A Nidhi company is a distinct entity in the non-banking finance sector, recognized under Section 406 of the Companies Act, 2013. In India, it is established with the primary aim of promoting the culture of thrift and savings among its members. These companies can only borrow and lend money exclusively from and to their members, who also serve as shareholders.
It is important to note that Nidhi companies are relatively small in comparison to the banking sector and mainly serve the purpose of encouraging savings within a specific community. The Ministry of Corporate Affairs is the registering authority for NIDHI companies.
Process for NIDHI Company Registration:
The process of registration is fairly simple. Follow the below steps:
Step 1: Apply for the DIN and DSC
First, the directors of the NIDHI company will have to apply for the DIN (Director’s Identification Number) and DSC(Digital Signature Certificate). DIN is given by the Ministry of Corporate Affairs and DSC is a digital signature used for the e-filing process. This step can be skipped if the directors already have both.
Step 2: Choose a Company Name:
Currently, you have to choose and present 3 unique names for your NIDHI company. Out of these 3, one will be selected and allotted to you by the MCA. These names must be unique and should not resemble any other company already registered.
Step 3: MoA and AoA:
To specify the purpose of the company, you will need to file the MoA(Memorandum of Association) and AoA(Articles of Association) with a subscription statement.
Step 4: Certificate of Incorporation(CIN):
It takes about 15-25 days to register a NIDHI company and to get an incorporation certificate. This certificate confirms that the company has been registered and specifies the company identification number too.
Step 5: Creation of a PAN, TAN, and Bank account:
You will need to apply for the company PAN and TAN. You will receive them within a week and then you can open a bank account by submitting your MoA, AoA, certificate of incorporation, and PAN to the bank.
Benefits of a Nidhi Company:
Registering a Nidhi company offers numerous benefits to its stakeholders. The key advantages are elaborated below:
1. Simple and Streamlined Formation
The process of forming a Nidhi company is straightforward, with minimal requirements. It mandates a minimum of 7 members, among whom 3 are designated as directors. The documentation process is uncomplicated, facilitating easy registration. Despite being a distinct type of Non-Banking Financial Companies (NBFC), Nidhi companies enjoy a comparably simplified registration procedure.
2. Freedom from RBI Compliance
One notable advantage is that Nidhi companies are exempt from complying with Reserve Bank of India regulations. This autonomy allows them to establish unique rules and regulations for their operations, setting them apart from other NBFCs.
3. Reduced Financial Risk
Nidhi companies mitigate financial risks by involving only their members in lending and depositing transactions. This limited scope of financial interactions ensures a safer transaction.
4. Cost-Effective Registration
Registering a Nidhi company is economically beneficial for its directors. The registration costs are lower compared to other types of NBFCs.
5. Assured Savings
The fundamental goal of Nidhi companies is to instill a culture of savings among the people of India. This focus on savings fosters trust and certainty in the concept of Nidhi companies.
6. Net-Owned Funding System
Nidhi companies operate on a net-owned funding system, wherein the owner invests an amount in the business to raise funds. For every Re. 1 invested by the owner, the company can raise Rs. 20 in funds.
Documents Required for Registering a Nidhi Company:
Below documents are required to register a Nidhi company:
- Evidence of the registered business location (such as ownership documents, rent or lease agreement)
- No Objection Certificate from the owner or landlord
- Proofs of identity and address for all members
- Photographs of all members
- Copies of PAN cards for all members
- Digital Signature (DSC)
- Director Identification Number (DIN) of the directors
- Memorandum of Association (MoA) of the company
- Articles of Association (AoA) of the company
- The MoA will specifically state the sole objective of the company, which is “promoting the practice of thrift and savings among its members, accepting deposits from and granting loans solely to its members for their mutual benefit.”
Required Conditions to Get ‘Nidhi’ Status:
The eligibility criteria for registration of a Nidhi company are as follows:
- Nidhi companies, in addition to their core members, are required to have at least 200 members for the company. Only after meeting this minimum shareholder requirement can a company proceed with Nidhi company registration.
- For the registration process, any company intending to become a Nidhi company must possess a minimum of Rs. 10 lakhs in net-owned funds. This criterion is essential for registration and must be adhered to. Companies with net-owned funds below this threshold are not eligible to apply for Nidhi company registration.
- To be eligible for Nidhi company registration, the ratio between the net-owned funds and the deposits must not exceed 1:20. Any ratio exceeding this limit will not be accepted for the Nidhi company registration.
- Another prerequisite for a company seeking Nidhi company registration is to have at least 10% of unencumbered term deposits of the outstanding deposits. Although a higher percentage of term deposits is acceptable, anything less than 10% will not suffice for Nidhi company registration.
- The company’s name must include ‘Nidhi Limited’.
- Once registered, companies under the Nidhi company category will be classified as public companies.
- Moreover, the registering company must have paid equity share capital of Rs. 5 lakhs.
If the Nidhi Company meets these conditions, it must file NDH-1 with the applicable fees within 90 days after the first financial year ends. The form should be certified by a practicing CA/CS/CWA.
For an extension, submit NDH-2 to the Regional Director within 30 days from the end of the first financial year.
Failure to meet the requirements after the second financial year results in a deposit acceptance restriction and possible penalties.
Prohibition for Nidhi Company:
Nidhi Companies have specific restrictions as per the Nidhi Rules. They are not allowed to:
- Engage in chit fund, lease finance, hire purchase finance, or acquire securities issued by any corporate body.
- Issue preference shares, debentures, or any form of debt instrument.
- Open current accounts with their serving members.
- Acquire another entity by purchasing securities or controlling the composition of any other company’s Board of Directors.
- Change their management without a board-approved special resolution and consent of the Regional Director.
- Conduct activities that deviate from the company’s stated objectives.
- Accept or lend deposits to non-members.
- Pledge members’ assets as security.
- Take deposits or grant funds to any corporate body.
- Enter into partnerships for borrowing or lending activities.
- Use advertisements to solicit deposits.
- Pay incentives to mobilize deposits from serving members or for fund deployment or issuing loans.
Additionally, new rules say Nidhi Companies can’t borrow loans from banks or other sources to lend to their members. They are also restricted from buying stocks, controlling other companies’ boards, or changing their management.
Conditions for Starting a Nidhi Company in India
To incorporate a Nidhi Company in India, you need to meet these conditions set by the Governing Authority:
- You must have at least 7 members, with 3 designated as directors to start the Limited Company incorporation process.
- You need a minimum equity share capital of Rs. 5 lakhs.
- Your company must have a limited company status under the Company Act, 2013.
- Your Memorandum of Association (MOA) must include the company’s intention to promote thrift and savings habits among its members.
Forms to be filed for Nidhi Company Registration:
The two forms that need to be filed for the Nidhi Company registration are:
- INC 9: To be filed by all the subscribers of the company to the Memorandum of Association(MoA).
- DIR 2: The directors of the company need to file this with the signatures of the subscribers, as per rules 5 & 6 of Nidhi Rules 2014.
Frequently Asked Questions (FAQs):
1. What is meant by Nidhi Company?
Ans: A Nidhi Company is a type of NBFC, that doesn’t need a license from the Reserve Bank of India (RBI). It was created to take deposits from and lend money to its members for their mutual benefit. Nidhi companies have been around even before the Companies Act 2013 came into existence and operate solely through their members.
2. What is the full form of Nidhi?
Ans: The full form of NIDHI is National Initiative for Developing and Harnessing Innovations.
3. Is Nidhi Company legal?
Ans: A Nidhi Company is registered under the provisions of the Companies Act, 2013. Its main purpose is to encourage thrift and savings among its members. To start a Nidhi Company, a minimum capital of Rs. 10 lahks is required (increased as per the Nidhi (Amendment) Rules, 2022).
4. Can we avail Loan from Nidhi Company?
Ans: Yes, you can avail of a loan from a Nidhi Company. Loan options and terms will vary, so check with the specific Nidhi company for details.
5. What is the loan limit of Nidhi Company?
Ans: The loan limits set against deposits are as follows:
- Amount ₹2 lakh – For a deposit of ₹2 crore
- Amount ₹7.5 lakh – Deposit between ₹2 and 20 crores
- Amount ₹12 lakh – Deposit between ₹20 and 50 crores
- Amount ₹15 lakh – Deposit greater than ₹50 crore