Nidhi Company

“Nidhi” also known as“Mutual Benefit Society” is governed by Section 406 of the Companies Act, 2013 and Nidhis Rules, 2014. “Nidhi” means a company which has been incorporated as a Nidhi with the object of cultivating the habit of saving amongst its members. Nidhi also refers to receiving deposits from and lending toits members only for their mutual benefit. Nidhi is like a Non-Banking Financial Company (NBFC) but is not governed by RBI. RBI does not govern Nidhi companies as it only deals with its members and not with outsider.

I. Applicability of Nidhi Companies:

• Every Company which had been declared as a Nidhi or Mutual Benefits under Section 620A (1) of Companies Act, 1956.
• Every company functioning on the lines of a Nidhi company or Mutual benefit society but has either not applied for or has applied for and is awaiting notification to be a Nidhi or Mutual Benefit Society under Section 620A (1) of Companies Act, 1956.
• Every company incorporated as a Nidhi pursuant to the provisions of Section 406 of the Companies Act, 2013.

II. Significance of Nidhi Companies

• The principle of Nidhi Company is to pool the savings from members and lend only to members and non-dealing with any outsider, which enables members to save their small amounts.
• Nidhi Companies can also help its members by granting loans to them for various needs whether for business or personal use. This the reason because of which Nidhi Companies can also be referred to as “Mutual Benefit Society” and some Nidhi Companies are also known under name as Benefit Funds, Mutual Benefit Funds, Nidhi, Permanent Fund, and Mutual Benefit Company.
• RBI is empowered to issue directions in matters relating to deposit acceptance activities of Nidhi companies. However, in recognition of the fact that these Nidhi’s deal with their shareholder? members only, RBI has exempted the notified Nidhi’s from the core provisions of the RBI Act.

III. Conditions applicable to the Nidhi Companies:

• Share Capital: Nidhi Company shall be incorporated as a public company with a minimum paid-up share capital of INR 5,00,000/- and shall issue fully paid-up equity shares with a nominal value of INR 10 each.A minimum of 10 equity shares or shares equivalent to INR 100 has to be allotted to each deposit holder of Nidhi Company. Saving account &Recurring accountholder shall hold at least one equity share of INR 10 each.
• Memorandum of Association (MOA) of Nidhi Company shall only have Main Object towards encouragement of the habit of savings amongst its members, receiving and lending money /deposits to and from its members for their mutual benefit etc. Nidhi Company may, however, provide locker facilities on rent to its members only if the rental income is 20% or less of the gross income earned by it at any time during the year.
• Nidhi company within 1 year of its incorporation shall ensure that:

1. It shall have minimum 200 members at any time within one year from the date of its incorporation and minimum 3 Directors.
2. Net owned funds should be minimum INR 10,00,000 within one year from the date of its incorporation and shall maintain the same throughout the year.
3. Ratio of Net Owned Funds to deposits shall not be more than 1:20 which means, the Company shall not accept deposits exceeding twenty times of its Net Owned Funds as per its last audited financial statements. This ratio shall apply to incremental deposits.
4. It shall have unencumbered term deposits with a Scheduled Commercial Bank other than a co-operative bank or a Regional Rural Bank or shall invest in post office deposits a minimum of 10% out of outstanding deposits on the last working day of the second preceding month. However, if approval from Regional Director is obtained, then the Nidhi Company may reduce the limit of 10% in case of unforeseen commitments for the purpose of repayment to depositors.

• Nidhi Company shall not levy service charges for issue of shares. Further, Nidhi Company cannot issue preference shares, debentures or any other debt instrument at any time. Its Name shall end with “Nidhi Limited”.Minor, a body corporate or trust cannot be a member of Nidhi Company. It cannot not open Current Account in the name its members. Nidhi Company shall not carry on any business in its own name other than that of borrowing or lending.
• If Nidhi Company has issued preference shares before the commencement of the Act, then the same shall be redeemed. It cannot carry on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate. It should pass a Special Resolution and obtain prior approval from the jurisdictional Regional Director for acquisition of any other company.
• Nidhi Company cannot pledge any of the assets lodged by its members as security. It can accept or lend deposits only from or to its members. It cannot enter into any partnership arrangement in its borrowing or lending activities.
• Nidhi Company shall not issue or cause to be issued any advertisement in any form for soliciting deposit subject to conditions. Private circulation of the details of fixed deposit schemes among the members with words “for private circulation to members only” shall not be considered to be an advertisement for soliciting deposits.
• Nidhi Company shall not pay any brokerage or incentive for mobilising deposits from members or for deployment of funds or for granting loans.
• Membership in Nidhi Company: A minor cannot be a member. Deposits may be accepted in the name of a minor, if they are made by the natural or legal guardian who is a member of Nidhi. A Nidhi shall not admit a body corporate or trust as a member.Its members should not reduced less than 200 at any time.
• Directors in Nidhi Company: The Director shall be a member of Nidhi Company and he/ she shall be on Board for 10 consecutive years and be eligible for reappointment only after the expiration of 2 years after he ceases to be a Director. Where the tenure of any director in any case had already been extended by the Central Government, it shall terminate on expiry of such extended tenure. The person to be appointed as a Director shall have a valid Director Identification Number (DIN) and shall not have been disqualified as provided in Section 164 of the Companies Act, 2013.

IV. Branches by Nidhi Company:

• Although Nidhi Company is governed by Companies Act, 2013, unlike a Company, it cannot easily open a branch office.
• Only a Nidhi Company which has earned net profits after tax for immediately preceding 3 continuous financial years and has filed financial statement and annual return (up to date) can open a branch within the state where it has its Registered Office Address.
• Nidhi company can open only 3 branches within the district. However, if approval is obtained from Regional Director then more than 3 branches can be opened outside the district andthe intimation of the same should be given to the respective Registrar within 30 days of such opening.
• Minimum requirements for closure of Branch of Nidhi Company:

1. Advertisement in a newspaper in vernacular language before at least 30 days of closure;
2. Fixing such advertisement on notice Board of Nidhi Company for at least 30 days from such advertisement;
3. ROC intimation within 30 days of closure.

V. Deposit:

• Acceptance of Deposits:

Fixed Deposits: Minimum period of 6 months and maximum period of 60 months;

Recurring Deposits: Minimum period of 12 months and maximum period of 60 months. Maximum period shall correspond to the repayment period of such loans granted by Nidhi Company in case of mortgage loans.

1. Nidhi Company shall not accept deposits exceeding twenty times of its Net Owned Funds as per its last audited financial statements. This ratio shall apply to incremental deposits.
2. Application for acceptance of deposit shall contain certain mandatory particulars as prescribed under Rule 12 which inter alia provides for financial position, terms and conditions of deposit, right of depositors to approach Consumer Disputes Redressal forums, proof of identity/address, introduction etc.,
3. Acceptance of Deposits shall be as follows:
4. In case of Savings Deposit Account, the maximum balance shall not exceed INR 1,00,000/- at any point of time and the rate of interest shall not exceed 2% above the rate of interest payable on savings bank account by nationalised banks.
5. Existing Companies (before 26th July, 2001) and which have accepted deposits in excess of the aforesaid limits, the same shall be restored to the prescribed limit by increasing the Net Owned Funds position or alternatively by reducing the deposit based on the ratio of net owned funds as given under Rule 11(2) and such companies shall not accept fresh deposits or renew existing deposits if such acceptance or renewal leads to violation of the prescribed ratio.

• Rate of Interest on Deposits:

Following shall be the maximum Rate of Interest:

1. Fixed and Recurring Deposits: Rate not exceeding the maximum rate of interest prescribed by the Reserve Bank of India which the Non-Banking Financial Companies can pay on their public deposits.

2. Savings Deposits Account: Rate of Interest shall not exceed 2% above the rate of interest payable on Savings Bank Account by nationalized banks.

• Foreclosure of Deposits:

1. Deposits shall not repay within 3 months;
2. After 3 months before 6 months no interest shall be paid on deposits;
3. After 6 months before expiry interest shall be reduced by 2% from the rate which it was accepted.
4. In case of death of depositor, it shall be repaid to the surviving depositor or nominee or legal heir with interest up to the date of repayment without any reduction in the interest rate.

VI. Loans:

• Loan to Members:

1. A Nidhi Company shall provide loans only to its members on the basis of last audited annual financial statements up to following limits:
   1. In case the total amount of deposits accepted from members is less than INR 2,00,00,000: INR 2,00,000 a maximum loan can be given to its members;
   2. In case the total amount of deposits from members is less than INR 2,00,00,000 but exceeds INR 20,00,00,000: INR 7,50,000, a maximum loan can be given to its members;
   3. In case the total amount of deposits from members is less than INR 20,00,00,000 but exceed INR 50,00,00,000: INR 12,00,000, a maximum loan can be given to its members;
   4. In case the total amount of deposits from members exceeds INR 50,00,00,000: INR 15,00,000 a maximum loan can be given to its members.
2. Nidhi Company shall not provide fresh loan of more than 50% of the limits if it has not made profits in three preceding financial years and member who has defaulted in repayment of loan shall not be eligible for further loan.
3. Loan shall only be provided against gold, silver, jewelry, immovable property, fixed deposit receipts, National Savings Certificates, other Government Securities and insurance policies subject to prescribed conditions.
4. Nidhi Company shall charge maximum interest at the rate of 7.5% above the highest rate of interest offered on deposits by said Company and shall be calculated on reducing balance method.
5. Rates of interest of all classes of loans shall be prominently displayed on the notice board at the registered office and each branch office of Nidhi.
6. Nidhi shall charge the same rate of interest on the borrowers in respect of the same class of loans.

• Repayment of Loan:

1. Gold, Silver and Jewellery: Repayment period shall not exceed one year. Security on loan can be 80% of the value of said ornaments.
2. Immovable Property: Repayment period shall not exceed 7 years, provided the loan shall not exceed 50% of the overall loan outstanding on the date of approval by the board.
3. Fixed Deposit Receipts, National Savings Certificates and other govt. Securities and Insurance Policies: Maturity date of such security shall not fall beyond the loan period or one year, whichever is earlier. Provided further that in the case of loan against fixed deposits, the period of loan shall not exceed the unexpired period of the fixed deposits.
4. Individual loan shall not exceed 50% of the value of property offered as security and the period of repayment of such loan shall not exceed seven years.

VII. Dividend:

• Dividend declared by Nidhi Company shall not exceed 25% or such higher amount as may be specifically approved by the Regional Director for reasons to be recorded in writing and subject to fulfilment of following conditions:

1. An equal amount of Dividend should be transferred to General Reserve;
2. There has been no default in repayment of matured deposits and interest; and
3. It has complied with all the rules as applicable to Nidhi Companies.

• In case of dividend payable in cash and if same is not claimed within 30 days from the date of declaration of the dividend, the company shouldcredit the said account in the account of the members.
• If the Nidhi Company announces the declaration of Dividend in local language in one local newspaper of wide circulation and the same is also displayed on the notice board of the Nidhi Companies for at least three months, then it shall be sufficient compliance under provisions of Dividend if the Dividend payable to a member is less than INR 100.

VIII. Appointment of Auditor& Auditors Certificate:

• Individual can be appointed as Statutory Auditor for a maximum one term of 5 consecutive years and audit firm can be appointed as Statutory Auditor for a maximum two terms of 5 consecutive years,provided that an auditor (whether an individual or an audit firm) shall be eligible for subsequent appointment after the expiration of two years from the completion of his or its term.
• The period prior to the commencement of these rules shall be taken into account in calculating the period of five consecutive years or ten consecutive years, as the case may be.
• The Auditor of the company shall furnish a certificate every year to the effect that the company has complied with all the provisions contained in the rules and such certificate shall be annexed to the audit report and in case of non-compliance, he shall specifically state the rules which have not been complied with.

IX. Returns andFiling Requirements:

• Form NDH-1: Nidhi Company shall file a return of statutory compliance in Form NDH-1 within 90 days from the close of first financial year which shall be certified by a CA/CS/CMA.
• Form NDH-2: If Nidhi Company is not meeting the conditions of minimum number of 200 members or ratio of 1:20 of net owned finds to deposits within 1 year as mentioned above, then it shall file Form NDH-2 to Regional Director for extension of period within 30 days of closure of first financial year.
• Form NDH-3: Nidhi Company shall file a half yearly return in Form NDH-3 within 30 days of conclusion of each half year.
• Form NDH-4: Nidhi Company shall file Form NDH-4 within 1 year of its incorporation or period up to which Regional Director has provided extension for filing of the same. In case of non-compliance, Nidhi Company shall be restricted from filing Form SH-7 and Form PAS-3.
• Form AOC-4: Nidhi Company shall file its financial statements in Form AOC-4 within 30 days of Annual General Meeting.
• Form MGT-7: Nidhi Company shall file its annual return in Form MGT-7 within 60 days of Annual General Meeting.
• The Auditor of the company shall furnish a certificate every year on compliance with the provisions and such certificate shall be annexed to the audit report.

X. Penalty:

• In case of non-compliance of Companies Act, 2013 and Rules thereunder, penalty for Company and every Officer in default shall be shall be as follows:

1. One time default: Fine up to INR 5,000
2. Continuing default: Fine up to INR 5,000 + Fine INR 500 per day from first day till the default continues

• Power to Enforce Compliance - Rule 24

1. ROC may call for such information or returns from Nidhi as he deems necessary and may engage the services of CA/CS/CWA in practice for assistance.
2. Regional Director may appoint a Special Officer to take over the management of Nidhi in case of Nidhi which has violated the Rules or MOA/AOA subject to opportunity of being heard.

XI. Major Exemptions to Nidhi Companies under Companies Act, 2013:

• Provisions with reference to Private Placement are exempted to Nidhi Companies. Subscription can be made by any number of persons without restriction of members limits of 50 / 200. Allotment of shares within 60 days / separate bank account, Subscription money shall be by way of cash (as sub-section (5) is exempted.
• Exemption under Section 47 is given with reference to voting right by member on a poll which allows a member to utilize his voting rightson poll up to five per cent, of total voting rights of equity shareholders.
• Provisions relating to further issue of Share Capital shall not be applicable to Nidhi Companies under Section 62.
• The document may be served only on members who hold shares of more than Rs.1000 in face value or more than 1% of the total paid-up share capital of the Nidhis whichever is less. For the other shareholders, document may be served by a public notice in newspaper circulated in the district where the Registered Office of the Nidhi is situated; and publication of the same on the notice board of the Nidhi company.
• Restrictions on purchase by company or giving of loans by it for purchase of its shares is not applicable, when shares are purchased by the Company from a member on his ceasing to be a depositor or borrower and it shall not be considered as reduction of capital under section 66 of the Companies Act, 2013.
• Nidhi Companies are exempted from compliance under provisions of Section 136 (1) to the effect that an intimation sent by public notice in newspaper circulated in the district of Registered Office shall be sufficient stating the date, time and venue of Annual General Meeting and that the financial statement with its enclosures can be inspected at the Registered Office of the company, and that the financial statement with enclosures are affixed in the Notice Board of the company and that a member is entitled to vote either in person or through proxy, in case of members who do not hold shares of more than INR 1,000 in face value or more than 1% of the total paid-up share capital whichever is less.
• Amount of deposit for proposal of candidature of Director is reduced to INR 10,000 for Nidhi Companies.
• Provisions for loan to Director under Section 185 shall not apply to Nidhi Company, if the loan is given to a Director or his relative in their capacity as members and such transaction is disclosed in the Notes of annual accounts.
• Provisions with respect to appointment and remuneration of Managing Director under Section 197 (1) and with respect to Registration offices and Fees under Section 403 shall be applicable with modifications that remuneration of a director who is neither managing director nor whole time director or manager for performing special services may be paid by way of monthly payment subject to the approval of the company in general meeting.

XII. Case Law:

• Non compliances should not Restrain the Company from continuingthe Business:

Fathimanatha Nidhi Limited vs Union of India, the petitioner asked for modification of the interim order passed by the Court which imposed restriction to enroll new members in the company, otherwisethe Company will be closed down without new members.According, to the respondent the Nidhi companies should not be permitted to continue the businessas the companies failed to meet requisite criteria for declaration as Nidhi companies. In this matter, the judgement was passed that when there are sufficient safeguards available to take action against the persons who violate the Rules, there is no reason to restraint the companyfrom doing the business. Accordingly, the condition against enrolment of new members has been relaxed and the petitioners be permitted to enroll new members additionally up to 10% of their present membership.

348 Nidhi companies failed to meet requisite criteria for declaration as Nidhi companies for the forms filed till 24^th August, 2021under the provisions of Companies Act, 2013 and this non-compliance was done twice within a period of 6 months. This made Government to urge the investors to check the status and background of Nidhi companies before investing in the same.

XIII. Taxation:

• There is no specific rate of Income Tax for Nidhi Companies under Income Tax Act,1961. Hence the rates of Income Tax that are applicable to be Domestic Companies shall be applicable to Nidhi Companies as well.
• Following are the Income Tax rates for Nidhi Companies:

1. Turnover or Gross Receipt of Manufacturing Domestic Companies in previous year not exceed INR 400 crores: 25% plus Surcharge of 7% if total income > INR 1 crore but < INR 10 crore;
2. Domestic Companies can one time opt for: 22% for existing manufacturing companies and 15% for new manufacturing companies registered on or after 01^st October, 2019 and before 31^st March, 2023 plus Surcharge of 10%;
3. Any other Domestic Company: 30% plus Surcharge of 12% if total income > INR 10 crore.

• Additional Health and Education Cess at the 4% shall be applicable.

Conclusion:

As evident by above provisions, there are both pros and cons for operation of a Nidhi Company. The main benefit is to the investors who intend to save their money for future with a desire that no outsider can use their savings and that the same money can be used for their own various needs. Also, the compliance of Nidhi Companies becomes easier as currently, the provisions of RBI are not applicable. However, since the activities of Nidhi Companies are resembling the activities of Non-Banking Financial Companies, RBI still has powers to issue the directions to them in the matters relating to deposit acceptance which can in future enhance compliance activities from the part of Nidhi Companies. Also, since the funds from members are raised in limited proportion, availability of obtaining credit is also limited.

Disclaimer:

The content of this article is only to provide knowledge and reference on the subject matter and should not be relied upon as it is without seeking advisory from professionals on the specific case and matter.