Overview
It is a company classified as an NBFC (a Non-banking financing company) and registered under Section 406 of
Companies Act, 2013. The main business of such a company is to facilitate lending money between the core
members of the company. This way members (or shareholders) are encouraged to save money and invest them
within the company. These deposits are then used by the company for its members (or shareholders), to
provide loans or advances, and to acquire government-issued stocks/bonds/debentures/securities. It is
regulated by the Ministry of Corporate Affairs, while the RBI monitors all its financial dealings.
Benefits
Cheaper To Borrow:
As a member, one can borrow money at a minimum rate, relative to the rate at which banks lend money. This
can be a major advantage in times of need, as different individuals in the mutual benefit society are likely
to need funds at different points in time.
Encourages Savings:
It encourages all its members to save money and encourages a thrifty lifestyle. A Nidhi Company, after all,
is a mutual benefit society wherein members can lend or borrow money and accept financial aid amongst them.
Fewer Complications:
Borrowing and lending to known persons, where the procedure is fixed, is much less complicated than dealing
with banks or in an informal setting. A Nidhi Company enables its members to unlock the potential of their
money and gain from lower interest rates when they require money themselves.
Checklists
- A minimum of seven members is required to start a Nidhi Company out of which three members must be the
directors of the company. However, it should acquire a minimum of 200 members within one year of
commencement.
- A minimum of 5 lakh rupees, is required as the equity share capital to start a Nidhi Company. This
entire amount has to be paid up. However, within one year of registration, the net owned funds should be
10 lakh rupees or more. This includes equity share capital and free reserves and excludes accumulated
losses as well as intangible assets.
- Unencumbered term deposits must be 10% or higher of the outstanding deposits.
- The ratio of net owned funds to deposits shouldn't be more than 1:20, where 10% of the total deposits
are in a fixed deposit account of a nationalized bank.
10 Things
Cannot conduct other businesses:
A Nidhi Company cannot carry on the business of chit fund, hire purchase finance, leasing finance,
insurance or acquisition of securities issued by anybody corporate whereas an NBFC engaged in the business
of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or
local authority or other marketable securities, leasing, hire-purchase, insurance business, chit business.
Current Accounts:
As the Nidhi Company is a mutual benefit institution, the government is against the commercialization of
such companies and hence does not give it the authority to start current accounts. Therefore, users do not
have the option of opening a current account under the Nidhi Scheme.
No Advertisements:
Nidhi Companies are not allowed to advertise or solicit anyone in the hope of gaining a deposit. However,
they are allowed to advertise their capacity to grant loans.
Preference Share Capital or Debentures:
A Nidhi Company is not allowed to use preference share capital or debentures to raise funds for itself.
Brokerage: Such companies are not allowed to provide any incentive or brokerage for mobilizing deposits or
granting loans.
Deposits from Non-members:
A Nidhi Company does not have the right to accept deposits from individuals who are not members of the
Company. Lending and depositing are features that are available only to members, and hence the circulation
and handing over of money occur only within members of the community.
Service Charge:
The Company does not have the right to charge any member a service charge for acquiring membership to the
Company.
Membership Restrictions:
A Nidhi Company cannot add a corporate body as its member and hence taking deposits from such institutions.
Branches:
A Nidhi Company is not allowed to open a second office as a subsidiary branch in India until it attains a
profit three years in a row.
Boundaries:
A Nidhi Company is not allowed to open a branch outside its state of origin in India.