An Overview on Rules Regarding Nidhi Company

Ashish M. Shaji

10 Feb, 2021

Nidhi Company is a type of company which accepts deposits and lend money to its members only. Under this, profit earned by members of the Nidhi Company is shared among themselves. Nidhi Company can only be registered as a public limited company. It falls under the purview of Non-Banking Financial Institution or an NBFC. In this blog, we will talk about the rules regarding Nidhi Company registration.

Objective of Nidhi Company

The main object of the Nidhi Company is cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only, for their mutual benefit.

Rules Regarding Nidhi Company: Members and Net Owned Fund

As per Nidhi Rules, 2014 it is required for every Nidhi Company to ensure the following:

(a) Not less than two hundred members;

(b) Net Owned Funds of 10 lakh rupees or more;

(c) Unencumbered term deposits of not less than 10% of the outstanding deposits as specified in rule 14;

(d) The ratio of Net Owned Funds to deposits of not more than 1:20.

(e) Nidhi Company is not allowed to admit a body corporate or trust as a member.

(f)  In Nidhi Company, it shall ensure that its membership is not reduced to less than two hundred members at any time.

(g) Minor shall not be admitted as a member of Nidhi Company.

Rules Regarding Nidhi Company: Restrictions

As per Rules, a Nidhi Company cannot carry on any of the following activities:

• Chit business;
• Hire purchase finance;
• Leasing finance;
• Insurance;
• Issue preference shares, debentures or any other debt instrument;
• Open any current account with its members;
• Acquire another company;
• Carry on any business apart from the business of borrowing or lending on its own name;
• Pledge any of the assets of its members as security;
• Issue or cause to be issued any advertisement for soliciting deposit.

Rules Regarding Nidhi Company: Branches

Nidhi Company is allowed to open branches in case it has earned net profits after tax during the preceding three financial years. They are allowed to open up to three branches within the district. Nidhi companies are not allowed to set up branches outside the state where its registered office is situated.

No branch office can be closed unless it publishes an advertisement in a newspaper in vernacular language in the place where it carries on business at least thirty days prior to such closure, informing the public about such closure and intimation is given to the Registrar within thirty days of such closure.

Rules Regarding Nidhi Company: Deposits

• In Nidhi Company, fixed deposits shall be accepted for a minimum period of six months and for a maximum period of sixty months.
• Recurring deposits shall be accepted for a minimum period of twelve months and a maximum period of sixty months.
• In Nidhi Company maximum balance in savings account at any given time qualifying for interest shall not exceed one lakh rupees and the rate of interest shall not exceed two percent above the rate of interest payable on savings bank account by nationalized banks.
• Nidhi Company may not offer interest on fixed and recurring deposits at a rate exceeding the maximum rate of interest prescribed by the Reserve Bank of India on which the Non-Banking Financial Companies can pay on their public deposits.

Rules Regarding Loans & Directors

In case of Loans-

• Nidhi Company shall provide loans to its members only.
• Amount of deposits shall be calculated on the basis of the last audited annual financial statements of the company.
• Only against the following securities, Nidhi company shall give loans to its members-
• Gold, silver, and jewelry;
• Immovable property;
• Fixed deposit receipts, National Savings Certificates, other Government Securities and insurance policies^[1].

In the case of Directors-

1. Director shall be a member of Nidhi Company.
2. The Director of a Nidhi company shall hold office for a term up to ten consecutive years on the Board of the company.
3. Where the tenure of the director has been extended by the Central Government, it will terminate on expiration of such extended tenure.
4. The Director shall be eligible for re-appointment only after the expiration of two years of ceasing to be a Director.

Rules Regarding Dividend & Auditor

In the case of dividend

Nidhi companies shall not declare dividend exceeding twenty-five percent or such higher amount as may be specifically approved by the Regional Director for reasons to be recorded in writing and further subject to the following conditions, namely:-

(a) An equal amount is required to be transferred to the General Reserve;

(b) There has been no default in repayment of matured deposits and interest and

(c) It has complied with all the rules as applicable to Nidhi companies.

In case of Auditor

• Nidhi companies are not allowed to appoint or re-appoint an individual as an auditor for more than one term of five consecutive years.
• Nidhi Company is not allowed to appoint or re-appoint an audit firm as auditor for more than two terms of five consecutive years;
• Provided that an auditor (whether an individual or an audit firm) shall be eligible for subsequent appointment after the expiration of two years from the completion of his or its term.

Rules Regarding Nidhi Company: Penalty

Where a company breaks any of the rules of the company then every officer of the company who defaults shall be punished with a fine which can extend up to 5000 rupees and where such contravention of rule is in continuation, then with a further fine that can extend up to 500 rupees every day.

Conclusion

Read our article: Checklist for Audit of Nidhi Company