Nidhi Company

A Nidhi Company is a specialized financial entity that focuses on managing deposits from and offering loans to its members, who also hold shares in the company. Its primary goal is to encourage saving and financial prudence among its members while providing them with loan facilities.

In India, Nidhi Companies enjoy specific regulatory relaxations and exemptions from standard compliance and tax obligations, distinguishing them as unique institutions aimed at mutual benefit.

The legal foundation for Nidhi Companies in India is established under Section 406 of the Companies Act, 2013, along with the Companies (Nidhi Companies) Rules of 2014 and Chapter XXVI of the Companies Rules, 2014.

Purpose and Characteristics of Nidhi Companies

Nidhi Companies play a crucial role in the Indian financial sector by fostering savings among their members. These companies are distinctive because they can accept deposits and extend loans solely to their members. The term "Nidhi," which means "treasure" in Hindi, reflects their focus on financial enrichment.

Nidhi Companies are categorized as Non-Banking Financial Companies (NBFCs). Although they are not directly regulated by the Reserve Bank of India (RBI), the RBI has the authority to issue directives concerning their deposit-taking activities.

What differentiates Nidhi Companies is their exclusive engagement with their members, who are also shareholders. This unique relationship allows them to bypass certain provisions of the RBI Act and other regulations that apply to conventional NBFCs. Consequently, a Nidhi Company is a legally established entity capable of managing deposits and providing loans exclusively to its member-shareholders, setting it apart from other financial institutions in India. Understanding Nidhi Companies involves recognizing these distinct attributes and their specific operational framework.

Nidhi companies are subject to specific regulations designed to ensure they prioritize the interests of their members. They must adhere to the following restrictions:

• No Public Deposit Advertising: Nidhi companies are prohibited from soliciting deposits from the general public.
• No Chit Fund Activities: Engaging in chit funds is not allowed.
• No Leasing or Hire-Purchase Financing: These companies cannot offer leasing or hire-purchase services.
• No Lottery Operations: Running lotteries is strictly forbidden.
• No Insurance Services: Providing insurance is outside their scope.
• No Asset Sales or Mortgaging: They cannot sell, mortgage, or use assets as collateral.
• No External Lending Partnerships: Collaborating with other entities for lending or borrowing purposes is not permitted.
• Member-Only Transactions: Deposits and loans are restricted to members only; non-members are excluded.
• No Certain Shares or Debt Instruments: Issuing specific types of shares or debt instruments is restricted.
• Share Value Limits: There are caps on the value of shares that can be held.
• No Current Accounts for Members: While savings accounts are allowed, current accounts are not.
• No Corporate Transactions: Nidhi companies cannot lend to or accept deposits from corporations.
• No Commission for Deposits: Paying commissions or fees to attract deposits is prohibited.
• No Activities Beyond Member Transactions: Their business activities are confined to borrowing and lending exclusively for members.
• No Hire-Purchase Financing: They are restricted from engaging in hire-purchase financing.
• No Broker Fees for Loans: Fees for loans to brokers are not allowed.

To successfully register a Nidhi Company in India, you'll need to prepare and submit the following documents:

1. Directors Identification Number (DIN): Required for all proposed directors.
2. PAN Card: Permanent Account Number for identification purposes.
3. Proof of Residence: Documentation verifying residential address.
4. Photographs: Recent photos of the proposed directors and members.
5. Identity Proof: Such as an Aadhar card.
6. Proof of Business Address: Includes a rental agreement or lease document.
7. Ownership Proof: Verification of ownership for the business premises.
8. NOC (No Objection Certificate): If applicable, to ensure no objections from relevant parties.
9. Memorandum of Association (MOA): Essential document outlining the company's objectives.
10. Articles of Association (AOA): Details the company's rules and regulations.

Before Registering:

1. Minimum Number of Members: You need at least 7 members to start the registration process for a Nidhi Company.
2. Minimum Directors: The company must have at least 3 directors.
3. Initial Capital: A minimum capital investment of Rs. 5 lakhs is required.
4. Director Identification Number (DIN): All directors must have a DIN.
5. No Preference Shares: Preference shares cannot be issued.
6. Primary Objective: The main aim of the Nidhi Company should be to encourage savings by collecting deposits from members and providing loans for their mutual benefit.

After Registration:

1. Member Quota: Within the first year, the Nidhi Company must achieve at least 200 members.
2. Net Owned Funds (NOF): The company's NOF should be more than Rs. 10 lakhs.
3. NOF to Deposit Ratio: This ratio must be higher than 1:20.
4. Unencumbered Deposits: Unencumbered deposits should be over 10% of the total deposits.

Starting a Nidhi Company in India involves several essential steps, including handling legal requirements for member defaults. Here’s a simplified guide to the Nidhi Company registration process:

1. Obtain DIN and DSC Directors must first secure a Director Identification Number (DIN) and a Digital Signature Certificate (DSC). The DIN is issued by the Ministry of Corporate Affairs (MCA), and the DSC is necessary for electronic filings. If directors already possess these credentials, they can skip this step.

2. Prepare MoA & AoA Create the Memorandum of Association (MoA) and Articles of Association (AoA), outlining the primary objectives of the Nidhi Company. These documents, along with a subscription statement, must be submitted to the Registrar of Companies (ROC).

3. Name Approval Submit three proposed names for your Nidhi Company to the MCA. The MCA will select one name for approval. The chosen name must be unique and not currently in use. Once approved, the name is valid for 20 days.

4. Submit Registration Application Once the name is approved, directors need to file a registration application. This includes submitting the MoA and AoA to the relevant authorities.

5. Receive Certificate of Incorporation (CIN) The Certificate of Incorporation, which includes a unique Company Identification Number (CIN), is typically issued within 15-20 days. This certificate officially registers the Nidhi Company.

6. Apply for PAN, TAN, and Open a Nidhi Bank Account Next, obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN). With these, open a Nidhi bank account by providing the Certificate of Incorporation, MoA, AoA, and PAN.

Compliance Requirements for Nidhi Companies

To ensure smooth operations and regulatory adherence, Nidhi Companies must comply with various requirements, including:

• NDH-1 Form: Submit a list of members within 90 days of the financial year’s end using this form.
• NDH-2 Form: If the Nidhi Company has fewer than 200 members in its first financial year, request an extension from the MCA using this form.
• NDH-3 Form: File a half-yearly return in addition to the NDH-1 Form.
• Annual Returns: File annual returns with the MCA using Form "MGT-7."
• Financial Statements: Submit annual financial statements and related documents in Form "AOC-4."
• Income Tax Returns: Like other businesses, Nidhi Companies must file annual income tax returns by September 30th of the following fiscal year.