NBFC Nidhi Company

A Brief Comparison on Nidhi Company vs NBFCs

Section 406 of the Companies Act 2013 governs Nidhi Companies & RBI Act govern NBFC. In this article, we will compare Nidhi Company vs NBFC.

They belong to the non-banking Indian finance sector. Their main business is to borrow money or lend money to its members.

Nidhi Companies are regulated by the Ministry of Corporate Affairs and Reserve Bank of India is empowered to give directions regarding the matters related to acceptance of deposits.

Main objectives of Nidhi Company

Following are the objectives of Nidhi Company Registration:

1. The main objective is to cultivate the habit of savings among its members and,
2. To receive or lend deposits to its members for their mutual benefit. It deals with its members only.

Its source of fund is a contribution from its members but in comparison to the banking sector, deposits raised by Nidhi companies are not as much as of the banking sector. Under this loans are given at reasonable rates. These types of loans are generally secured loans.

Requirements for Nidhi Company

• For the purpose of Incorporating a Nidhi Company under the Companies Act 2013^[1], it has to be a public company.
• It must have a minimum equity share capital of Rs. 5,00,000.
• There must be minimum 3 directors and 7 members.
• No issuance of preference shares. If preference shares had been already issued before the commencement of this act, then these shares shall be redeemed as per the terms of the issue of such shares.
• The main objective of such a firm would be to cultivate the habit of savings among its members and its services will be restricted to its members only.
• Its name must have Nidhi Limited.

Requirements for Incorporation of Nidhi Company

For incorporation of Nidhi Company-

• Every Nidhi Company within a period of one year from the commencement of these rules ensures that it has a membership of 200 people.
• It will also ensure that its net owned funds are Rs.10,00,000 or more.
• It will also ensure that the ratio of net owned funds to deposits is not more than 1:20.

Restrictions on Nidhi Company

It may be noted that Nidhi Vs NBFC can be compared for a better understanding of their benefits. However, certain restrictions have been imposed on Nidhi Company.

Nidhi Company has the following restrictions:

1. Chit Fund
2. Hire Purchase Finance
3. Leasing Finance

• On the issuance of preference shares and debentures or any other debt instrument.
• Cannot open a current account with its members.
• Acquire another company and control the composition of a board of directors of the company.
• Cannot enter into any arrangement for the change in management, but it can be done if the special resolution has passed in general meeting and prior approval of the regional director has been obtained.
• They cannot accept deposits or lend money to any person other than members.
• Cannot carry any business other than the borrowing or lending.
• Cannot pledge assets which have been lodged by the members as security.
• They cannot accept deposits or lend money to body corporate.
• They cannot enter into a partnership agreement for its borrowing or lending activities.
• They cannot issue advertisement for deposits.
• They cannot pay any brokerage for granting a loan to its members.

What is NBFC Registration?

The Non-Banking Financial Companies (NBFCs) are a financial institution that is engaged in providing banking services. A non-banking institution whose principal business is to receive deposits under any scheme is also a non-banking financial company. They provide banking services but do not have a banking license.

NBFCs are those type of financial institutions which are engaged in the business of loans & advances, and acquisition of shares/ stocks or other securities issued by government or local authority, leasing, hire-purchase, insurance business, but do not include those financial institution whose principal business is related to agricultural activity, industrial activity, sale or purchase of any goods or services other than securities and sale/purchase/construction of immovable property.

Under the Indian Financial System, NBFCs have become an important segment.

They raise funds from the public and then lend them to ultimate spenders. They are also engaged in advancing loans to wholesale traders & retail traders, small-scale industries and to self-employed persons. They are considered as complementary to the banking sector as they are engaged in providing customer-oriented services, an attractive rate of return on deposits and provide flexibility in meeting the credit needs.

NBFCs are regulated by Reserve Bank of India and issue directions under the framework of Reserve Bank of India Act, 1934.

• It is a financial institution, which is the company;
• A non-banking institution whose principal business is to receive deposits under any scheme or in any manner;

Requirements for NBFCs Registration

• First, it is very important to get registered itself with the RBI.
• Any company, desirous of commencing business as NBFC should have a minimum net owned funds of Rs. 200 lakhs.
• (Net Owned Funds = Paid up share capital + Free Reserves – Accumulated losses, deferred revenue expenditure, and other intangible assets.)
• For the purpose of NBFC registration, one must have to submit the application in the prescribed format along with the documents required by the RBI.
• After satisfaction RBI issues the certificate of registration to the company.
• NBFCs holding a valid certificate of registration can accept public deposits.

NBFCs need to comply with the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998. Here are some of the important regulations are:

• They can accept public deposits for a minimum period of 12 months and for a maximum period of 60 months.
• They cannot offer interest rates higher than the ceiling rates prescribed by the RBI.
• They must possess an investment-grade credit rating.
• Repayment of deposits cannot be guaranteed by RBI.
• They cannot offer any additional benefit or gifts to the depositors.
• They cannot accept deposits repayable on demand.

Types of NBFCs

Based on business activity, NBFCs are divided into the following types:

• Investment and credit company
• Micro finance company
• NBFC Factor
• Systematically important core investment company
• Infrastructure debt fund
• Peer to peer lending platforms
• Housing finance companies
• Infrastructure finance company
• Mortgage guarantee companies 
• Non-operative financial holding company

Nidhi Company vs NBFC – Comparison

NBFCs and Nidhi Company differ on the following aspects:

NBFC is a type of financial institution which engages in the business of loans/ advances and acquisition of shares/stocks or other securities issued by Government or local authority, leasing, hire-purchase, insurance business, chit business whereas Nidhi Company cannot carry the business related to chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate.

It may be noted that an NBFC requires prior approval from RBI before commencing any business whereas Nidhi Company doesn’t require RBI approval. NBFCs may issue preference share capital or debenture but a Nidhi Company shall not issue preference capital for raising funds.

Nidhi Company is not permitted by the government to open current account but NBFCs must open a current account. A Nidhi company can’t enter into a partnership for lending or borrowing purpose however no such restriction exist in NBFCs.

Conclusion

NBFCs as well as Nidhi Company both are rising in the country. There are certain advantages as well as limitations in both cases. If you wish to know more on Nidhi Company vs NBFC, then you are advised to go through our blogs.

Read our article: Prior Approval for NBFC’s Merger/Amalgamation from RBI