Nidhi Company its Process for Incorporation and Restrictions

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Nidhi Company its Process for Incorporation and Restrictions

Nidhi Company is defined under section 406, which lays down as below:

Nidhi means a company which has been incorporated with the object of cultivating the habit of savings amongst its members, receiving deposits from, and lending to, its members. Nidhi Companies are registered for the mutual benefit of their members.

Since the main businesses of Nidhi companies are borrowing from or lending to Members, Nidhi companies come under the definition of NBFC company, so it comes under the radar of RBI.

But, Nidhi companies dealings are restricted to only its members, so these Companies enjoy exemptions from core provisions of the RBI Act, viz.

Requirement of Nidhi company registration, maintenance of liquid assets and creation of reserve fund, and RBI Directions, but again exemption related to the interest rate on deposits, prohibition from paying brokerage on deposits, a ban on advertisements and the requirement to submit Returns.

Mandates to Incorporate Nidhi Company

1. Public Company: It has to be incorporated as a public company.
2. Capital: Minimum paid-up equity paid-up share capital shall be Rs. 5 Lakh.
3. Object: No Nidhi shall have any object in its Memorandum of Association other than the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from, and lending to, its members only for their mutual benefit.
4. Minimum Members: It must have not less than 200 members.
5. Net owned funds: It shall have at least Rs. 10 lahks of net owned funds.

Since Nidhi companies are incorporated as public limited companies, all the requirements applicable to incorporate a public limited company shall apply to Nidhi companies.

Therefore, incorporating a public limited company is the first step to starting Nidhi's business.

Few Other Peculiarities About Nidhi Company

1. Nidhi company can not issue preference shares. If a Nidhi had issued preference shares before the commencement of this Act, such preference shares should be redeemed in accordance with the terms of the issue of such shares.
2. Every Company incorporated as a Nidhi shall have the last words Nidhi Limited as part of its name.
3. A minor can not be admitted as a member of Nidhi, but deposits may be accepted in the name of a minor if they are made by a natural or legal guardian who is also a member of Nidhi.
4. Nobody corporate or Trust can become a member of Nidhi Company.
5. Nidhi shall file a return of statutory compliances in Form NDH  1 within ninety days from the end of the first financial year after its incorporation and, where applicable, the second financial year.

Restrictions Imposed on Nidhi Company

As per rule 6 of Nidhi rules, 2014, there are certain prohibitions on activities of Nidhi companies:

• Start a business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate
• Issue preference shares, debentures or any other debt instrument by any name
• Open any current account with its members
• Acquire another company by purchase of securities or control the composition of the Board of Directors of any other company without passing the special resolution as well as obtain prior approval of the regional director having jurisdiction over such Nidhi
• Start any business other than the business of borrowing or lending in its own name
• Accept deposits from or lend to any person other than its members
• Pledge any of the assets lodged by its members as security
• Take deposits from or lend money to any body corporate
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Also read: Types of Corporations for Company Registration in Canada

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