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Governing Nidhi companies

  • Category
    Economy
  • Published
    4th May, 2022

Context

The Ministry of Corporate Affairs (MCA) has amended rules governing Nidhi companies.

  • The Public Companies desiring to function as ‘Nidhis’ now must obtain prior declaration from the central government before accepting any deposits.

Background

  • In order to make regulatory regime for Nidhi Companies more effective and also to accomplish the objectives of transparency & investor friendliness in the corporate environment of the country, the Central Government has amended the provisions related to Nidhi under the Companies Act and the Rules.
  • Nidhi companies existed even prior to the existence of companies Act 2013. The basic concept of nidhi is "Principle of Mutuality".
  • These companies are more popular in South India, and 80% of them are located in Tamil Nadu.

Analysis

About Nidhi Company

  • Nidhi Company is a type of Non-Banking Financial Company (NBFC) recognized under section 406 of the Companies Act, 2013.
  • Nidhis are also included in the definition of Non- Banking Financial companies which operate mainly in the unorganized money market.
  • However, since 1997, NBFCs have been brought increasingly under the regulatory ambit of RBI.

RBI And Nidhi

  • Since Nidhis come under one class of NBFCs, RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities.
  • However, in recognition of the fact that these Nidhis deal with their shareholder-members only, RBI has exempted the notified Nidhis from the core provisions of the RBI Act and other directions applicable to NBFCs.

Principle of mutuality and Nidhis

  • The principle of mutuality postulates that “all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus are contributors to the common fund”.
  • Nidhis are formed to borrow and lend money to its members. It inculcates the habit of saving among its members and works on the principle of mutual benefit.

Existing rules

  • Governing laws:
  • Nidhi companies are governed by Nidhi Rules, 2014. They are incorporated in the nature of Public Limited Company and hence, they have to comply with two set of norms, one of Public limited company as per Companies Act, 2013 and another is for Nidhi rules, 2014.
  • No RBI approval is necessary to register the company, as RBI has specifically exempted this category of NBFC in India to comply its core provisions such as registration with RBI etc.
  • Every nidhi company must ensure within a period of one year from the commencement that it has not less than 200 members.
  • Process of Registration:
  • An Application for Name Registration
  • Fill Part B of SPICe+, MOA, AOA and AGILe Form
  • Convert SPICe+ Form into PDF
  • Upload the Form on Ministry of Corporate Affairs.
  • Registration:
  • Nidhi company registration is simple and less complex as compared to other types of finance companies like NBFC which require RBI license to start.
  • A Nidhi company can be started with an initial capital of 5 lakh and requires at least seven people to start with (minimum 7 members).
  • Nidhi company registration also requires three directors initially.
  • Every promoter or director needs a copy of PAN card, ID proof and address proof to apply for a Nidhi company in India.

Amendments made in existing provisions

  • The amended provisions of the Companies Act (Section 406) and Nidhi rules requires that the Nidhi companies have to apply to the Central government for updation of their status/ declaration as Nidhi Company in Form NDH-4.
  • Registration: To become a Nidhi company, the entity has to first register as a public limited company, which has more disclosure requirements than a private limited company.
  • Declaration: a public company set up as a Nidhi with share capital of 1 million needs to first get itself declared as a Nidhi from the Union government.
  • Membership: This can be done by submitting an application showing a minimum membership of 200 and net owned funds of 2 million within 120 days of its incorporation.
  • The promoters and directors of the company have to meet the criteria of fit and proper person as laid down in the rules.
  • Concept of deemed approval: That is, if no decision on the application is conveyed to the company within 45 days of filing the application, approval would be deemed as granted.
  • No Loan to companies: Only individual members are allowed in Nidhi companies and it cannot give loans to companies.

Benefits

  • Very Easy formation: Nidhi company registration is very simple and the level of complexity as compared to other types of finance companies like NBFC is minimal in Nidhi Company.
  • Cost Efficient Registration: Registering Nidhi Company comes with the pocket-friendly cost. The minimum capital requirement for registration of Nidhi Company is Rs 5,00,000 lakh which you can invest within 2 months after getting your Nidhi Company registered.
  • No RBI Regulations – less compliance: RBI has exempted Nidhi Company from following stringent compliances.
  • More Certainty in Nidhi company: In India, everyone likes to do the savings for six years old child to sixty years old man. And, the main objective of Nidhi company is to promote the habit of saving amongst its member which means it is certain and going concern business as the members will not stop savings anytime.
  • Less level of Risk - Non- payment loans: It is the safest route for lending loan and the loans given to members are at very low rates in comparisons with other providers which again bring greater savings amongst members.
  • Net owned fund- Invest one get twenty: Net owned fund means the amount of capital invested by owner in its business for raising funds. The net owned fund ratio of Nidhi Company is 1:20, which means you invest one rupee and raise the deposit of twenty rupees.

Challenges in India

  • Member specificity: As discussed above, Nidhi Companies can accept deposit and lend the money only to its members and shareholders.
  • No outsider can deposit money in a Nidhi Company which limits the number of funds raised by the Company. Since, Nidhi Companies don’t accept deposits from the outsiders other than its members and shareholders, the amount received by them from their members if less limits the ability of the Company to lend money to its members.
  • And if the lending capacity of a Nidhi Company is limited, it thrashes the whole objective of the formation of the Nidhi Company.
  • No advertisement: Unlike other financial institutions, Nidhi Companies are restricted from advertising their depositing schemes. Nidhi Companies are allowed to advertise among its members only.
  • Single ownership: Nidhi Companies are restricted from running any other business other than lending and borrowing on its name.
  • Time boundness: A Nidhi Company is not allowed to carry on its deposit schemes any more than a period of 5 years.

Conclusion

Nidhi Companies along with certain limitations associated with it, it can be concluded that Benefits offered by Nidhi Companies surely overpowers its flaws. In recent times Nidhi Companies have been trending in the financial markets for the variety of benefits they provide. The capital required for incorporating a Nidhi Company is quite affordable even for the middle earning people. Moreover, the registration process of a Nidhi Company is fairly easy and requires less documentation as compared to other financial institutions.

Practice Questions

Q1. To realize the goal of $5 trillion economy, India needs to resolve the issues faced by its NBFC. Discuss.

Q2. Critically examine the role of asset reconstruction companies in tackling the problem of bad loans in Indian banking sector.

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