Nidhi company registration

Nidhi company is a non-banking financial (NBFC) type of company. It is defined and provided under section 406 of Companies act. Its core business is collecting money in the form of deposits and further lending it to its members in the form of loans. The borrowing of money is also done through its members only. Nidhi company is also called Mutual benefit company, Permanent fund and benefit funds company. The word Nidhi in Hindi means treasure. The purpose of such companies is to help small households, who find it hard to invest their money and get loans from banks and other financial institutions. Nidhi company creates a sense of assurance to them that they are members of that company and only members can avail loans and their deposits are in safe hands.

Nidhi company is governed by the Nidhi rules, 2014 which are regulated by the Ministry of corporate affairs. Nidhi company does not require any license or permission from Reserve Bank of India (RBI). It is a company that works through its members and for them only. It is the cheapest and the easiest way to raise fund from the general public, the only precondition before taking deposit from a person is that the person must be made a member. Though a Nidhi company does not require permission from Reserve Bank of India, but RBI has the power to issue directions to such companies in matters appertain to acceptance of deposit from its members.

Nidhi companies were in existence before the enactment Companies act, 2013 but were regulated after Nidhi rules were formed. The basic concept of the company is the principle of mutual benefit of its members. These companies are not popular in the northern part of India, but these are very popular in South India and 80 percent of these companies are functioning in Tamil Nadu.

Benefits of Nidhi company

Easy to form/incorporate

It is easy to form a Nidhi company as the process of registration is easier and less complex as compared to other companies. Minimum no. of members required to form a Nidhi company is 7 and out of these 7 members 3 must be appointed as directors of the company. It takes 35 to 45 days for registering a Nidhi company.

No permission required from Reserve bank of India –

Though Nidhi company is Non-Banking Finance company, but it is exempted by RBI from taking permission from it before establishing itself. The overall compliance is also less, and it is only governed by Nidhi rules, 2014. Banks and other NBFC’s are required to adhere to stringent rules and regulation of Reserve bank of India. The no. of documents and other formalities is also less in Nidhi company.

Better credibility –

Nidhi company is a localized form of repository of money. In India financial literacy is very low, and people generally tend to stay away from banks. But a Nidhi company is formed for a local area mostly a single district. All members are local people in the company, people tend to have trust in their own people, and thus they have an assurance that the company works for their benefit.

Limited power to extend loan –

Nidhi company has certain restriction on the amount of loan it can extend to a single member, thus the risk of default gets lower as no member can take a large loan, as we are witnessing nowadays that big companies or individuals take large loan and then default. To avoid this and safeguard the interest of all members, a single member can take a limited amount of loan. And if he defaults in repayment then he is barred from taking loan again.

Can provide locker facility –

This is an added advantage to its members; members can keep their valuables in lockers. And Nidhi can earn income from providing this facility.

Advertisement by word of mouth –

Nidhi company cannot advertise about its business activity, but Nidhi company works in a local area and members are mostly from one district therefore members of Nidhi are its advertising agents in disguise. People tend to trust their own people more. Thus, Nidhi can become very successful if its operations are clean and accountable.

Trust, financial institutions and other companies cannot avail loans from Nidhi –

Nidhi company cannot extend loans to trust, companies or other institution. These entities are powerful and have a wider influence as compared to an individual member. Thus, Nidhi rules do not permit it to extend loans to such entities.

Separate legal identity –

Nidhi is a legal entity and also a juristic person. Thus, Nidhi company can sue and can be sued. Nidhi company has its own identity different from its members.

Limited liability –

Nidhi company is incorporated as Public limited company. Therefore, its liability is limited. Members are not responsible personally for liabilities of the company.

Perpetual existence –

Nidhi company has uninterrupted existence and perpetual succession. Its is not affected by any single member whether that member dies or quits his membership. It can only end if it is legally dissolved.

Better rate of interest –

Nidhi company offers attractive 7.5 percent rate of interest to its members, and it can charge up to 20 percent interest while extending loans to its members. The rate of interest is also same to one class of loans and cannot change as per members, it must be same for all members.

General guidelines for registration of Nidhi company

• Every company functioning on the line of Nidhi company or which must start incorporation process afresh has to be incorporated with registrar of companies (ROC) pursuant to section 406 of Companies act and must comply with other requirements mentioned in the Nidhi rules, 2014. 
• Nidhi company shall be a public company and shall have a minimum paid up capital five lack rupees.
• Once the act commences, no company shall issue preference shares to any person or firm.
• For already function Nidhi companies, preference shares issued by the Nidhi company shall be redeemed in accordance with term of issue of shares.
• Every company which is incorporated shall have ‘Nidhi Limited’ in its name.

Documents required for registration

• A copy of PAN cards of directors and shareholders in the Nidhi company.
• Copy of ID proofs like Aadhar, passport or driving license of shareholders and directors.
• Address proof of shareholders and directors.
• Photographs of director and shareholders.
• Land documents like registered deed, lease/rent deed or any other land document.
• Copy of electricity bill or a copy of electricity approval by electricity board.
• A copy of No objection certificate if any required to be obtained.

Registration process

• To start incorporation, process the company requires a minimum of at least 3 directors and 7 members.
• The company shall apply for Director Identification No. (DIN) and Digital Signature Certificate (DSC).
• Then company shall apply to Ministry of Corporate Affairs through Form INC-1 for reserving its name, the name should have Nidhi limited in it.
• After getting approval of the name the company shall prepare Memorandum/Article of association, Nidhi company shall in its Memorandum of Association state its object as – “Cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to its members only, for their mutual benefit’’
• The company shall then apply for incorporation of company with Registrar of companies.
• The company shall then apply for PAN no., Tax deduction and collection account no.
• Ministry of Corporate affairs has simplified the process of online registration of company, the company can apply online on the web portal of Ministry and fill form INC-32, INC-33 and INC-34 for incorporation.

Law governing Nidhi Company

The incorporation of such entities is in the form of Public Limited Company; therefore, they have to comply with provisions of Companies act and another set of rules that are Nidhi rules, 2014. There is no need to take approval or any type of license from Reserve bank of India. This category of NBFC has been exempted by RBI and thus compliance is simpler for this type of NBFC compared to other NBFC’s. Nidhi rules have provided detailed process of compliances such as registration requirements of the company, general restriction and prohibition, method of taking deposits, method of extending loans, rate of interest to be charged etc.

Activities prohibited/restricted for Nidhi company

• Nidhi company cannot do business of –

  •Chit fund

  •Insurance

  •Acquiring securities

  •Leasing finance

  •Hire purchase finance

  •Asset financing

• It cannot issue debentures, debt instruments of any form and preference shares.
• Nidhi company cannot open current account of its members but can open saving accounts.
• It cannot acquire a company by purchasing its securities, it cannot control the board of directors of another company in any form or enter into an arrangement with it for change of its management, until a special resolution is passed in the general meeting of the company and prior approval from the concerned regional director is obtained.
• Cannot do any other business except that of borrowing and lending but can provide locker facility.
• Company is prohibited from accepting deposits or lending loans to a non-member.
• It cannot enter into partnership agreement in borrowing or lending of money.
• Cannot advertise regarding solicitation of deposit. But private circulation of details of fixed deposit schemes can be done to its members for their information and such private circulation would not be considered as advertisement.
• Cannot pay brokerage to any person for mobilizing deposits from its members or granting loan to its members.
• A trust or a body corporate cannot be a member of Nidhi company.
• A minor cannot be a member of Nidhi company, but deposits can be accepted in the name of minor if deposited by guardian of that minor provided guardian is already a member of the Nidhi company.