About Nidhi Company
The feature that differentiates Nidhi Company from other companies, NBFCs etc. is that “Nidhi” deals with “deposits from” and “loans to” it’s members (shareholders) only, and works for the mutual benefits of it’s members. Accordingly, certain exemptions have been provided to these companies in respect of annual compliances and taxation.
Nidhi Companies in India are formed, governed, and regulated by Section 406 of the new Indian Companies Act of 2013, the Companies (Nidhi Companies) Rules of 2014, and the Chapter XXVI of the Companies Rules, 2014.
The objective of incorporating a Nidhi Company is to encourage savings amongst it’s members. And To fulfill this objective of cultivating the habit of saving amongst it’s members. Nidhi companies are allowed to take a deposit from and lend to the members only. In other words, the funds contributed to a Nidhi company come only from it’s members (shareholders) and are to be used only by the shareholders of the Nidhi Company. The name “Nidhi” in Nidhi Company means “treasure” and it originates from the Hindi vocabulary.
Nidhi Company is a certain category of NBFC. Though not directly regulated by the RBI, still RBI has powers to issue directives for them related to their deposit acceptance activities. Moreover, because these “Nidhis” deal with their shareholder-members only, they have been exempted from the core provisions of the RBI Act and other directions applicable to NBFCs. Therefore, Nidhi Company is an ideal legal entity to take a deposit from and lend to a specific group of people.
Nidhi Company Registration
Section 406 of the Companies Act of 2013 and the Companies (Nidhi Companies) Rules of 2014 is comprising of all the provisions which are in relation to the “incorporation and governance of the Nidhi Companies in India”. The guidelines and directives for the Nidhi Companies are also issued by the RBI. These are mainly related to financial activities and investments by companies including the NBFCs.
Because of “Nidhi Companies” being engaged in the business of deposits and loans by it’s members only, certain exemptions have been provided to these companies, by the RBI.
The interest charged on the loans under a Nidhi Company is quite reasonable. The purposes these are sought for, includes, manufacturing/renovation of houses or child’s education, etc. The loans are provided against security only. The deposits under Nidhis do not earn much interest as compared to deposits in the organized banking sector.
All lending and borrowing of the Nidhi Companies is done by it’s members, exclusively. Hence, such companies are also referred to as Mutual Benefit Societies. Because they work for the mutual benefit and welfare of all members.
If you are looking to start a business in financing or loans in India, then Nidhi Company is the best option for it.
Some points about the working of Nidhi Companies in India, as mentioned in Rule-6 of the “Nidhi Rules of 2014”, are significant to note:
- It cannot carry any of the following kinds of transactions. Such as leasing finance, hire purchase finance, chit fund, insurance, or acquisition of securities issued by any corporation.
- It cannot accept deposits from or give loans to some external individual or corporation.
- A Nidhi Company is not empowered to issue preference shares, debentures, or some other debt instruments in any form.
- Companies Act 2013 and Nidhi Rules 2014 act as the governing bodies, which regulate the functions and operations of a “Nidhi Company” in India
- A “Nidhi Company” does not come under the purview of RBI. Therefore, it does not need any license from RBI to operate a loan business.
- It is not entitled to perform either a “vehicle finance business or microfinance business” in India.
- Within 12 months of registration, the number of members must be at least 200.
- A maximum interest rate of 20% p.a. (calculated by the reducing balance method) can be charged.
- The maximum rate of interest that can be offered on savings deposit account shall not exceed 2% above the rate offered by Nationalised Banks.
- Nidhi Company can accept FD, RD & savings and can earn an interest of 12.5% currently.
- The rate of interest that can be offered on Fixed and Recurring Deposits shall not exceed the maximum rate of interest prescribed by RBI for the NBFCs to be offered on deposits. The maximum limit for the rate of interest for NBFCs is also applicable to the Nidhi companies.
- It’s operations must be limited to the district level for the first 3 Years. After completion of 3 years, 3 offices can be set up within the same district. For expansion out of the district, prior approval from the “Regulator Director” is required.
- It can only give loans against security. These securities may be Gold, Property, Fixed Deposits, Government Securities, or Life Insurance Certificates.
- Unencumbered deposits (Deposits which aren’t offered as securities for any purpose) should not be less than 10 % of outstanding deposits.
- Filing of Annual Accounts, Audit, and Tax Returns, in the proper format, is compulsory.