Nidhi Company: Rules and Regulations in India

Increasing prices and low purchasing ability have always been a matter of distress for the middle and small-income people. Their financial burden somehow made savings next to impossible for them.

However, with the concept of Nidhi Company, they too become able to savings and investing. So, the concept of Nidhi Company acts as a savior for both middle and low-level income groups.

In India, most of the investment companies cater to a large amount of money, whereas in comparison, banks provide a minimal possibility for growth in terms of savings.

Further, a Nidhi Company Registration provides the most effective, efficient and easy way to save money along with a wide scope of monetary growth.

Nidhi Company

Nidhi Company is often known as the Mutual Benefit Finance Company. This is a type of NBFC (Non-Banking Financial Company).

It basically operates on the principle of mutual benefits and is regulated and administered by the Ministry of Corporate Affairs (MCA). Its major functions include lending and borrowing of money.

Further, the registration of a Nidhi Company is done on the basis of rules and provisions of the Companies Act, 2013.

Moreover, it is mandatory and obligatory for a Nidhi Company to be incorporated as a Limited Company. Furthermore, a minimum number of three directors and seven shareholders are required to form a Nidhi Company.

Lastly, it is significant to mention that all the objectives and functions of a Nidhi Company are required to be stated in the Memorandum of Association during incorporation.

Benefits of a Nidhi Company Registration

Following listed are the benefits of a Nidhi Company Registration–

Liability is limited – Liability of all the Directors and shareholders working in the Nidhi Company is limited. Moreover, in case the Nidhi Company suffers from any bad loss or faces any financial concern in the course of its business affairs, the personal assets of the Members or Directors are not at risk of being seized by any banks, creditors, and government.
Fewer Regulations – Nidhi companies are governed and administered under the Nidhi Rules, 2014. Moreover, the Central Government is the regulating body controlling all its activities and operating. It is significant to note that the guidelines imposed by the RBI on this company are very few.
Better Credibility – Nidhi companies enjoy better credibility in comparison to any other members based organizations such as the Trusts, Cooperative Societies or the NGOs.
Better Option for Savings – The main purpose behind the incorporation of a Nidhi Company is to encourage the habit of saving among the working members of the Company. Further, the Nidhi Companies are to tend to lend and borrow money from its shareholders and members only.
Easy Access of the Public Funds – The loans from the Nidhi Company is available at a cheaper rate in comparison to the loans available from banks and other NBFCs (Non-Banking Financial Corporation). And the overall procedure for obtaining a loan and customized services are much easier, convenient and quicker.
Ease of Fund – Nidhi Company is one of the safest, cheapest and easiest way of inviting deposits from the general public. The applicant just needs to take them as registered members.
Micro Banking – In India, Nidhi Company provides banking services to both the remote and rural public, which still is based in the far-off locations and is, hence, devoid of accessing finance from the national banks and NBFCs.
Better Credit Co-operative Society – Nidhi Company, is a close alternative for a credit co-operative society. And, therefore, is more preferred by a small financer. Further, when a Nidhi company has been successfully registered, all the members can avail of all the benefits and privileges of a credit co-operative society.
Simple Processing – Borrowing and lending to known persons, who belong to the same group, is comparatively less complicated than dealing with the banks, where the procedure prescribed is impersonal and fixed.
Easy Registration Process – The process for registering a Nidhi Company is very easy as it only requires a license from RBI. Moreover, the applicant is just required to incorporate his company as a public limited company with the MCA.
Single Regulatory Body – After the Amendment in the Companies Act, 2013, Nidhi Companies are governed by Nidhi Company Rules.
Low Capital Requirement – Ministry of Corporate Affairs (MCA) instructs that the minimum capital requirement for a Nidhi Company is of Rs. Five lakhs. And, within a period of one year, the said capital has to be raised to at least Rs. ten lakhs.
Fulfilling the needs of Lower and Middle-income groups – Nidhi Companies play a significant role in meeting the needs of the lower and middle-income groups by offering them financial help that too without complex formalities and documentation.
Easier Eligible – People earning minimum wages and belonging to a lower stratum are usually unable to obtain loans from the traditional banks because of their high eligibility criteria. For them, Nidhi Company is a better option to obtain loans because of less compliance.
No External Involvement – Nidhi Companies obtain funds from their members and further offer loans to their members only. Moreover, all the transactions take place within this group itself. So, no external factors are distressing the working of these companies. Moreover, the investors or members themselves look after the operations of the company.
Separate Entity – Nidhi Company enjoys the status of a separate legal entity, which means it can acquire assets and incur a loss in its own name.

Features of a Nidhi Company

Following listed are the features annexed with the concept of a Nidhi Company –

Carrying out any of the following activity is not allowed for a Nidhi Company-

Leasing
Finance,
Hire Purchase Finance,
Chit Fund,
Insurance,
Acquisition of the securities issued by any corporation.

It can neither accept deposits nor can provide loans to some external individual or corporation.
A Nidhi Company is not authorized to issue preference shares, debentures, or any other debt instruments in any form.
The Companies Act, 2013 and Nidhi Rules, 2014 are the governing acts that are regulating the functions and operations of Nidhi Company in India.
The concept of a Nidhi Company does not come under the ambit of RBI (Reserve Bank of India). Hence, a Nidhi company does not require any license from the RBI to operate a loan business.
It is not allowed to perform the vehicle finance business or the microfinance business in India.
Within a period of 12 months of registration, the number of members in the company must be at least 200.
A maximum interest rate of 20 percent p.a. (calculated by using reducing balance method) can be charged.
The maximum interest rate that can be charged on a saving deposit account shall not exceed 2 percent above the rate charged by Nationalized Banks.
Nidhi Company can accept Fixed Deposit, Recurring Deposit & savings and can benefit from an interest of 12.5 percent.
Rate of Interest that can be charged on a Fixed and Recurring Deposit must not exceed the maximum rate of interest prescribed by the Reserve Bank of India (RBI) for the NBFCs to provide on their deposits. The maximum provided limit of the rate of interest applicable to NBFCs is also applicable to a Nidhi company.
Operations of a Nidhi Company are limited to the district level for the first three years. After the completion of the first three years, three offices can be set up within the area of the same district. Further for the expansion out of a district, prior approval is required from the Regulator Director.
It can only provide loans against security. Term securities include Gold, Property, Fixed Deposits, Life Insurance Certificates, and Government Securities.
Unencumbered deposits should not be less than 10 percent of outstanding deposits.
Filing of the Annual Accounts, Audit, and the Tax Returns, in a proper format, is compulsory.

The Requirements to be fulfilled before the Registration of a Nidhi Company

Following listed are the requirements before registering a Nidhi Company–

Capital requirement –If any person is willing to apply for the registration of a Nidhi company, a minimum Paid-up Share Capital of Rs. Five lakh is needed. Further, the last name of the said Company must end with “Nidhi Limited”.
Minimum 3 Directors –The age of all the Directors must be 18+ years, and the family members are also capable of joining as a Director.
Shareholders – A minimum of 7 shareholders are required. Further, the Directors can also own shares in a Nidhi Company.
No Minimum Shareholdings – If anyone is willing to keep maximum control over the business and its affairs then he or she can even retain 99.99 percent shares
No Finance Experience Required – If you are not having any experience with NBFC or Bank or Nidhi, do not worry, you are still eligible for Nidhi Company License.

The Requirements to be fulfilled after the Registration of a Nidhi Company

Following are the requirements which are to be fulfilled after obtaining registration of a Nidhi Company –

By the end of the first year, the count of the number of members or shareholders working in the Nidhi Company must exceed 200 at least.
NOF must be more than Rs. Ten lakhs.
The ratio for NOF to Deposit must be more than 1:20.
Unencumbered deposits should exceed 10 percent of outstanding deposits.

Documents Required for obtaining Registration of a Nidhi Company

Following are the Documents required for obtaining registration of a Nidhi Company –

Identity proof of the Directors and shareholders
Copy of the PAN Card of all the Directors
Address proof of all the directors and shareholders
Aadhaar Card of all the Directors and shareholders
Proof of a registered office in the form of an Electricity or Water bill)
Copy of the rent agreement (If the premises being used is a rented property)
Passport-sized photographs of all the directors
NOC (No-Objection Certificate) from the owner of the property

Compliances for a Nidhi Company

Following are the compliances that a Nidhi Company has to follow –

NDH-1 Form: A Nidhi Company is required to submit a list of members in this particular form within a period of 90 days from the end of every financial year.
NDH-2 Form: It can request MCA (Ministry of Corporate Affairs) for an extension in this Form if in case the concerned company has not been able to add two hundred members in its first financial year.
NDH-3 Form: Other than the above provided NDH-1 Form, a half-yearly return is also needed to be filed in NDH-3 Form.
Annual Returns with ROC: The Nidhi Company is required to file its Annual Returns with the MCA through Form MGT-7.
Profit & Loss Statement and Balance sheet: The financial statements and other related documents are to be submitted, annually, in Form AOC-4.
Income Tax Returns: Nidhi Company, like all other business structures, must file its Annual Income Tax Returns by the 30th of September of the following financial year.

Procedure for Incorporating a Nidhi Company

Following are the steps that are involved in the process of Incorporating a Nidhi Company–

DIN and DSC – The applicant has to mandatorily obtain the Director Identification Number (DIN) and the Digital Signature Certificate (DSC) for all the proposed directors of the company.
Name approval – It is mandatory and compulsory to have ‘Nidhi Limited’ at the end of the company’s name. Thus, the name of the concerned company has to be registered in the form of a Public Limited Company with the words ‘Nidhi Limited’ at the end.
Filing COI – The COI (Conflict of Interest) has to be filed by the concerned applicant. This has to be filed in the form INC- 7, INC- 22, and DIR- 12.
Submission of details of the members – According to the prescribed requirements of registration, the company must have at least 200 members at the time of application. Further, the details of all the members must be filed with the Nidhi board under MCA or ROC.