Nidhi means funds. One of the sub-categories of the Indian non-banking finance sector is the Nidhi Company. It is recognised under Section 406 of the Companies Act of 2013.
The term ‘Nidhi’ has been defined under Rule 3 (da) of the Nidhi Rules of 2014, which means a company has to be incorporated with the following objectives:
- Encourage the members to invest in profitable schemes and save money
- Receiving deposits and lending money to its members for their mutual benefit.
- Duly complying with the rules and regulations formed by the Central Government.
To put it simply, the company’s core business activities include borrowing and lending money to its members. Nidhi means a company that has been incorporated solely with the objective of develop a habit of thrift and reserve funds among its members and receiving deposits and lending to its members only for their mutual benefit. This article talks about the structure of a Nidhi company in India and other important aspects of the Nidhi Company.
Governing laws for Nidhi Company in India
A Nidhi company is incorporated in the nature of a Public Limited Company as per the provisions of the Companies Act of 2013. Considering the fact that a Nidhi Company only limit its activities to its members, therefore RBI does not directly govern the functioning of the company. The Reserve Bank of India has exempted Nidhi Companies from the provisions of the RBI Act and other directives issued by RBI. It is governed by the Nidhi rules of 2014 enacted by the central government. Some of the important rules that you must know are listed below:
- Rule3(d) of the Nidhi Rules talks about the net owned funds;
- Rule3(e) of the Nidhi Rules talks about the non-performing asset;
- Rule4 of the Nidhi Rules talks about the incorporation and incidental matters;
- Rule5 of the Nidhi Rules talks about the requirements for minimum number of members, net owned fund etc.;
- Rule6 of the Nidhi Rules talks about the general restrictions or prohibitions;
- Rule7 of the Nidhi Rules talks about the share capital and allotment;
- Rule8 of the Nidhi Rules talks about the membership;
- Rule11 of the Nidhi Rules talks about the acceptance of deposits by Nidhi;
- Rule12 of the Nidhi Rules talks about the application form for deposit;
- Rule15 of the Nidhi Rules talks about the loans;
- Rule16 of the Nidhi Rules talks about the rate of interest;
- Rule17 of the Nidhi Rules talks about the rules relating to Directors;
- Rule21 of the Nidhi Rules talks about the filing of half yearly return;
- Rule22 of the Nidhi Rules talks about the auditor’s certificate;
- Rule23 of the Nidhi Rules talks about the power to enforce compliance;
- Rule24 of the Nidhi Rules talks about the penalty for non-compliance.
Activities That Are Prohibited For a Nidhi Company in India
As per the Nidhi rules of 2014, a company cannot indulge itself in certain activities. All the Nidhi Companies that are registered in India are required to abide by these prohibitions/restrictions which are imposed on them in terms of their activities. These activities are as follows:
- Nidhi Companies cannot indulge in the activities of chit funds;
- Nidhi Companies cannot indulge in the activities to hire-purchase finance;
- Nidhi Companies cannot indulge in leasing of finances;
- Nidhi Companies cannot indulge in the activities of the insurance business;
- Nidhi Companies cannot indulge in the activities of business securities;
- Nidhi Companies are restricted from accepting deposits from any other person except its members;
- Nidhi Companies can only lend funds to its members and not to any other person.
Selecting a Name for a Nidhi Company in India
The name of a company plays a very important role as it is the first impression of the company. The following factors are to be kept in mind while selecting a name for a Nidhi Company in India:
- The meaning of the name is the first and foremost consideration to be taken. Ideally, the name should be relevant to the company’s activities.
- The name should be short and meaningful. It is important to keep it short as it also makes your prospective customers recall the name easily.
- The uniqueness of the name is very important. It should not resemble or be identical to the name of any existing company. This increases the chance of being rejected.
- The name of the company should not violate the provisions of Emblems and Names Act of 1950.
- The name of the company should not be against the Indian laws. Use of abusive words in the name is prohibited. Also one must not use any such word in a way which might be against the belief or customs of any caste, creed, or religion.
- The name of the company should not include the phrase ‘British India’ in it.
Basic Structure of a Nidhi Company in India
Before you go for the process of registration, you must go through the structure requirements by a Nidhi Company in India. The following is the list of the requirements for the structure of a Nidhi Company in India:
- The company needs to be incorporated as a Public Limited Company as per the provision of Companies Act of 2013
- The company must appoint a minimum of 7 shareholders.
- The company must appoint a minimum of 3 directors.
- The company must have minimum of 200 members.
- All the directors of the company must have the Director Identification Number (DIN).
- The company must have the minimum equity capital of INR Five Lakhs.
- The company must have net owned funds of INR Ten Lakhs or more
- The company must end with ‘Nidhi Limited’.
- The objective of the company should restrict to lending and borrowing of funds among its members only.
- The company must have unencumbered term deposits of 10% or more of the outstanding deposits.
- The company must maintain a ratio of 1:20 or less for the net owned funds.
What Are The Documents Required To Register A Nidhi Company In India?
As we have seen above, what are the structural requirements of a Nidhi company, let us now see what are the documents are required by the Nidhi Company to register in India:
- A copy of rent or lease agreement to establish the registered place of business;
- In case a where place of business is rented, NOC (No Objection Certificate) duly signed by the landlord of that place;
- A copy of government authorised Identity proofs;
- A copy address proofs of the members of the company;
- Photographs of the members of the company;
- Digital Signature Certificate (DSC) of the company;
- Copies of PAN cards of the members;
- Director Identification Numbers (DIN) of all the directors;
- Certified copy of the updated Memorandum of Association (MOA) of the company;
- Certified copy of the updated Articles of Association (AOA) of the company.
Benefits after the Registration
The registration of a Nidhi company provides a lot of benefits, and these benefits can be summarised as follows:
- The first one is the legal existence of the company. Registering a company under the Nidhi tile will give the company a separate entity. It will be considered a separate legal entity, meaning the company and member will be two separate identities. This will give the company the right to sue and be sued.
- Another benefit is for the members, the liability of all the menders will be limited. This means, depending on the amount invested or contributed by the members of the company, their liability will be judged. Members will only be liable for their share in the company, and the personal liabilities of the members will not be used to meet the company’s liabilities.
- Members can borrow the funds at a lower interest rate.
Annual Compliance for a Nidhi company in India
Every Nidhi Company that is incorporated in India is required to file the auditor’s certificate, Form NDH-1 and Form NDH-3.
The explanation for above mentioned forms are as follows:
- As per the Companies Act of 2013 and Rule 5 of Nidhi Rules of 2014 under Section 406, all Nidhi companies incorporated in India are required to file a return as per statutory compliance form NDH 1 with a period of ninety days from the ending of the first financial year. Also, such form have to be certified by a practising Company Secretary or Chartered Accountant or Cost Accountant. In the case company needs an extension in filing form, then it can apply to the Regional Director in Form NDH-2. The director is obliged to pass the order within a period of 30 days from receiving such an application.
- As per the Companies Act of 2013 and Rule 21 of Nidhi Rules of 2014, all Nidhi companies incorporated in India and covered under rule 2 are required to half yearly return with the Registrar under Form NDH-3 along with the prescribed fee as provided in Companies (Registration offices and Fees) Rules, 2014 within a period of 30 days from the conclusion of each half year. Also, such form have to be certified by a practising Company Secretary or Chartered Accountant or Cost Accountant.
The basic concept on which a Nidhi company works is the, ‘Principle of Mutuality’. A Nidhi Company is sub-category of NBFCs (Non-Banking Financial Company). It is regulated by the Ministry of Corporate Affairs (MCA) and is incorporated under Section 620A of the Companies Act of 1956 or Section 406 of the Companies Act of 2013. It is only partially regulated by the RBI in matters relating to their deposit acceptance. The Central government formulated the Nidhi Rules 2014 to carry out the firms’ objectives. The company’s main objective is to lend and borrow money from its members. It also inculcates the habit of saving among its members. Nidhi Company isn’t required to receive a license from the RBI that is Reserve Bank of India; hence it is easy to form. It is registered as a public company and should have “Nidhi Limited” as the last words of its name.
Read Our Article: What Is Nidhi Company? Know It’s Registration Procedure