Advantages and Disadvantages of Nidhi Companies in India

Anushka Saxena

02 Aug, 2023

A Nidhi Company is a Company that carries on the business of accepting deposits and lending the same on demand amongst its members. It is registered under section 406 of the Companies Act 2013. The main objective of a Nidhi Company is to develop the habit of small savings among the middle and lower-middle-class population of the country. Because of its rigid membership structure, Nidhi Companies are considered a secured means of investment. Moreover, the registration process of Nidhi Company is simple and requires less documentation as compared to other forms of NBFCs. Further, in this blog, we shall discuss in detail the advantages of Nidhi companies and learn about certain limitations of it as well.

Salient Features of Nidhi Company

The main objective behind starting Nidhi Companies in India was to cultivate the habit of small savings among the lower and middle-class population of the country. One of the critical features of a Nidhi company is the limitation of its services to its members only. This reduces the risk of non-paying loans as the Company accepts deposits and offers loans to its members only. Other than the low risk of non-payment of loans, there are certain other advantages of Nidhi Companies, which we shall discuss in detail further in this blog.

• Nidhi Companies cultivate the habit of frugality and savings amongst its members.
• The registration process of Nidhi Companies is simpler than other forms of NBFCs and requires less documentation.
• Every Nidhi Company is mandatorily required to have Nidhi Limited in their name, and its core business must be to accept and lend deposits among its members only.
• Unlike NBFCs, Nidhi Companies cannot carry on the business of chit fund, hire purchase finance, leasing finance etc.

Advantages of Nidhi Companies

Nidhi Companies play a crucial role in helping the middle and lower-middle classes by providing them with financial services with minimum documentation and formalities. For people with a low annual income, it is difficult to meet the minimum eligibility criteria of loans and other financial services, due to which they are unable to fulfil their long-held dreams. Nidhi Companies provides a huge relief to these people by allowing them to deposit their savings and benefit from the returns at fixed durations. Apart from this, there are several other advantages of Nidhi Companies. Some of the advantages of Nidhi Companies are listed below:

• Easy Formation

The registration process of a Nidhi Company is relatively easy in comparison to other NBFCs. To create a Nidhi company, only seven persons are required, wherein three will be appointed as a Director. Moreover, the registration process requires less documentation and paperwork, which makes it easy to register a Nidhi Company.

• Minimal risk of non-payment of Loans

Since Nidhi Companies accept deposits and offer loans to none other than its members, it reduces the risk of non-repayment of loans as compared to other businesses of the exact nature. As all the financial activities of a Nidhi company are restricted to its members only, this risk of external factors affecting the functioning of the Company also reduces. Nidhi Companies are considered as one of the safest and easiest ways of inviting deposits from the public.

• Limited RBI Regulations

Even though Nidhi Company comes under the category of NBFC, it doesn’t require the approval of RBI to start its operations. Nidhi Companies must incorporate themselves as a Public Limited Company with the Ministry of Corporate Affairs (MCA)¹. The financial activities of Nidhi Companies fall under the ambit of Nidhi Rules, 2014, and the Companies Act, 2013. The regulatory compliances of Nidhi Rules are less stringent as compared to that of RBI. Hence, it becomes easier to start a Nidhi Company in India as RBI has exempted it from following stringent compliances.

• Low Capital Requirement

The minimum requirement of capital for registration is one of the vital advantages of Nidhi Company. As per Nidhi Rules 2014, the minimum capital required for registering a Nidhi Company is Rs 5 Lakh only, where you have the opportunity to invest the capital within two months after the registration also by paying the registering fees of Rs 19,999 only. When compared with the minimum net owned fund required for registering other NBFCs in India, the capital needed for registering a Nidhi Company is very less.

• No outside interference

The overall operations of a Nidhi Company are concerned with and to their members only. No external party can deposit money; also, they can’t intervene in management-related decisions of the Company.

• Perpetual Succession

Even after the death or retirement of any member of the Nidhi Company, its operations are not interrupted and continue to operate, irrespective of any such change in the Company. Nidhi Companies follow a practice of perpetual succession which allows the Nidhi Company to continue its operations till the time it gets legally dissolved.

The Downside of Nidhi Companies

After reading about the advantages of Nidhi companies, it seems all hunky-dory to start a Nidhi Company. However, it is to be remembered that Nidhi Companies do come with certain limitations as well. Nidhi Companies also have certain restrictions that should be known before starting one. Following are some of the disadvantages of starting a Nidhi Company in India:

• As discussed above, Nidhi Companies can accept deposits and lend the money only to its members and shareholders. No outsider can deposit money in a Nidhi Company, which limits the number of funds raised by the Company. Since Nidhi Companies don’t accept deposits from outsiders other than its members and shareholders, the amount received by them from their members, if less, limits the ability of the Company to lend money to its members. And if the lending capacity of a Nidhi Company is limited, it thrashes the whole objective of the formation of the Nidhi Company.
• As per section 406 of the Companies Act 2013 and Nidhi Rules 2014², A Nidhi Company has to ensure that by the end of 1st-year post-incorporation, it holds a minimum of 200 members, and the Net Owned fund should be Rs 10 lakh or more than 10 lakh rupees. Fulfilling these requirements post one year of incorporation might sometimes get tricky.
• Unlike other financial institutions, Nidhi Companies are restricted from advertising their depositing schemes. Nidhi Companies are allowed to promote among its members only.
• Nidhi Companies are restricted from running any other business other than lending and borrowing on its name.
• A Nidhi Company is not allowed to carry on its deposit schemes any more than a period of 5 years.

Restrictions on the Nidhi Company

It is not simple to register a Nidhi corporation; there are a number of requirements that all shareholders and members must abide by. A Nidhi corporation is often forbidden from engaging in any of the following actions:

• A Nidhi firm shouldn’t operate in the fields of insurance, leasing finance, hire purchase, chit funds, or hire purchase.
• It is improper for a Nidhi Company to issue debentures or preference shares.
• Any member of a Nidhi Company should not have a current account opened for them.
• A Nidhi firm should not lend money to anyone who is not a member of the firm or take deposits from them.
• It is forbidden for a Nidhi Company to publish any form of advertisement.
• A Nidhi Company shouldn’t sign any pay brokerage agreements or other contracts to solicit deposits of any type.
• None of the assets offered as security for the company’s obligations may be pledged by the members.

Final Thoughts

After a detailed discussion of the advantages of Nidhi Companies and certain limitations associated with it, it can be concluded that the Benefits offered by Nidhi Companies surely overpowers its flaws. In recent times Nidhi Companies have been trending in the financial markets for the variety of benefits they provide. The capital required for incorporating a Nidhi Company is affordable, even for the middle-earning people. Moreover, the registration process of a Nidhi Company is relatively easy and requires less documentation as compared to other financial institutions. For the registration purpose, you simply have to apply online and submit all the required documents. For any query related to Nidhi Company and its registration process, you can contact us at Enterslice.

FAQs

Also, read: A Complete Guide on How to Register a Nidhi Company

1. https://www.mca.gov.in/content/mca/global/en/home.html
2. https://pib.gov.in/PressReleasePage.aspx?PRID=1818298