Nidhi Company Registration Explained

Nidhi Companies in India serve the purpose of promoting thrift and savings among their members. They are unique entities that can borrow from and lend to their own members, which means that the funds they work with come exclusively from their shareholders. Nidhi companies, while smaller in scale compared to traditional banks, play a vital role in fostering a culture of saving within a community. For comprehensive information on initiating the registration process for a Nidhi Company in India, you can refer to the "Starting a Nidhi Company" article available in the India Filer Learning Center. In this summary, we will primarily focus on the nuances of registering a Nidhi Company in India.

Overview of Nidhi Companies

Nidhi Companies are registered Limited Companies that engage in receiving deposits from their members and lending to these members. The activities of Nidhi Companies are subject to the oversight of the Reserve Bank of India (RBI) because they resemble Non-Banking Financial Companies (NBFCs). However, since Nidhi Companies exclusively handle the money of their shareholder-members, the RBI has granted them exemptions from certain core provisions and regulations applicable to NBFCs.

Restrictions on Nidhi Companies

Nidhi Companies operate under specific restrictions outlined in the Nidhi Rules of 2014. According to Rule 6 of these rules, a Nidhi Company is not allowed to:

  1. Engage in chit fund operations, hire purchase finance, leasing finance, insurance, or acquiring securities issued by any corporate entity.

  2. Issue preference shares, debentures, or any other debt instruments by any name or in any form.

  3. Open current accounts with its members.

  4. Acquire another company through the purchase of securities or influence the composition of the Board of Directors of any other company unless it passes a special resolution in its general meeting and obtains prior approval from the relevant Regional Director.

  5. Conduct any business other than borrowing or lending in its own name. However, Nidhi Companies adhering to all the rules may provide locker facilities to their members, with rental income not exceeding twenty percent of their gross income during a financial year.

  6. Accept deposits from or lend to individuals who are not their members.

  7. Pledge any assets provided by their members as security.

  8. Accept deposits from or lend money to corporate entities.

  9. Enter into partnership arrangements in their borrowing or lending activities.

  10. Issue or cause to be issued any form of advertisement to solicit deposits. An exception is made for private circulation of fixed deposit scheme details among Nidhi members with the label "for private circulation to members only."

  11. Pay any brokerage or incentives for mobilizing deposits from members or deploying funds or granting loans.

Nidhi Company Registration Process

To establish a Nidhi Company in India, the initial step involves incorporating a Limited Company under the Companies Act of 2013. This necessitates a minimum of three Directors and seven shareholders for the incorporation process. During this incorporation, it is crucial to ensure that the company's Memorandum of Association clearly states the objective of cultivating thrift and savings among its members and dealing exclusively with receiving deposits from and lending to its members for their mutual benefit.

After the Limited Company is incorporated, the Nidhi Company must meet the following criteria within one year from its commencement:

  1. Maintain a minimum of two hundred members (shareholders).

  2. Possess Net Owned Funds (NOF) amounting to ten lakh rupees or more.

  3. Hold unencumbered term deposits of no less than ten percent of the outstanding deposits.

  4. Maintain a ratio of Net Owned Funds to deposits not exceeding 1:20.

"Net Owned Funds" represent the aggregate of paid-up equity share capital and free reserves, reduced by accumulated losses and intangible assets as seen in the last audited balance sheet.

If the Nidhi Company satisfies the above conditions required for operating as a Nidhi Company, it must, within ninety days from the close of the first financial year after its incorporation (and where applicable, the second financial year), file a return of statutory compliances in Form NDH-1. This form must be duly certified by a practicing Chartered Accountant (CA), Company Secretary (CS), or Cost and Works Accountant (CWA), along with the requisite fees.

In cases where the Nidhi Company is unable to meet the requirements within one year from its commencement, it can apply to the Regional Director for an extension of time within thirty days from the close of the first financial year by using Form NDH-2.

If, even after the second financial year, the Nidhi Company fails to meet the requirements for a Nidhi Company, it is prohibited from accepting further deposits from the beginning of the second financial year until it complies with the provisions for operating as a Nidhi Company, and it becomes liable for penal consequences.

Nidhi Amendment Rules, 2020

As of the Ministry of Corporate Affairs' notification on February 3, 2020, an amendment to existing rules was introduced. Stakeholders are advised to use the revised and latest forms for Nidhi companies, which include:

  1. Form No.NDH-1 – Return of Statutory Compliances

  2. Form No.NDH-2 – Application for extension of time

  3. Form No.NDH-3 – Return of Nidhi Company for the half-year ended

These forms help Nidhi companies remain compliant with regulatory requirements and ensure the proper functioning of their operations.