Nidhi Company

Difference between Nidhi Company and Chit Funds

Difference between Nidhi Company and Chit Funds

The essential difference between Nidhi Company and Chit Funds is discussed in this article. Let’s start with a fundamental knowledge of what a Chit Fund and a Nidhi Company are: –

Defining a Nidhi Company

A government-run initiative called Nidhi Company was created to protect the interests of small and medium-sized enterprises.

Money lending and borrowing among its members is their primary activity. They are also called Mutual Benefit Funds Companies, Mutual Benefits, Permanent Funds, and Benefit funds. In layman’s words, it may be described as an organisation created to foster a culture of fiscal responsibility among its members and to take deposits from and lend to them for their mutual benefit.

The registration of a Nidhi Company is done under Section 406 of the Companies Act 2013, and the focal government notifies it as a Nidhi Company by Section 620A of the Companies Act. It’s a non-bank financial company (NBFC) that lends and borrows money from its members and stockholders.

The Nidhi Rules, 2014, are the rules that apply to Nidhi Companies. They have been granted public limited company status. Therefore, they must follow two sets of guidelines: one for Public Ltd. firms under the Companies Act, 2013 and another for the 2014 Nidhi regulations. Such a corporation can be legally established without Reserve Bank clearance.

The Hindi word “Nidhi” signifies “funds” or “finance”. Nidhi refers to a corporation that was formed to instil a culture of thrift and saving among its members, as well as receiving deposits and lending to them exclusively for mutual benefit.

Advantages of Registration of a Nidhi Company

There are numerous benefits of registration of a Nidhi Company in India, which are given below:-

  • There is no external involvement in the management of the company.
  • It is simple to lend money to group members, raise capital, or borrow money from them.
  • They are easily managed.
  • Low capital investment.
  • A reduction in the number of required compliances.
  • Registration at a low cost.
  • The Companies Act 2013 provides several advantages and exemptions.
  • The RBI’s role is minimal.
  • A safe investment with a reduced interest rate.
  • There’s a low chance of risk.
  • A better way to save.
  • A better replacement for a Credit Co-operative Society.
  • It is recognized as a distinct legal entity.
  • Meeting the financial needs of low-and middle-income individuals.
  • Processing is simple.
READ  Nidhi Company Incorporation Procedure

Meaning of Chit Funds

In India, a chit store is a type of saving plan. A company that oversees, conducts, or supervises chits is known as a chit support company. As foreman, agent, or any other capacity, chits are specified in Section 2 of the Chits Funds Act 19821. As per the Chit Funds Act 1982 under Section 2(b), a chit, also known as a chit subsidize, Chitty, Kuri, or by some other name, is a transaction in which a person agrees with a stipulated number of individuals, that everyone must subscribe a certain proportion of money (or a certain amount of grain conversely), by method d periodic instalments over a specified duration and that each such subscriber may be entitled to the prize money in turn, as decided by part of by auction or by delicate or in any other way stated in the chit agreement.

A Chit Fund is a tremendous financial tool for saving and borrowing. It provides a decent return on investment as a saving tool and as a borrowing plan. It may be a trustworthy source of money in crises and otherwise.

Benefits of Chit Funds

  • It acts as a mechanism to save money and invest.
  • You get quick and easy access to money.
  • There is no or very minimum paperwork.
  • No collateral is charged.
  • No questions asked.
  • You can get the money in case of need or emergency.
  • A high amount of dividend is provided.
  • Low-interest rate.
  • You get usage flexibility.

Difference between Nidhi Company and Chit Funds

The primary difference here between Nidhi Company and Chit Fund is that a Nidhi Company is an NBFC that can only lend or accept deposits, while the latter, i.e., Chit Fund, is also a committee as a Nidhi Company, but they only accept instalments over a fixed timeframe that are paid by its members, and they neither lend nor accept the amount as a whole.

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These chit-financing programmes may be undertaken by composer financial institutions or unstructured schemes conducted by companies and relatives. There are several types of chits in which savings are created in the economic growth of individuals in a certain place, such as Kerala, through facilitating access to credit.

This is a typical phenomenon in Kerala, where a substantial segment of the population is engaged in. In Kerala, there is a state–owned corporation named Kerala State Financial Enterprise, whose major economic activity is the chit industry.

Chit Funds are occasionally exploited by their promoters, and there are several examples of the founders operating what is essentially a bogus scheme or Ponzi scheme and abruptly fleeing with their money.

Brief Differences Between Nidhi Company And Chit Funds
The Chit Funds register as per NBFC & Chit Funds Act, 1982. It is one of the particular types of companies which require additional licenses to work, while Nidhi Company is registered under The Companies Act and directives of RBI.
Chit Fund can be managed by an outsider appointed for supervision. Whereas in a Nidhi Company, there are no outsiders. It is entirely run by the members.
A Chit Fund is also known as a committee where a fixed instalment is paid by the members, which means some people contribute set money for a decided period, while a Nidhi Company is an NBFC, the members can deposit some amount of money or recurring deposit and lend money.
The Chit Fund members can withdraw some amount of money through auctions or a lucky draw, etc., while in a Nidhi Company shareholders, money is lent as a loan and must be returned with some interest.
A chit fund is kept for a certain duration. While a Nidhi Company, saving deposits or loans have a fixed duration, not the company.

Conclusion

Nidhi Companies are Non-Banking Financial Companies (NBFCs) that can accept deposits and lend money to their customers. Nidhi Company Registration is an entirely online procedure. Nidhi Companies are prohibited from paying a commission on deposits or conducting any type of marketing. Chit Fund Company, often known as the committee, is a form of Indian saving scheme in which members pay a defined payment over a specified timeframe. Chit Funds that are registered are safe since they are governed by the Chit Fund Act of 1982. The Chit Fund Company can only be registered by the state governments under this law. During the registration process, the owner must pay a security deposit of 100% of the chit value to the registrar of chits. If a chit fund business is found to be fraudulent, the Registrar of Chit Funds and the State Government can take regulatory action against the company’s owner. Unregistered chit funds are not safe since they have no legal obligation to reimburse the deposited cash to their subscribers.

READ  A Comprehensive Guide to the Restrictions on Nidhi Company

FAQs

  1. What is the difference between Nidhi Company and a bank?

    While NBFCs are required to open current accounts, The Nidhi Company is classified as a mutual benefit organisation rather than a for-profit business. No brokerage fees can be paid by Nidhi Companies. Nidhi Companies are not permitted to offer any brokerage services or incentives to move a member's funds.

  2. What are the other names of the chit fund?

    “Chit” refers to a transaction in which a person enters into an agreement with a specific number of people that each of them will subscribe to a particular amount of money (or an exact amount of grain in place of money) through periodic instalments. This transaction may be called a chit, chit fund, chitty, puree, or by any other name.

  3. What is the difference between Nidhi Company and a cooperative society?

    The Ministry of Corporate Affairs has regulations that apply to Nidhi Companies. A Co-operative Society, on the other hand, is governed by the State Government, which appoints a Registrar of Co-operative Societies. The primary goal of a Nidhi Company is to offer financial services to its members.

  4. What is the other name of Nidhi Company?

    Permanent Funds, Benefit Funds, Quasi Bank, Mutual Benefit Funds, and Mutual Benefit Company are other names for them. They are governed by the Ministry of Corporate Affairs, which has the authority to provide them with instructions about their deposit acceptance operations.

  5. Who controls chit funds?

    The Chit Funds Act of 1982 mandates that state governments alone register and oversee chit funds. The state appoints the Registrar of Chits for regulation in accordance with Section 61 of the Chit Funds Act.

  6. What is an example of a chit-fund?

    Consider a 50-member chit fund system where each member contributes Rs 10,000 per month to a Rs 5,000,000 pot over the course of 50 months. The member who placed the greatest discount bid at the time the auction was advertised won the bid. According to the law, the most discount someone may provide is 40%.

  7. Which is the largest chit fund in India?

    It is the largest chit fund in the nation and is presumably entirely secure. This company, which has operations in the states of Maharashtra, Tamil Nadu, Karnataka, and Andhra Pradesh, employs close to 6,000 people. If someone wants to save money for anything, they can invest in its plans.

  8. Can a Nidhi Company become a bank?

    Because it is neither advantageous nor tenable, a Nidhi Company cannot be turned into an NBFC or Non-Banking Financial Company. We have described how to transform your company into a full-fledged NBFC Company in this article.

  9. Is Nidhi Company private or government?

    A privately held small business entity is a private limited corporation. It prohibits the transfer of shares and caps membership at fifty. Nidhi corporation, on the other hand, is a kind of public corporation with no cap on the total number of members.

  10. Is Nidhi Company a chit fund?

    A Nidhi Company is an NBFC that can only lend money or accept deposits, whereas a Chit Fund is also a committee like a Nidhi Company but only accepts payments made in instalments over a set period of time by its members. This is the main distinction between the two.

Read our article:How NBFC is different from Nidhi and Micro Finance Company?

References

  1. https://www.indiacode.nic.in/handle/123456789/1797?sam_handle=123456789/1362

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