Nidhi Companies: Meaning, Benefits, Rules & Registration

What are Nidhi Companies?

Nidhi companies are financial organizations that work as a mutual benefit society for their members. The members accumulate money as savings and then utilize it as a credit facility. They fall under the Companies Act, 2013, and are thus defined as Non-Banking Financial Companies (NBFCs) but they differ from traditional NBFCs as they serve only their members and refrain from providing services to people in general. The key purpose of Nidhi companies is to instill financial discipline amongst the members and to meet the needs of the community by providing finances for savings. They are regulated by the Ministry of Corporate Affairs (MCA) and, to some extent, by the Reserve Bank of India (RBI).

In other words, they operate as mutual benefit societies, focusing on fostering savings habits and providing credit facilities exclusively to their members and their relatives. Unlike typical Non-Banking Financial Companies (NBFCs), Nidhi companies are restricted in their scope of operations, serving a closed group rather than the general public. They play a crucial role in promoting financial inclusion and discipline within communities while adhering to regulatory guidelines set by the Ministry of Corporate Affairs and the Reserve Bank of India.

Legal Framework of Nidhi Companies

The legal framework governing Nidhi companies is primarily established by the Companies Act, 2013, along with the Nidhi Rules, 2014, issued thereunder. These rules outline the conditions for the registration, regulation, and operation of Nidhi companies in India. Additionally, regulatory oversight is provided by the Ministry of Corporate Affairs (MCA) to ensure compliance with statutory requirements. While Nidhi companies are considered Non-Banking Financial Companies (NBFCs) under the Companies Act, they have distinct characteristics and limitations compared to other NBFCs, as they exclusively serve their members and their relatives. Moreover, the Reserve Bank of India (RBI) also exercises control over certain aspects of Nidhi company operations, particularly concerning lending practices and capital adequacy. Overall, the legal framework aims to establish a transparent and regulated environment for Nidhi companies to operate while promoting financial inclusion and safeguarding the interests of their members.

Composition of Nidhi Companies

A Nidhi company is a company that is owned by the shareholders who like, are also the members themselves. These shareholders, by all means, contribute to the capital of the business organization and have a say in the various decision-making processes. Only natural persons are entitled to become a member of the Nidhi company and corporate entities are not entitled to such a thing. As it aims at serving the needs of its members and creating financial inclusion within the community, this ensures that the company continues to be guided by this mission.

• A Nidhi company must have a minimum of seven members upon incorporation, with at least three of them serving as directors.
• Membership in a Nidhi company is Restricted: corporate entities or trusts cannot become members, and minors are not eligible for membership, although deposits can be made on their behalf by natural or legal guardians who are Nidhi company members.
• Additionally, within one year of its establishment, a Nidhi company must ensure it has at least 200 members.

Benefits of Nidhi Companies

Nidhi companies offer several benefits to their members, including:

1. Access to Credit Facilities: Loans on a small scale can be accessible for all different purposes including education, emergency cases, and business expansion, at affordable rates of interest.

2. Savings Promotion: Nidhi companies implore individuals to cultivate a culture of savings which is possibly attainable through weekly savings and earning attractive interest rates on their savings deposits.

3. Limited Liability Protection: Owners of Nidhi companies have only limited liabilities with the organization which implies that their assets will not be liable to the Company.

4. Democratic Control: Nidhi companies embrace the concept of several members who can exert power by being involved in the process of decision-making and choosing the board too.

5. Simplified Regulatory Compliance: In contrast to the complicated regulatory requirements for commercial banks and other NBFCs, the Nidhi companies have simpler rules that help them to give their members satisfying service.

Post Incorporation Requirements

Following incorporation, the Nidhi companies should adhere to the regulatory processes to sustain the quest for transparency, accountability, and financial strength. These requirements include:

1. Maintaining Minimum Net Owned Funds: Nidhi companies should also maintain a minimum level of net owned funds, which is determined by RBI to ensure banking stability and solvency.

2. Restricting Deposits and Loans: Nidhi companies are entitled to receive deposits and provide loans only to the members of the company; they, however, must follow rules and regulations announced by the RBI.

3. Conducting Audits and Filings: Nidhi companies have to conduct annual audits of their financial accounts by the respective auditors as well as file annual returns at the MCA.

4. Compliance with Laws and Regulations: The Nidhi Companies, as per the Companies Act, 2013, and the Nidhi Rules, 2014, need to follow the provisions touching on governance, management, and operations.

Process of Registration of Nidhi Companies

Nidhi’s corporate registration process consists of several steps:

1. Obtain Digital Signature Certificate (DSC) for Directors and Shareholders: DSC must digitally sign the company documents registration form along with the information sent to the police.

2. Get Director’s Identification Number (Designated Director’s DIN): DIN is issued to the directors of a company by the Ministry of Corporate Affairs (MCA).

3. Reservation of Company Name and Draft Articles of Association: The name of Nidhi Company must be approved by the Registrar of Companies (ROC) and the written Articles of Association and Articles of Association must be approved as per the rules and regulations.

4. Submission of Company Registration Documents to the Registrar of Companies (ROC): Once completed and signed, the documents must be submitted to the ROC along with the application fee and other appropriate information.

5. Obtaining the Certificate of Incorporation: The ROC’s approval of the draft set of rules that the Nidhi company is operating on and completion of other formalities will be followed by the ROC’s issuance of the Certificate of Incorporation, thus completing the process that officially establishes the Nidhi company.

Annual Statutory Compliance of Nidhi Companies

Nidhi companies are to work on different statutory requirements every year to maintain their legal status and run their affairs smoothly. These requirements include:

1. Conducting Annual General Meetings (AGMs): Nidhi companies by the prescribed period should hold AGMs to evaluate the performance of the company, approve the financial statements, and elect the directors.

2. Filing Annual Returns with the ROC: Nidhi companies have to submit annual filings with the ROC, including details regarding shareholders, directors, and the company’s financial statements.

3. Conducting Statutory Audits: Nidhi companies need to undertake audits every year done by chartered accountants to confirm the accuracy and openness of financial reporting. The audited financial statements are to be filed with ROC and presented to the members.

4. Maintaining Registers and Records: Nidhi companies must keep the registers and books that are prescribed by the Companies Act, 2013, such as the registers of members, directors, investments, deposits, and loans.

Financing on Nidhi Companies

The Nidhi companies are the financial institutions, which are being given the rights to provide loans to their members, as the security for these loans can be any immovable property, gold, or any other recognized securities. Nevertheless, the gross loans granted by the company to its members cannot be more than a limit that the RBI has predefined, usually according to the net assets of the company. This restriction underwrites that Nidhi companies work on a prudent lending basis and maintain a healthy liquidity level to meet the aspirations of their members without endangering the default of the loans.

Conclusion

Nidhi companies play a great role in enhancing financial inclusion, making members save more, and also giving out credit services. Governed by a specific legal system and regulatory oversight, Nidhi companies offer several advantages such as democratic management, limited liability protection, and simplified regulatory compliance. Complying with the set of regulatory norms and keeping within the boundaries of the law, the Nidhi companies keep themselves as an affordable financial conduit for their members while contributing to the country’s economic growth and development.

Nidhi Companies- FAQs

What is a Nidhi company?

A Nidhi company is a type of non-banking financial institution (NBFC) recognized under the Companies Act, 2013 in India. These companies are formed to cultivate the habit of thrift and savings among its members and to lend funds to its members only for their mutual benefit.

What are the primary objectives of a Nidhi company?

The primary objectives of a Nidhi company include promoting the savings habits of its members, providing them with financial assistance for their various needs, and fostering a spirit of mutual benefit and cooperation among members.

What are the key rules and regulations governing Nidhi companies?

Nidhi companies are regulated primarily by the Companies Act, 2013, along with the Nidhi Rules, 2014. These rules lay down guidelines regarding the incorporation, operations, lending activities, membership criteria, and compliance requirements for Nidhi companies.

Who can become a member of a Nidhi company?

Any individual, partnership firm, or corporate entity can become a member of a Nidhi company by fulfilling the membership criteria prescribed by the company’s rules and regulations. Typically, members must be Indian citizens and willing to contribute to the company’s savings and borrowing activities.

What are the restrictions on the lending activities of Nidhi companies?

Nidhi companies are restricted from engaging in certain lending activities, such as providing loans to non-members or engaging in any form of chit fund activity. Additionally, the amount of loans granted to members must adhere to the prescribed limits set forth by the regulatory authorities.