Starting a Nidhi Company

The word “Nidhi” in Nidhi Company comes from a root word traditionally meaning “treasure”. In its more recent context in the Indian FINANCIAL sector it refers to any mutual benefit society notified by the Central / Union Government as a Nidhi Company. They are created primarily for the motive of cultivating the habit of thrift and savings among their members.

The companies doing Nidhi business, viz. borrowing from members and lending to members only, are known under different names such as Nidhi, Permanent Fund, Benefit FUNDS, Mutual Benefit Funds and Mutual Benefit Company. Nidhis are more popular in South India and are highly localized single office institutions. They are mutual benefit societies, because their dealings are restricted only to the members; and membership is limited to individuals. The principal source of funds is the contribution from the members. The loans are given to the members at relatively reasonable rates for purposes such as house construction or repairs and are generally secured. The deposits mobilized by Nidhis are not much when compared to the organized banking sector.

Regulatory framework

Nidhi’s are Companies Registered under the Companies Act

Nidhi’s are companies registered under section 620A of the Companies Act, 1956 (Section 406 of the new Companies Bill 2012, as passed by Lok Sabha) and is regulated by Ministry of Corporate Affairs (MCA). Even though Nidhis are regulated by the provisions of the Companies Act, 1956, they are exempted from certain provisions of the Act, as applicable to other companies, due to limiting their operations within members.

The Central Government vide Notification No.5/7/2000-CL.V dated 23rd March 2000 constituted a Committee to examine the various aspects of the functioning of Nidhi Companies.There was no Government Notification defining the word ‘Nidhi’. Taking into consideration the manner of functioning of Nidhis and the recommendations of the Shri P.Sabanayagam Committee in its report and also to prevent unscrupulous persons using the word ‘Nidhi’ in their name without being incorporated by Department of Company Affairs (DCA) and yet doing Nidhi business, the Committee suggested the following definition for Nidhis:

“Nidhi is a company formed with the exclusive object of cultivating the habit of thrift, savings and functioning for the mutual benefit of members by receiving deposits only from individuals enrolled as members and by lending only to individuals, also enrolled as members, and which functions as per Notification and Guidelines prescribed by the DCA. The word Nidhi shall not form part of the name of any company, firm or individual engaged in borrowing and lending MONEY without incorporation by DCA and such contravention will attract penal action.” A part of this definition is appearing in the new Companies Bill 2012 at Section 406.

Also under the ambit of Reserve Bank of India

Nidhis are also included in the definition of Non-Banking Finance Companies or NBFC’s which operate mainly in the unorganized money MARKET. However, since 1997, NBFCs have been brought increasingly under the regulatory ambit of the Indian Central Bank, RBI. Non-banking FINANCIAL entities partially or wholly regulated by the RBI include:

• NBFCs comprising equipment leasing (EL), hire purchase finance (HP), loan (LC), INVESTMENT (1C) (including primary dealers (PDs)) and residuary non-banking (RNBC) companies.
• mutual benefit financial company (MBFC), i.e. nidhi company.
• mutual benefit company (MBC), i.e. potential nidhi company i.e., A company which is working on the lines of a Nidhi company but has not yet been so declared by the Central Government;has minimum net owned FUND(NOF) of Rs.10 lakh, has applied to the RBI for certificate of registration and also to Department of Company Affairs (DCA) for being notified as Nidhi company and has not contravened directions/ regulations of RBI/DCA.
• miscellaneous non-banking company (MNBC), i.e. chit FUND company.

Since Nidhis come under one class of NBFCs, RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. However, in recognition of the fact that these Nidhis deal with their shareholder-members only, RBI has exempted the notified Nidhis 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.

RBI Guidelines for Nidhi Company

The RBI guidelines provide that a Nidhi company notified under section 620-A of the Companies Act is classified at present as “Mutual Benefit Financial Company” by RBI and regulated by the Bank for its deposit taking activities and by DCA for its operational matters as also the deployment of funds. These Companies enjoy exemption from core provisions of the RBI Act viz. requirement of registration, maintenance of liquid assets and creation of reserve fund, and RBI Directions except those relating to interest rate on deposits, prohibition from paying brokerage on deposits, ban on advertisements and the requirement of submission of certain Returns. Such companies, however, are allowed to deal with their shareholders only, for the purpose of accepting deposits and making loans. There are a number of companies functioning on the lines of Nidhi companies but not yet notified by DCA. As RBI Directions to classify them as loan companies had disallowed them the special dispensation available to Notified Nidhi companies, the Bank and the Government received representations from a large number of such companies and their associations. Government decided to give them a special dispensation and notified that applications of companies incorporated on or before January 9, 1997 shall be considered for notifying as Nidhi Company under section 620-A of the Companies Act, 1956 only if they have minimum NOF of Rs.10 lakh or more. These companies shall be required to have net owned fund of Rs.25 lakh by December 31, 2002 like companies already declared as Nidhis. Government has also clarified that NOF shall have the same meaning as assigned to it in the RBI Act, 1934. Thus a new class of companies has been created i.e. the potential Nidhi companies. To distinguish them from the notified Nidhi companies (Mutual Benefit Financial Companies) the term Mutual Benefit Companies (MBC) is being used. Since the notified nidhi companies are exempted from the provisions of Section 45-IA (Compulsory Registration with RBI), Section 45-IB (Maintenance of Liquid Assets) and Section 45-IC (Creation of Reserve Fund), it has been decided on the lines of Government advice to exempt the MBCs in existence as on January 9, 1997 and having NOF of Rs.10 lakh from the above mentioned provisions of the Act in terms of powers vested with the Bank under Section 45 NC of the Act and also from those provisions of NBFC Directions on Acceptance of Public Deposits and Prudential Norms which do not apply to notified nidhi companies.