Operating Nidhi Company- Know About the Restrictions on Nidhi Company

Welcome to the world of Nidhi Companies, where the focus is on helping people save money and provide credit facilities within a community. Running a Nidhi Company lets you empower individuals and promote a culture of saving. However, it’s important to understand the regulations that govern these companies to ensure compliance while harnessing their potential for mutual benefit and financial growth. This article briefly describes the Nidhi Company Registration Process, What are the General Restrictions on Nidhi Company?

Nidhi Company Meaning

Before discussing the Nidhi Company rules and restrictions, let us have an overview of Nidhi Company meaning.

A Nidhi Company is a kind of Non-Banking Financial Institution (NBFI). The term “Nidhi” in Sanskrit means “treasure,” and these companies aim to cultivate the habit of thrift and savings among their members. The primary objective of a Nidhi Company is to promote the welfare of its members by accepting deposits from them and providing loans exclusively to its members.

Nidhi Companies are regulated by the Ministry of Corporate Affairs (MCA) under the Companies Act, 2013, and the Nidhi Rules, 2014. They are registered as public limited companies and operate on the principle of mutual benefit, with their members as both the depositors and borrowers.

Requirements for Nidhi Company Registration Process

Below are the requirements for Nidhi Company registration process-

Now let us have a look at the Nidhi Company rules and restrictions.

Nidhi Company Incorporation

Here is a general outline of the process for Nidhi company incorporation in India includes:

• Name approval:
  • Select a unique name for the Nidhi company
  • Check the name availability with the Registrar of Companies (ROC) through the MCA (Ministry of Corporate Affairs) portal
  • Once approved, the name will be reserved for 20 days
• Digital Signature Certificate (DSC) and Director Identification Number (DIN):
  • Obtain DSC for the proposed directors
  • Obtain DIN for the proposed directors from the MCA portal
• Memorandum and Articles of Association:
  • Prepare the Memorandum of Association (MOA) and Articles of Association (AOA) for the company
  • These documents outline the objectives, rules, and regulations of the Nidhi Limited Company
• Application submission:
  • Prepare and file the SPICe (Simplified Proforma for Incorporating Company Electronically) form with the ROC
  • Attach the MOA, AOA, and other required documents along with the application
  • Pay the prescribed fees during the filing
• Certificate of Incorporation:
  • After processing the application, if the ROC is satisfied, they will issue a Certificate of Incorporation
  • The certificate confirms the legal existence of the Nidhi Limited Company

Why is it necessary to know the Nidhi Company rules and restrictions?

Knowing the Nidhi Company rules and restrictions is crucial for several reasons:

• Compliance: Understanding and adhering to the regulations ensures that your Nidhi Company operates within the legal framework. Compliance demonstrates your commitment to transparency, accountability, and ethical practices, fostering trust among your members and stakeholders.
• Legal Protection: By knowing the rules, you can safeguard your company from potential legal consequences or penalties that may arise due to non-compliance. Staying updated with the regulations helps mitigate risks and ensures smooth operations.
• Member Protection: The rules and restrictions imposed on Nidhi Companies aim to protect the interests of the members. Adhering to these guidelines ensures that members’ deposits are safe and loans are provided within prescribed limits. This fosters confidence among members and strengthens the reputation of your company.
• Financial Stability: The regulations help maintain the financial stability of Nidhi Companies. By following the deposit limits, interest rate restrictions, and lending guidelines, you can ensure that your company’s financial health remains sound. This protects both the company and its members from undue financial risks.
• Regulatory Oversight: Nidhi Companies operate under the oversight of regulatory authorities such as the Ministry of Corporate Affairs (MCA) and the Reserve Bank of India (RBI). Complying with the rules establishes a positive relationship with these authorities and facilitates smoother interactions, including filing returns and obtaining necessary approvals.
• Member Confidence: Knowledge of Nidhi Company rules and restrictions instills confidence in your members. They feel assured that their interests are protected, their deposits are handled responsibly, and the operations of the company are conducted in a regulated manner. This encourages greater participation and engagement from members.

Overview of Rules Regulating Nidhi Company

The rules and regulations governing Nidhi Companies in India are primarily outlined in the Companies Act, 2013, and the Nidhi Rules, 2014. These rules ensure the proper functioning, transparency, and protection of the interests of the company’s members. Here are the key rules applicable to Nidhi Companies:

Incorporation and Registration:

• The company must be incorporated as a public limited company under the Companies Act, 2013.
• The name of the company must include the term “Nidhi Limited.”
• Minimum capital requirements and other registration formalities must be fulfilled.

Membership

• Membership is limited to individuals only.
• Each member must hold a minimum of 10 equity shares or any higher amount specified in the company’s bylaws.

Net Owned Funds (NOF)

• The company must maintain a minimum net-owned fund of INR 10 lakhs.
• The NOF represents the company’s net worth and acts as a safeguard for the deposits of its members.

Interest Rates

• The interest rates charged on loans provided by Nidhi Companies should not exceed the limits set by the Reserve Bank of India (RBI) for NBFIs.

Branch Expansion

• Nidhi Companies can establish branches, but there are initial restrictions on opening branches outside the state of the registered office.
• Branch expansion is subject to meeting specific financial criteria.

Regulatory Compliance

• Nidhi Companies must comply with various regulatory requirements, including filing annual returns, maintaining proper books of accounts, conducting regular audits, and submitting financial statements to the Registrar of Companies (RoC) and MCA.

Auditing and Reporting

• Regular audits must be conducted by qualified auditors.
• Annual financial statements and other reports must be submitted to the RoC and MCA.

What are the General Restrictions on Nidhi Company?

The general restrictions on Nidhi Company are-

• Nidhi Company is strictly prohibited from dealing in funds, hire purchase financing, leasing financing, insurance, or obtaining securities from any legal entity. In addition, Nidhi cannot invest in any securities of any company. Further, if Nidhi Company wants to carry out any business activities, it has to apply for a license from RBI.
• Nidhi Company is not authorized to issue preference shares, debentures, or any debt instruments in any form or under any name. In addition, Nidhi Company cannot issue securities of any kind and can only issue equity interests to its members, as they can only trade with its members.
• Nidhi Company has limited ability to open its member’s checking accounts. Nidhi Company can open a savings bank account and not open a current account of its member as RBI has exempted Nidhi Company to follow the procedures of banking regulations.
• Nidhi Company is restricted from acquiring any other company. Unlike other forms of companies, the Nidhi Company does not have control over the securities of other companies and the Board of Directors. Therefore, they can enter into any agreements, unless they have adopted a special resolution at the general meeting of the company. The other condition may be the approval from the Regional Director having jurisdiction over that particular Nidhi Company. This is the only reason why Nidhi Company companies operate only in their particular state.
• Nidhi Company may not engage in any business other than lending and borrowing. Nidhi Company cannot carry on any business under its name other than lending and borrowing. Nidhi Company may provide a locker to its members.
• Accepting money and lending money to any person other than its member is strictly prohibited by Nidhi Company. Nidhi Company can trade with its members only if Nidhi Company wants to trade outside its member before Nidhi Company has to proceed further for full-fledged NBFC.
• Nidhi Company has restrictions on pledging assets posted by its members as security. Assets deposited by a company partner cannot be pledged to take over a loan with any entity of the bank. This act provides its member with security for their property.
• No Nidhi Company may enter into any partnership agreement for lending or borrowing. Nidhi Company companies are non-commercial companies and operate on the principle of reciprocity. So they cannot enter into any partnership agreement for any major financial projects.
• Nidhi Company is restricted from any kind of advertisement. However, Nidhi Company can only advertise among its members.
• Nidhi Company shall not pay any brokerage or inducement for providing or providing loans. To call the deposits of members, Nidhi Company is not permitted to hire a person for the purpose. Else cannot even offer any incentives or brokerage.

Final words

Operating a Nidhi Company entails adhering to a set of rules and restrictions laid out by the MCA. Knowing Nidhi Company rules and restrictions helps us understand and comply with these regulations, Nidhi Company Companies can foster a savings-oriented environment while ensuring the protection of members’ interests. It is essential to stay updated with the latest guidelines and consult legal professionals or experts well-versed in company law to navigate the intricacies of managing a Nidhi Company successfully.

In case of any query regarding Nidhi Company rules and restrictions, a team of expert advisors from Legal Window is here to assist you at every step. Feel free to reach us at [email protected].