Nidhi Company

Unveiling 2022 Nidhi Company Regulations: An analysis

calendar20 Oct, 2023
timeReading Time: 11 Minutes
[14:33] Margesh Rai Unveiling 2022 Nidhi Company Regulations:

A corporation recognised by the Companies Act of 2013 when read alongside the Nidhi Rules of 2014 is referred to as a “Nidhi company.” Their primary duties, which fall under the non-banking Indian finance sector, are money borrowing and lending among their members. It is a business that was set up specifically to instil the value of being frugal and prudent among its members. They go by a variety of names, including Mutual Benefit Funds, Benefit Funds, Permanent Funds, and Mutual Benefit Companies.

A Nidhi Company is a recognized form of Indian non-banking finance company under Section 406 of the 2013 Companies Act. Their primary business is lending and borrowing money between members. Additionally known as Permanent Funds, Benefit Funds, Mutual Benefit Funds, and Mutual Benefit Companies. They are governed by the Ministry of Corporate Affairs, which has the authority to issue directives regarding their deposit acceptance activities. In acknowledgement of the fact that these corporations deal exclusively with their shareholder-members. The term “Nidhi” refers to a company that has been established with the intention of fostering the practice of thrift and the creation of reserve funds among its members, in addition to accepting deposits and making loans to those members only for the purpose of maximizing their individual and collective well-being.

In this piece of writing, the complexities of the most recent amendment concerning Nidhi Companies, which was presented to the public by the government as the 2022 Nidhi Company amendment, are broken down. In the article, each key component of the amendment is broken down in great detail, and the article concludes with a discussion of the amendment’s after-effects and an analysis of its ramifications.

Rules and Regulations Governing Nidhi Company

The Nidhi Rules, 2014 are the rules that regulate Nidhi companies, which were recently revised as the 2022 Nidhi Company amendment. Nidhi Company is incorporated in the nature of a Public Limited Company, and as a result, they are required to comply with two sets of norms: the first set is for Public limited companies according to the Companies Act of 2013, and the second set is for Nidhi rules according to the Companies Act of 2014. Because the RBI has specifically exempted this category of NBFC in India from complying with its fundamental regulations, such as registering with the RBI, there is no need to obtain approval from the RBI in order to incorporate the company. Within the first year after its inception, every Nidhi firm is required to demonstrate that it has attained a membership of at least 200 individuals.

Process of Registration

The Companies (Incorporation) Rules, 2014 have been further modified by the Ministry of Corporate Affairs via its notification dated 18 February 2020 effective from the 23rd of February 2020 and from then they are to be known as the 2022 Nidhi Company amendment. As part of these modifications, the previous form INC-32 (SPICe) has been replaced with SPICe+, in addition to some additional adjustments which are as follows:

  1. An Application of Name Registration
  2. Fill Part B of SPICe+, MOA, AOA and AGILe Form
  3. Upload the Form to the Ministry of Corporate Affairs

Deep Dive Into The 2022 Nidhi Company Regulation Amendment

The Nidhi Company Amendment 2022 was issued on April 19, 2022, by the Ministry of Corporate Affairs. These rules are intended to further amend the Nidhi Rules, 2014, which were previously published.

In accordance with the revision, the following new provision of 2022 Nidhi company amendment that can be found in Rule 3-B:

If a public company desires to be declared as a Nidhi on or after the effective date of the Nidhi (Amendment) Rules, 2022, the business must submit an application for declaration as a Nidhi in Form NDH-4 within a period of 120 days of the date of its incorporation. If the company satisfies the qualifications outlined below, it will be declared as a Nidhi. These conditions are as follows:

  1. The firm must be incorporated in India
  2. It has not less than 200 members; and
  3. It has Net Owned Funds of twenty lakh rupees or more.

Along with Form NDH-4, the company must also include a declaration signed by all of the company’s promoters and directors stating that they meet the requirements for being a fit and proper person. This declaration must be attached to Form NDH-4. The application that was submitted in Form NDH-4 will be reviewed by the Central Government, which will then communicate its decision to the company within a period of forty-five days.

A Nidhi company that is incorporated under Rule 4 must be a public company and must have a minimum paid-up equity share capital of ten lakh rupees. In addition, the Nidhi company must have at least one director.

Provided, however, that any Nidhi that was in existence as of the date of commencement of the Nidhi Amendment Rules of 2022, must comply with this condition within a period of eighteen months beginning with the date of commencement of such rules.

No Nidhi may, as a further part of Rule 6 (d), acquire or purchase securities of any other company, control the makeup of the Board of Directors of any other company in any way, or enter into any arrangement for the change in management of that company.

According to Rule 6(k)(1), a Nidhi is not allowed to borrow money from banks, other financial institutions, or any other source in order to provide loans to its members from outside sources.

According to the revised version of Rule 9, every Nidhi is required to keep a minimum of twenty lakh rupees in its “Net Owned Funds” (this does not include the revenues from any preference share capital), or such a larger amount as the Central Government may set from time to time.

“Provided that every Nidhi that was in existence as of the date of commencement of the Nidhi (Amendment) Rules, 2022 shall comply with this requirement within a period of eighteen months from the date that the Nidhi (Amendment) Rules, 2022 commenced”.

Key Changes of 2022 Nidhi company amendment

2022 Nidhi company amendment rules encompass several significant revisions that have been implemented as of the 19th of April, 2022, and they have been discussed below:[1]

Proviso to Rule 3A

If a company fails to fulfil the obligation of declaring itself as a Nidhi company in the prescribed Form (NDH-4) after the implementation of the Nidhi (Amendment) Rules 2022, or if the application submitted in Form NDH-4 is rejected by the Central government, then the company is prohibited from accepting any deposits from its members or granting any loans to its members starting from the date of non-compliance or the date of rejection of Form NDH-4, whichever occurs later.

A company that fails to fulfil the obligation of declaring itself as a Nidhi company through the prescribed Form (NDH-4) either after the implementation of the 2022 Nidhi Company amendment rules or if the application submitted in Form NDH-4 is rejected by the Central government, is prohibited from accepting any deposits subsequent to the date of non-compliance, the date of commencement of the aforementioned rules, or the date of rejection of the application in Form NDH-4, whichever occurs later. In the event that a company raises deposits, the provisions outlined in Chapter V of the Companies Act 2013 will be applicable.  

Furthermore, it should be noted that the aforementioned regulation does not pertain to corporations that have been established as Nidhi subsequent to the initiation of the aforementioned guidelines.

Rule 3B

  1. Upon the implementation of Amendment Rule 2022, any public company that seeks to be recognised as a Nidhi must adhere to the following criteria and submit an application in Form NDH-4 within 120 days of its establishment:
  2. It has not less than 200 members; and
  3. it has Net Owned Funds of 20 Lakh rupees or more.
  4. In addition to Form NDH-4, it is required that the company includes a declaration regarding the satisfaction of the fit and proper person criteria by all promoters and directors of the company.
  5. In order to ascertain the suitability and integrity of any promoter or director, the evaluation process shall take into account the following factors:
  6. The factors to consider in evaluating an individual’s suitability include their integrity, honesty, ethical conduct, reputation, fairness, and character.
  7. Additionally, it is important to ensure that the person does not possess any disqualifications, such as those listed below:
  8. A criminal complaint or information, as per Section 154 of the Code of Criminal Procedure, 1973 (2 of 1974), has been lodged by an individual licenced by the Central Government against the aforementioned individual, and it is currently awaiting resolution.
  9. The individual in question has been subjected to the filing of a charge sheet by an enforcement agency in relation to unresolved economic offences.
  10. A regulatory authority or enforcement agency has issued an order of restraint, prohibition, or debarment against an individual in relation to matters pertaining to company law, securities legislation, or financial markets that are now in effect.
  11. The court has issued a conviction order against an individual for committing an offence that involves moral turpitude.
  12. The individual in question has been officially declared insolvent and has not yet received a discharge.
  13. An individual has been determined to possess a mental condition deemed unsound by a legally authorised court, and this determination remains valid.
  14. This individual has been classified as a deliberate defaulter.
  15. The individual in question has been officially designated as a fugitive economic offender.
  16. An individual meeting the aforementioned criteria holds the position of director in five or more firms that have been incorporated or declared as Nidhi or serves as a promoter for three or more companies that have been incorporated or proclaimed as Nidhi.

The application submitted in Form NDH-4 shall be subject to examination by the Central Government, which would then communicate its decision to the company within a period of 45 days. If the Central government does not make a decision on the filed Form NDH-4 within the specified period, it will be considered as accepted.

Upon determining that the company has fulfilled the aforementioned criteria, the Central government will proceed to formally announce the company’s designation as a Nidhi company by an official notification published in the gazette. The corporation is required to submit Form 20A to the Registrar of Companies in order to record the approval granted by the Central government. The commencement of the company’s business is contingent upon obtaining approval from the Central Government.

Any firm that fails to adhere to the stipulations outlined in this subsection will be prohibited from submitting Form No. SH-7, which pertains to notifying the Registrar of any changes in share capital, as well as Form PAS-3, which pertains to the submission of allotment returns.

The provisions outlined in this rule shall not be deemed applicable to a public business that was incorporated under the Act before to the commencement date of the Nidhi (Amendment) Rules, 2022.

Rule 4

In order to qualify as a Nidhi company, a business must be open to the public and have a minimum paid-up equity share capital of Rs. 10 lakhs (before, this threshold was set at Rs. 5 lakhs).

Every Nidhi company that was operating as of the date of commencement of the Nidhi Amendment Rules,2022, is required to comply with this requirement within a period of eighteen months beginning on the date that the amendment Rules were first implemented.

Rule 6

d) A Nidhi company is not allowed to acquire or purchase securities of any other company, control the makeup of the Board of Directors of any other company in any way, or enter into any arrangement for the change of its Management. These restrictions apply to all companies. 

k) A Nidhi company is not allowed to borrow money from any other source, including banks, financial institutions, or any other entity, in order to provide loans to Nidhi company members. 

Rule 8

4) A member is prohibited from transferring more than fifty percent of his shareholdings (as of the date on which he made a deposit or obtained a loan) while the loan or deposit is still being serviced or held, depending on the circumstance. With the proviso that the member must always keep the minimum amount of shares needed by the sub-rule in their possession at all times.

Rule 9

Every Nidhi Company is required to keep a minimum of INR 20 Lakhs or such a larger amount of net-owned money as the Central Government may prescribe from time to time. (Before this change, the NOF was ten million rupees). Provided, however, that every Nidhi that was in existence as of the date of commencement of the Nidhi (Amendment) Rules,2022 is required to comply with this requirement within a period of eighteen months beginning on the date of commencement of such rules.

Rule 20

The regulations pertaining to the categorization of assets for mortgage loans or loans secured by jewellery, namely gold loans, have been revised to encompass the inclusion of “gold” or “silver”. 

Requiring post-incorporation Nidhi firms to get prior clearance or licence is a crucial measure aimed at ensuring these entities remain under the purview of the Ministry of Corporate Affairs, hence facilitating effective regulatory oversight. The requirement for Directors and Promoters to meet the “fit and proper person” standard serves to enhance the credibility and value of Nidhi firms’ management. The government has implemented a shortened process for granting approval, reducing the deadline to 45 days. This measure aims to facilitate prompt handling of applications and enhance compliance with the provisions outlined in the Act and Rules.

The implementation 2022 Nidhi company amendment is aimed at safeguarding the welfare of the general people and mitigating the potential for unlawful utilisation or exploitation of public monies. There has been a notable rise in occurrences of fraudulent activities, resulting in the exploitation of unsuspecting members of the general public and the loss of their diligently acquired financial resources. The proposed revisions appear to be timely, as they effectively handle contemporary challenges.

Conclusion

The 2022 Nidhi company amendment is aimed at promoting the welfare of the general people. A key aspect of these regulations is the requirement for any organisation intending to establish a Nidhi company to obtain a declaration from the central government. The acquisition of said declaration was formerly mandated under the prior regulation, albeit widely disregarded, hence its current status as a compulsory requirement. The entity is compelled to adhere to the severe requirements in order to ensure compliance, as they had previously neglected to fulfil the requirement of obtaining the Central Government’s declaration.

Frequently Asked Questions

1. Is it possible for a Nidhi corporation to establish multiple branches?

Indeed. Nidhi corporations can open three branches per district. However, with the Regional Director’s approval, the Nidhi Corporation can open more than three branches. This authorization can be sought for branches within the same district or beyond the district but within the state. Each additional branch must be registered with the Registrar of Companies within 30 days of its opening. Nidhi firms cannot construct collection centres, branches, deposit centres, or offices under different names outside their registered office state.

2. Is it possible for a Nidhi firm to terminate the operations of one of its branches?

Yes. The company has the ability to cease operations at a particular branch by issuing a newspaper advertisement in the local language of the area where it conducts business, at least 30 days prior to the intended closure. It shall also inform the public with respect to such closure. The advertisement copy or notification regarding the closure of a branch should be revised and shown on the company’s notice board for a duration of 30 days, starting from the publication date of the advertisement in the newspaper. The Registrar of Firms must be notified by Nidhi firms within a period of 30 days subsequent to their liquidation.

3. What is the significance of NDH-4 in Biological Systems?

• A Nidhi corporation can commence its operations just upon obtaining NDH-4 clearance and completing the submission of form 20A.

• The government is required to grant authorization for NDH-4 within a period of 45 days from the date of submission. Failure on the part of the government to issue a rejection or approval within this timeframe will result in the automatic authorization of NDH-4.

• The filing of Form 20A is a necessary requirement subsequent to obtaining NDH-4 approval. Consequently, commencing Nidhi business operations prior to the receipt of NDH-4 approval is strictly prohibited.

• Companies that were established subsequent to the implementation of these regulations are exempt from the requirement to submit NDH-1 and NDH-2 forms.

4. Is it possible for a Nidhi firm to provide loans secured by securities?

Affirmative. A Nidhi firm has the authority to provide loans by accepting securities such as Fixed Deposits Receipts, National Saving Certificate (NSC), Insurance Policies, and other government securities as collateral. However, it is necessary for these securities to be pledged with Nidhi, and they should not experience declines below the loan period or one year, whichever occurs first. When considering a loan secured by Fixed Deposits (FD), it is important to ensure that the loan duration is shorter than the remaining time of the FD.

5. What is the prevailing interest rate for loans extended by Nidhi companies?

The interest rate on loans provided by a Nidhi Company should not surpass 7.5% above the maximum interest rate allowed by the company on deposits. The calculation will be performed using the reduction balancing approach.span>

6. Is the approval of the Reserve Bank of India (RBI) necessary for the incorporation of a Nidhi company?

Although a Nidhi firm falls within the classification of a Non-Banking Financial firm (NBFC) owing to its operational characteristics, it does not necessitate authorisation from the Reserve Bank of India (RBI). Nidhi firms acquire capital through engaging in borrowing and lending operations. The incorporation of a Nidhi firm is required to adhere to the Nidhi Rules, 2014, which were established by the Central Government of India.

Read Our Article: Nidhi Company New Rules As Stated In Amendment 2022

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