A Comprehensive Guide to the Restrictions on Nidhi Company

Narendra Kumar

05 Sep, 2022

A Nidhi company known by the name of Mutual Benefit Companies is a legal company which can accept deposits as well as lend loans only to its members. The profit earned by the members is shared among themselves.

Guide to the Restrictions on Nidhi Company

If you are planning to incorporate a Nidhi Company, then you should look into the restrictions that are imposed on a Nidhi company in general terms as per the Nidhi rules, 2014.

A Nidhi company comes under the purview of a non-banking financial institution or an NBFC and does not require any approval from the RBI or the Reserve Bank of India.

The Nidhi rules govern a Nidhi company, 2014^[1]. Some of the restrictions on Nidhi company are listed below-

• A Nidhi company is not allowed to carry on a business related to lease financing, hire purchase financing, and chit fund, acquisition of the securities or any insurance issued by a body corporate.
• Nidhi Company cannot accept deposits from the general public and offer loans to the public. It can only accept deposits and extend loans to its members. It is based on the mutuality principle. Hence it is restricted from carrying on its own business. Even for carrying out some business activities, it needs an RBI license.
• A Nidhi company cannot issue preference shares, debentures as well as other debt instruments in any form and under any name whatsoever
• A Nidhi company can transact only with its members by issuing the equity shares of their company. Therefore, a Nidhi company is prohibited from issuing the securities of any other type.
• A Nidhi company cannot acquire other company through control of the board of directors composition or purchasing of securities of the other company whatsoever in any manner. No Nidhi company shall enter into an agreement for changing of its management.
• A Nidhi company is prohibited from issuing any advertisement for soliciting deposits in any form.
• If a Nidhi company engages in soliciting the deposits, then the fixed deposit schemes should carry the words (for private circulation to the members of the company only”. Only then it can be considered for private circulation among the members.
• Similar to other financial institutions, a Nidhi company is prohibited from advertising itself when related to the deposits. However, a Nidhi Company can issue advertisement within its group of members for any of the major events such as a launching of a new product, etc.
• No Nidhi company will pay any incentive or any brokerage for mobilization of the deposits from the company members or for granting of loans to the members or deployment of funds.A Nidhi company can do this only if the Nidhi Company has passed a special resolution in the annual general meeting as well as obtained the previous approval from the Regional Director who is having a jurisdiction over such Nidhi.
• No Nidhi company will pledge it’s an asset which is kept as collateral security by its members.

Conclusion

Nidhi Company is not dynamic and flexible to work as much as other companies are. It has its advantages as well as limitations. There are restrictions on the working of a Nidhi company since its deals in money related matters that too without the RBI approval, so the restrictions are bound to be there. Keeping in mind these restrictions on Nidhi Company, a start-up can choose the form of business ownership.

Read our article: Maximum Rate Interest Loan by Nidhi Company