Nidhi Company

Checklist for Incorporation of Nidhi Company

Checklist for Incorporation of Nidhi Company

Nidhi company is the most popular structure to start finance business for the community and by the community. In this article, We will discuss the checklist for the Incorporation of Nidhi company.

What should you know before Incorporation of Nidhi Company? 

  • Nidhi is the company which has Incorporation of Nidhi Company with the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit.
  • The companies doing Nidhi business, viz. borrowing from members and lending to members only, are known under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company.
  • As Nidhi’s falls under one class of NBFCs thus, RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. 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 and other directions applicable to NBFCs.

Applicability of companies act on Incorporation of Nidhi company

  • For the purpose of carrying out the objectives of ‘Nidhi’ companies, the Central Government made Nidhi Rules, 2014 and these rules shall be applicable to
  • Every company which had been declared as a Nidhi or Mutual Benefits under Section 620A(1)of Companies Act, 1956;
  • Every company operating on the outlines 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[1];

Pursuant to the provisions of Section 406 of the Companies Act, 2013 every Incorporation of Nidhi Company.

Requirements for Nidhi Company formation

There are the following requirements for Nidhi Company Registration:-

  • A Nidhi company to be registered under this Act shall be a Public Company
  • It shall have a minimum paid up equity share capital of ₹ 5,00,000/-
  • No preference shares shall be issued
  • If preference shares had already been issued by a Nidhi Company before the commencement of this Act, such preference shares are to be redeemed in accordance with the terms of the issue of such shares.
  • The object of the company shall be cultivating the habit of thrift and savings amongst its members, receiving deposits from and lending to its members only for their mutual benefits
  • It shall have the words ‘Nidhi Limited’ as part of its name.

Requirement after Incorporation of Nidhi Company

Within a period of 1 year from the commencement of these rules, every Nidhi company shall ensure that it has

  • Minimum number of members should be 200;
  • Net owned funds shall be ₹ 10,00,000/- or more (‘Net owned funds’ means the aggregate of paid-up equity share capital and free reserved as reduced by the accumulated and intangible assets appearing in the last audited balance sheet);
  • The ratio of net owned funds to deposit shall be not more than 1:20;
  • Unencumbered term deposits of not less than 10% of the outstanding deposits as specified in Rule 14;

General Restrictions

Rule 6 provides general restrictions. According to this Rule, no Nidhi shall-

  • Carry on the business of
  1. Chit Fund,
  2. Hire Purchase Finance,
  3. Leasing Finance,
  4. Insurance or Acquisition of Securities issued by any body corporate;
  • Issue
  • Preference Shares,
  • Debentures or
  • Any Other Debt Instrument by any name or in any form whatsoever;
  • Open any Current Account with its members;
  • Acquire another company by;
  • Purchase of securities or
  • Control the composition of the Board of Directors of any other company in any manner whatsoever or
  • Unless it has passed a special resolution in its general meeting and also obtained the previous approval of the Regional Director having jurisdiction over NidhiEnter into any arrangement for the change of its management;
  • Carry on any business other than the business of borrowing or lending in its own name;
  • Accept Deposits from or lend to any person, other than its members;
  • Pledge any of the assets lodged by its members as security;
  • Take Deposits from or lend money to anybody corporate;
  • Enter into any Partnership Arrangement in its borrowing or lending activities;
  • Issue or cause to be issued any advertisement in any form for soliciting deposit;
  • Pay any brokerage or incentive for mobilizing deposits from members or for deployment of funds or the granting loans.
  • Locker facilities on rent to its members subject to the rental income from such facilities not exceeding 20% of the gross income of the Nidhi at any point of time during a financial year shall be provided to Nidhi’s which have adhered to all the provisions of these rules.
READ  A Complete Guide on How to Register a Nidhi Company

Membership

  • As a member, a Nidhi shall not submit a body corporate or trust.
  • Except as otherwise permitted under these rules, every Nidhi shall ensure that its membership is not reduced to less than 200 members at any time.
  • A minor would not be allowed as a member of Nidhi.
  • But 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.

Share capital and allotment

Rule 7 provides that every Nidhi shall issue equity shares of the nominal value of not less than ₹ 10/- each. This requirement shall not apply to a company which has been declared as a Nidhi company. Provided that this requirement shall not apply to a company referred below:

  • According to Section 620A(1)of Companies Act, 1956 every company which had been declared as a Nidhi or Mutual Benefits;
  • 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;
  • No service charge shall be levied for the issue of shares.
  • Every Nidhi shall allot to each deposit holder at least a minimum of 10 equity shares or shares equivalent to ₹100/-.
  • A savings account holder and a recurring deposit account holder shall at least 10 equity shares of ₹ 10/-.

Acceptance of deposits by Nidhi company

  • A Nidhi shall not accept deposits exceeding 20 times of its Net Owned Assets as per last audited financial statements.
  • For a minimum period of 6 months and a maximum period of 60 months only the fixed deposits shall be accepted.
  • Recurring deposits shall be accepted for a minimum period of 12 months and a maximum period of 60 months.
  • The maximum period of recurring deposits shall correspond to the repayment period of such loans granted by Nidhi in case of recurring deposits relating to mortgage loans.
  • The maximum balance in a savings deposit account at any given time qualifying for interest shall not exceed ₹ 1,00,000/- and the interest shall not exceed 2% above the interest rate payable to savings bank account by nationalized banks.
  • Interest for fixed and recurring deposits shall be at a rate not exceeding the maximum rate of interest prescribed by RBI which the NBFC can pay on their public deposits.

Every Nidhi shall invest and continue to keep investing, in unencumbered term deposits with a scheduled commercial bank or post office deposits in its own name an amount which shall not be less than 10% of the deposits outstanding at the close of the business on the last working day of the second preceding month.

In case of unforeseen commitments, temporary withdrawal may be permitted with the prior approval of the Regional Director for the purpose of repayment to depositors, subject to such conditions and time limit which may be specified by the Regional Director to ensure restoration of the prescribed limit of 10%.

Loan by Nidhi Company

A Nidhi shall provide loans only to its members.  The loans given to a member shall be subject to the following limits:

  • ₹ 2,00,000/- where the total amount of deposits from members is less than ₹ 2 crores;
  • ₹ 7,50,000/- where the total amount of deposits from its members more than ₹ 2 crores but less than ₹ 20 crores;
  • ₹12,00,000/- where the total amount of deposits from its members is more than ₹ 25 crores but less than ₹ 50 crores;
  • ₹15,00,000/- where the total amount of deposits from its members is more than ₹ 50 crores.
  • Further, a Nidhi shall give loans to its members only against the following securities, namely:—
  • Loans to the members shall be given against the securities of gold, silver and jewelry and immovable property.
  • Repayment period of such loan shall not exceed one year in case of gold, silver, and jewelry.
  • In case of immovable property, the loan shall not exceed 50% of the value of the property offered as security and the period of repayment of such loan shall not exceed 7 years.
  • A loan may be given to the fixed deposit receipts, National Savings Certificates and other Government securities and insurance policies.
  • The rate of interest to be charged on any loan shall not exceed 7.5% above the highest rate of interest offered on deposits by Nidhi and shall be calculated by reducing balance method.
  • A number of deposits shall be calculated on the basis of the last audited annual financial statements.
READ  Loan and Interest of Nidhi Company: A Legislative Requirement

Dividend by Nidhi Company

  • A Nidhi company shall not declare dividend exceeding 25% of
  • Such a higher amount as may be specifically approved by the Regional Director for reasons to be recorded in writing and subject to below-mentioned conditions-
  1. An equal amount is transferred to General Reserve;
  2. There has been no default in repayment of matured deposits and interest; and
  3. It has completed with all the rules as applicable to Incorporation of Nidhi Company.

The legal requirement of Directors in a Nidhi Company

  • The director shall be a Member of Nidhi.
  • He shall hold office for a term up to 10 consecutive years on the Board.
  • He shall be eligible for re-appointment only after the expiration of 2 years ceasing 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 individual to be appointed as a Director shall comply with the requirements of section 152(4) of the Act and have not been disqualified as provided in Section 164 of the Act.

Auditor appointment procedure in a Nidhi company

  • The tenure of Auditor is five consecutive years.
  • No auditor or audit firm as an auditor shall be appointed for more than two terms of five consecutive years.
  • After the expiration of two years from the completion of his term the auditor shall be eligible for subsequent appointment.
  • The Auditor of the company shall furnish a Certificate every year to the effect that the company has complied with all the provision contained in the rules and certificates shall be enclosed to the audit report and in case of non-compliance, he shall specifically state the rules which have not been complied with.

Branches by Nidhi company

  • A Nidhi may open branches only if it has earned net profits after tax continuously during the preceding 3 financial years.
  • Within the district, the company may open up to 3 branches only.
  • If it proposes to open more than 3 branches within the district or any branch outside the district, it shall obtain prior permission of the Regional Director and intimation requires being provided to the Registrar about the opening of every branch within 30 days of such opening.
  • No Nidhi shall open branches or collection centers or offices or deposit centers, or by whatever name called outside the State where its registered office is situated.
  • Unless financial statement and annual return are filed with the Registrar, the branches or collection centers or offices or deposit centers will be opened.
READ  Conversion of a Nidhi Company into a Full-Fledged NBFC Company

Closure of Branch by Nidhi Company

A Nidhi shall not close any branch unless

  • It publishes an advertisement in a newspaper in vernacular language in the place where it carries on business at least 30 days prior to such closure.
  • At least 30 days from the date of which advertisement was published informing the public about such closure; fixes a copy of such advertisement or a notice informing such closure of the branch on the notice board of Nidhi for a period of.
  • Gives intimation to the Registrar within 30 days of such closure.

Annual returns required to fill by Nidhi Company

  • Nidhi requires to file a return of statutory compliances in Form NDH – 1 along with such fee as prescribed with the Registrar duly certified by a Company Secretary in practice or a Chartered Accountant in practice or a Cost Accountant in practice within 90 days from the closure of the first financial year after its incorporation and where applicable, the second financial year.
  • In case if the company fails in complying with the above criteria, then it shall within90 days from the close of the 1stfinancial year, apply to the Regional Director in Form NDH -2 along with fee for extension of time and the Regional Director may consider the application and pass orders within 30 days of the receipt of the application.
  • In case of failure, the Nidhi shall not accept any further deposits from the commencement of the second financial year till it complies with the provisions besides being liable for penal consequences provided in the Act.
  • Every company covered under rule 2 shall file half yearly return with the Registrar in Form NDH-3 along with such fee within 30 days from the conclusion of each ½ year duly certified by a company secretary in practice or chartered accountant in practice or cost accountant in practice.

Companies Covered under Rule -2 are the following:

  • Every company which had been declared as a Nidhi or Mutual Benefits under Section 620A(1)of Companies Act, 1956.
  • In accordance to 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.
  • Pursuant to the provisions of Section 406of the Companies Act, 2013 every company incorporated as a Nidhi.

Power to enforce compliance with Nidhi company

  • The Registrar of Companies may call for such information or returns from Nidhi as he deems necessary and may engage in the services of Chartered Accountants, Company Secretaries in practice, Cost Accountants or any firm thereof for assisting him in the discharge of his duties.
  • The Regional Director may appoint a Special Officer to take over the management of Nidhi in case the Nidhi has violated these rules or has failed to function in terms of the Memorandum and Articles of Association.
  • The Special Officer shall function as per the guidelines are given by such Regional Director.  An opportunity of being heard shall be given to the concerned Nidhi by the Regional Director before appointing any Special Officer.

The penalty for non-compliance of law by Nidhi company

  • If a company breaches any of the provisions of the rules the company and every officer of the company who is in default shall be punishable with fine which may extend to 5,000/- and where the contravention is a continuing one, with a further fine which may extend to 500/- for every day after the first during which the contravention continues.

Further, in accordance with Rule 9, every Nidhi shall maintain Net Owned Funds (excluding the proceeds of any preference share capital) of not less than 10 lakh rupees or such higher amount as the Central Government may specify from time to time.

Read our article:Rules Regarding Nidhi Company Setup in India

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