How to Incorporate a Nidhi Company
Section 406 of Companies Act 2013 and Companies (Nidhi Companies) Rules, 2014 govern Nidhi companies. A Nidhi company has been incorporated with the following objectives:
1. Imbibing the habit of thrift and savings amongst its members.
2. Receiving and lending deposits from/to its members for their mutual benefit, which complies with rules of Chapter XXVI of Companies Rules, 2014.
Nidhi means ‘treasure’. In the financial sector, however, it means any mutually beneficial society that has been notified by the centre, which tries to cultivate the habit of savings among its members.
The companies doing Nidhi business are known under different names like Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company. This type of a company is popular in the southern part of the country and are considered to be localised single office institutions. They are mutual benefit societies as their dealings are restricted to its members and the membership is limited. The source of funds for such a society is the contribution from its members. Loans thus given out are at reasonable rates and most of the loans are for construction of house, or repairs. Loans are generally secured.
Since most of the funds come from the members, deposits thus raised by a Nidhi company are not much as compared to the organized banking sector.
Since Nidhis come under one class of NBFCs, the RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. However, since Nidhis deal with their shareholder-members only, RBI has exempted such notified firms from the core provisions of the RBI Act and other directions applicable to NBFCs. As on date (February 2013) RBI does not have any specified regulatory framework for Nidhis.
Loans under Nidhi Company
Fund lending is a major feature for a Nidhi Company. Here are some important points:
1. The maximum loan to one person will not exceed Rs. 200,000 if the deposit is less than 2 crore.
2. A Nidhi Company cannot give any unsecured loan or a micro finance loans.
3. The maximum period of a gold loan is 1 year.
4. Repayment period for a loan against property cannot exceed 7 years.
5. Maximum gold loan can be 80% of the value of the gold.
6. Maximum loan against a property cannot exceed 50% of the value of the property.
7. A Nidhi Company cannot provide vehicle loans.
Interest rates on deposits
There are essentially three types of deposits on which the interest is provided which are as follows:
1. Fixed deposits (FD): The maximum rate should not exceed the rate provided by the NBFC which is currently is 12.5%.
2. Recurring deposit (RD): The maximum rate should not exceed the rate provided by the NBFC which is currently is 12.5%.
Interest Rates on loans
There are essentially three types of loans which are provided by a Nidhi.
1. Gold/Silver loan: Maximum rate should be 7.5% plus the max rate given on deposits. e.g. 7.5% + 12.5% = 20%.
2. Loan against property: Maximum rate should be 7.5% plus the maximum rate given on deposits. e.g. 7.5% + 12.5% = 20%
3. Other Loans (includes against FD): Maximum rate should be 7.5% plus the max rate given on deposits. e.g. 7.5% + 12.5% = 20%
Acceptance of Deposits under Nidhi Company
The acceptance of deposits is one of the major features for a Nidhi Company and, therefore, one must adhere to the Nidhi rules. Here are some important points:
1. A fixed deposits can be accepted for a minimum of 6 months and a maximum of 60 months.
2. A recurring deposits can be accepted for a minimum of 12 months and a maximum of 60 months.
3. A maximum balance on which the interest is given under the savings account cannot exceed Rs. 100,000.
4. The points given below are also important for repayment of deposits:
a) No deposit is to be repaid within 3 months.
b) If the deposits are repaid before maturity, then the interest provided will be reduced by 2 percent.
Applicability of Nidhi Registration
The Centre made ‘Nidhi Rules, 2014’ for the purpose of carrying out the objectives of ‘Nidhi’ companies. These rules shall be applicable to:
1. A Nidhi or Mutual Benefits registered under Section 620A(1)of Companies Act, 1956
2. Every company functioning on the lines of a Nidhi company or mutual benefit society but has either not applied for or has applied for and is awaiting notification to be a Nidhi or Mutual Benefit Society under Section 620A(1)of Companies Act, 1956
3. Every company incorporated as a Nidhi with respect to the provisions of Section 406 of the Companies Act, 2013.
Requirements for Nidhi Company
1. A Nidhi company that has to be incorporated under this Act shall be a public company;
2. It must have a minimum paid up equity share capital of Rs.5,00,000/-;
3. There will be no issuances of preference shares. If such shares had already been issued by a Nidhi Company before commencement of this Act, such preference shares are to be redeemed in accordance with the terms of issue of such shares;
4. The objective of such a firm would be to imbibe in the members a habit of thrift and saving and the services would only be restricted to its members;
5. The name must have Nidhi Limited
Now, what are the requirements after incorporation?
Every Nidhi shall, within a period of one year from the commencement of these rules, ensure that it has a minimum membership of 200 people. It must also ensure that net owned funds are Rs. 10,00,000/- or more (‘net owned funds’ mean the aggregate of paid up equity share capital and free reserved as reduced by the accumulated and intangible assets appearing in the last audited balance sheet).
It must also ensure that the ratio of net owned funds to deposit is not more than 1:20. Unencumbered term deposits should not be less than 10% of the outstanding deposits, thus specified in Rule 14.
Rule 6 provides general restrictions. According to this rule, no Nidhi shall:
1. Carry on the business of
a. Chit Fund,
b. Hire Purchase Finance,
c. Leasing Finance,
Insurance or Acquisition of Securities issued by anybody corporate;
a. Preference Shares,
b. Debentures or
c. Any other debt instrument by any name or in any form whatsoever;
3. Open any Current Account with its members;
4. Acquire another company by;
a. Purchase of securities or
b. Control the composition of the Board of Directors of any other company in any manner whatsoever or
5. Enter into any arrangement for the change of its management, unless it has passed a special resolution in its general meeting and also obtained the previous approval of the Regional Director having jurisdiction over Nidhi;
6. Carry on any business other than the business of borrowing or lending in its own name;
7. Accept deposits from or lend to any person, other than its members;
8. Must not pledge any of the assets that have been lodged by its members as security;
9. Take Deposits from or lend money to anybody corporate;
10. Enter into any Partnership Arrangement in its borrowing or lending activities;
11. Issue or cause to be issued any advertisement in any form for soliciting deposit;
12. Pay any brokerage or incentive for mobilizing deposits from members or for deployment of funds or the granting loans.
It’s imperative to note that Nidhis which have adhered to all the provisions of these rules may rent out facilities of lockers to its members. The rent must not exceed 20% twenty per cent of the gross income of the Nidhi at any point of time during a financial year.
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