company. Also, the name and other details of the new members needed to enter in the register of the member.

Procedure to add members under Nidhi Company

  • Choose and divide shares:
    You need to choose any one person’s share and divide his share into a small share certificate which should be equal to either one share or ten shares, depending upon the requirement.
  • Attach the share certificate with FORM SH – 4:
    Secondly, to give effect to the share transfer Nidhi Company needs to attach FORM SH- 4 with the share certificates being issued to the member.
  • Attach along with Membership Form:
    The share certificates and the form SH 4 are now required to be attached with the membership form. All the necessary details are needed to be furnished with the share certificate and Form SH-4.
  • Hand over the share certificate to him:
    After the successful share transfer, the set of all the necessary documents should be handed over to the applicant.  One copy of the documents shall be kept in the company as a record.
  • Pass board resolution for each entry:
    Its mandatory for a Nidhi Company to pass a board resolution to validate the share transfer happened during the month. The board resolution shall be passed at the every month end.
  • Enter details in Share Transfer Register:
    Nidhi companies are required to maintain a share transfer register, and every detail concerning share transfer shall be entered in the share transfer register.

Read our article: Compliances for a Nidhi Company: A Complete Checklist

What are the general restrictions on Nidhi Company?

  • Carrying a business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities from any corporate entity, is strictly prohibited for Nidhi Company. 

In addition to this, Nidhi Company cannot invest in any securities of any company. Further, if Nidhi Company wishes to carry any business activities, they need to apply for RBI license.

  • Nidhi Company is not allowed to issue preference shares, debentures or any debt instruments of any form or under any name whatsoever.

In addition to this, Nidhi Company cannot issue securities of any type and can only issue equity shares to its members, as they are only allowed to deal with its members.

  • Nidhi Company is restricted form opening current account of its member.

Nidhi Company is allowed to open a savings bank account, and restricted from opening current account of its member, as RBI has exempted Nidhi Company to follow the procedures of banking regulations.

  • Nidhi Company is restricted to acquire any other company.

Unlike other form companies, Nidhi Company does not have control over the securities of other companies and board of director. Hence, they are restricted to enter into any agreement unless they have passed a special board of resolution in a general meeting of company. Other condition can be when they have acquired the approval of regional director having jurisdiction over that particular Nidhi Company. This is the only reasons Nidhi Companies operates only in their particular state. 

  • Nidhi Company is restricted from carrying a business other than lending and borrowing. 

As mentioned above, Nidhi Company cannot run any business by its name other than lending and borrowing. Nidhi Company can provide a locker facility to its members.

  • Accepting money and lending money to a person other than its member is strictly prohibited for Nidhi Company.

Nidhi Company can only trade with its members if Nidhi Company wishes to deal outside its member than Nidhi Company has to proceed further for fully-fledged NBFC.

  • Nidhi Company has restrictions on Pledging assets lodged by its members as security.

The said restriction protects the right of the members. The assets deposited by the member of the company, cannot be pledged to take a loan from any entity of bank. This act provides security to its member for their assets.

  • No Nidhi company shall enter into any partnership agreement for lending or borrowing purpose.

Nidhi Companies are non –commercial companies and work upon the principle of mutuality. Hence, they cannot enter into any partnership agreement for any big finance projects.

  • Nidhi Company is restricted from any kind of advertisement.

Nidhi Companies are restricted from advertising their depositing schemes, unlike other financial institutions. However, Nidhi Company can only advertise between its members only.

  • Nidhi Company is restricted from paying any brokerage or incentives, for deploying or granting loans.

For the purpose of convening deposits form members, Nidhi Company is not allowed to hire a person for this purpose. Else nor can offer any incentives or brokerage.

Conclusion

Nidhi companies shall not be considered as a flexible company, as it works under many restrictions. Since, their deal is with monetary matters, which needs to be approved by RBI, such companies become bound to work under the restrictions.

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

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Shailza Sharma

Miss Shailza Sharma, BA. LLB graduate from Himachal Pradesh University. She holds an experience of 2.5 years in various Legal companies and organizations.

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