Conversion of a Nidhi Company into a Full-Fledged NBFC Company

Sonal Pruthi

11 Feb, 2021

The article speaks about the conversion process from a Nidhi company into a full fledged NBFC Company. Nidhi Company carries out business of lending and borrowing with its members. The investment is circulated between its members only. An NBFC-non-banking financial company is a type of bank involved in the banking activities. However, there are certain exceptions for banking activities carried out by an NBFC. An NBFC carries out business of borrowing and lending of deposits with the public. Lending and borrowing is carried with the public. This is a difference between NBFC and Nidhi Company.

NBFC and Nidhi companies are trying to fix the financial gap between organised and unorganised banking activities. It strengthens the financial aid of rural and semi-urban areas.

Salient Features of Nidhi Company

The following are the features of a Nidhi Company:

1. To inculcate the habit of saving and reserving funds among its members.
2. To receive deposits and loans from its members only for their mutual benefit.
3. Nidhi companies are exempt from the main provisions otherwise applicable to NBFC’s in India.
4. It requires minimum of 7 members and 3 directors to commence the business.
5.  These companies must register themselves with the name of Nidhi Limited.
6. There a maximum limit of members is 200.

Exceptions on Nidhi Company under which Legislation restricts the conversion into full fledged NBFC Company

The following businesses can be carried out by NBFCs but not by Nidhi Companies:

1. No business of categories– of chit fund, hire purchase, leasing finance, insurance or acquisition of securities issued by a corporate.
2. No issue of shares or debentures– they cannot issue preference shares, debentures, or any debt instrument by any name or in any form.
3. No current account– they cannot open a current account with its members.
4. The acquisition is not performed– they cannot acquire another company by purchase of securities or control the composition of the Board of Directors of any other company. They cannot acquire or agree to acquire unless a special resolution has been passed in its general meeting and they have obtained the previous approval of the Regional Director having jurisdiction for the same.
5.  The only business of lending – The Nidhi Company cannot enter into any business except lending and borrowing in its name. The condition to the above is; Nidhi companies have started with the locker facility. Locker is subject to rents at the maximum of 20 per cent of the gross income of the Nidhi at any point of time during a financial year.
6. No deposits from the public- they can accept deposits only from members of the Nidhi.
7. No deposits from corporate.
8. No pledge of securities by members.
9. There can be no partnership agreement for borrowing or lending activities.
10.  They cannot issue advertisement for deposits– only if the deposit scheme has been for the deposits stating that it is only for private circulation. It will not be advertisement for soliciting deposits.
11.  The company cannot pay brokerage or incentive for mobilising deposits from members or for the deployment of funds or for granting loans.

Read our article:A Complete Guide on How to Register a Nidhi Company

When can Nidhi Company not be converted into full fledged NBFC Company?

According to Nidhi Rules, 2014, a Nidhi Company is not allowed to engage in any business activity other than what is prescribed for a Nidhi Company.

There is the fundamental difference between Nidhi and NBFC, which is as follows:

1. Capital Requirement- The minimum net worth of the Nidhi Company is 10 Lakhs rupees, whereas for a full fledged NBFC company is 2 Crores Rupees.
2. Registration- The Nidhi Company does not require RBI registration, but a full fledged NBFC needs to get registered with the RBI.

When Nidhi Company is converted into full fledged NBFC Company

For conversion of Nidhi Company into NBFC Company the following has to be considered:

1. No license shall be filed directly to RBI^[1] for NBFC.
2. Changing the business name to the appropriate name.
3. Change the objectives under Memorandum of Association.
4. Changes in other legal obligations.

Procedure for the Nidhi company to be full fledged NBFC Company

The procedure which allows the conversion of Nidhi into full-fledged NBFC Company:

1. Type/class of NBFC is chosen– The type of NBFC is to be selected. There are multiple types of NBFC like asset finance company, loan Company, microfinance company or an investment company.
2.  Establishment of Company– The NBFC Company, has to be established as a Public or Private Company.  
3. Investment in a Company– There is a requirement of minimum capital investment.
4. Technical requirement– The director must have prior experience.
5. NBFC License– One has to apply for the NBFC License. Here the application is to be submitted to the RBI.
6. Approval or rejection by RBI– here it means that RBI has the authority to either accept or reject the approval.
7. The expense for conversion– the total cost of conversion of Nidhi Company into full-fledged NBFC is Rupees 8-10Lakhs.

Conclusion

It can be concluded that a Nidhi company to be converted into full fledged NBFC. The Nidhi Company requires no License, but NBFC requires registration under RBI. After conversion of a Nidhi company into a full fledged NBFC the registration is mandatory.

Read our article:A Brief Comparison on Nidhi Company vs NBFCs