Nidhi Company Registration - Definition
Nowadays, Nidhi Company has evolved as a popular lending mechanism for obtaining secured loans. These companies are most predominant in the Southern Parts of India. Moreover, the operations and the affairs of this company is very much similar to that of a Co-operative Society. Further, section 406 of the Companies Act, 2013, deals with the process of Nidhi Company Registration.
Furthermore, the prime reason behind incorporating this business structure is to encourage and motivate its members to save, so that they can smoothly and with ease satisfy their financial needs arising from time to time. Hence, this company is based on the principle of Mutual Benefits.
What is a Nidhi Company?
The term Nidhi Company refers to a type of NBFC (Non-Banking Financial Corporation) which is regulated and governed by the provisions of the Companies Act, 2013. The only significant feature that differentiates this Company from other companies is that this business structure deals with the deposits from and loans to its members, i.e., shareholders only, and works just for the mutual benefits of its members.
Further, it shall be noteworthy to take into consideration that the activities of this business structure do fall under the ambit of RBI (Reserve Bank of India), as it is similar to that of an NBFC. However, RBI has excused this Company from the core provisions of the RBI Act, 1934 and other regulations prevalent on an NBFC, as these Companies deals only with the money of its shareholders or members.
Advantages of a Nidhi Company
In India, the benefits of a Nidhi Company can be summarised as:
- No External Involvement in the Company’s Management;
- Easy to lend money to or raise capital or borrowings from group members;
- Easy to manage;
- Low capital requirement;
- Relaxation in the number of compliances;
- Cost-efficient registration;
- Many privileges and exemptions are provided under the provisions of the Companies Act, 2013;
- The Minimal involvement of RBI;
- Secured investment with lower Rate of Interest;
- Low level of risk;
- Better savings option;
- Nidhi Company Rules is the Single Regulatory Body;
- Better substitute of a Credit Co-operative Society;
- Enjoys the status of a separate legal entity;
- Fulfilling the financial requirements of the lower and middle-income groups;
- Simple processing;
- Easy access to public funds;
- Limited liability.
Basic Requirements for Obtaining Nidhi Company Registration
The basic requirements for Incorporating a Nidhi Company are as follows:
- A Minimum of 7 shareholders or members are required;
- A Minimum of 3 Directors are required;
- A Minimum of Rs 5 Lakhs needed as the capital Requirement;
- DIN (Director Identification Number) for Directors;
- No Preference Shares will be issued;
- The ultimate objective of this company is to inculcate the habit of saving in its members or shareholder by receiving deposits from and lending to them only for their mutual benefits;
- The nominal value of each equity share issued must not be less than Rs 10 per share;
- A minimum of 10 equity shares or shares corresponding to Rs 100 should be issued to each deposit holder.
Documents Needed for the Incorporation of a Nidhi Company
The documents needed for obtaining registration can be summarized as:
- From Directors and Shareholders:
- PAN Card details of the Members;
- Photographs of the Directors and Members;
- Digital Signature Certificate;
- Aadhar Card or Voter ID of the Members;
- Address Proof of the Directors;
- DIN (Director Identification Number) of the Directors.
- For Registered Office:
- Rent Agreement or the Lease Deed or the Sale Deed of the place being used as Registered Office; or,
- Address Proof of the Registered Office;
- No-Objection Certificate (NOC) signed by the actual owner of the Property.
- Documents which are needed to be prepared and drafted by CA or CS:
- MOA (Memorandum of Association) of the Company;
- AOA (Article of Association) of the Company;
- MCA (Ministry of Corporate Affairs) form attestation.
Procedure for Nidhi Company Registration
The steps involved in the procedure for obtaining registration are as follows:
- Obtain DSC and DIN
The First and the foremost step for all the Directors is to obtain DIN (Director Identification Number) and DSC (Digital Signature Certificate).
- Apply for a Name Approval
Now, in the second step, the shareholders or the Directors are required to apply for a name approval by suggesting three names to the MCA (Ministry of Corporate Affairs). Further, out of all the names suggested, the MCA will choose one name for the said company. Furthermore, it shall be taken into consideration that all the names suggested must be of unique character and not similar to an already existing company’s name. Moreover, according to rule 8 of the Companies Act, 2013, the approved name will remain valid only for a period of 20 days.
- Drafting of MOA and AOA
After completing the process of name approval, the directors need to submit the Application for registration in the form INC- 32, together with the Articles of Association (AOA) and Memorandum of Association (MOA), respectively. Further, it is significant to take into consideration that the documents must state the objective behind incorporating a Nidhi Company.
- Certificate of Incorporation
Usually, it takes about 15-25 days time to get the Certification of Incorporation. Further, this certificate acts as a piece of evidence or proof that the said Company has been incorporated. Furthermore, this certificate also mentions the company’s CIN (Company Identification Number).
- Opening of a Bank Account and Applying for TAN and PAN
In last, the directors need to apply for PAN (Permanent Account Number) and TAN (Tax Deduction Account Number). Further, shareholder or the members of the company is also required to get a bank account opened just by submitting the Certificate of Incorporation, and the copies MoA, AoA, along with the allotted PAN details to the bank.
Post-Nidhi Company Registration Requirements
The Post-Nidhi Company Registration requirements can be summarized as:
- At least 200 members
According to the first requirement by the end of the 1st year, the company must have at least 200 members or shareholders. Further, it is required to submit the list of all the members within a period of 90 days starting from the end of every fiscal year, in this particular Form.
In case the Company is not able to have at least 200 members, then, in that case, the shareholders or the members of the company are required to submit NDH-2 to the Regional Director. By submitting this form, the company may avail an extension of another financial year, if the same is filed within a period of 30 days starting from the end of the 1st fiscal year after commencement.
Further, if even after the completion of 2nd financial year, the company fails to meet the prescribed requirements, then the same will not be qualified to accept deposits until the compliance of these provisions, and moreover, it can also attract penal consequences.
- NOF should be more than Rs 10 Lacs
The second post-requirement talks about NOF (Net Owned Funds). The NOF of the company must be more than Rs 10 lakhs. The term Net Owned Funds denotes the Aggregate of Paid-Up Equity Share Capital and Free Reserves as reduced by the intangible assets and accumulated losses appearing in the Last Audited Balance Sheet.
- Ratio of the NOF to Deposits
The Ratio for the Net Owned Funds to Deposit must be more than 1:20.
- Unencumbered Deposits
Unencumbered deposits must exceed 10 percent of the outstanding deposits.
Further, this business structure also needs to file a Half-yearly Return with the ROC (Registrar of Companies) in Form NDH-3 (again duly certified by a Practicing CA/ CS/ CWA) together with the prescribed fees. Moreover, such form must be filed within a period of 30 days, starting from the end of each half-year.
Mandatory Compliances for Nidhi Company
The mandatory compliances for a Nidhi Company are as follows:
- Form NDH – 1
It needs to submit the list of members within a period of 90 days starting from the end of every fiscal year, in this particular Form.
- Form NDH – 2
If in case the company is not able to meet the target of 200 members in the first financial year, then it can request the MCA (Ministry of Corporate Affairs) for granting an extension in this Form.
- Form NDH -3
Other than the form mentioned above, i.e., NDH-1 Form, a half-yearly return is also needed to be filed in Form NDH-3.
- Annual Return with the ROC
It needs to file its Annual Returns with the MCA by way of Form MGT-7.
- Profit and Loss Statement and the Company’s Balance Sheet
The financial statements and other concerned documents are required to be submitted, on an annual basis, in Form AOC-4.
- Income Tax Returns (ITR)
It needs to file Annual Income Tax Returns (ITR) by 30th September of the following financial year.
Ceiling Limit on the Loans Provided by a Nidhi Company
The ceiling limit on the loans provided by Nidhi Companies can be summarized as:
Amount of Deposits
Permissible Loan limits
If the total amount of deposit is less than Rs 2 Crore.
Rs 2 Lacs
If the total amount of deposit is between Rs 2 crore to less than Rs 20 crore
Rs 7.50 Lacs
If the total amount of deposit is between Rs 20 crore to less than Rs 50 crore
Rs 12 Lacs
If the total amount of deposit is Rs 50 crore or more
Rs 15 Lacs
Is Nidhi Company Allowed to have Branches?
Yes, a Nidhi Company is allowed to have branches but subject to following conditions:
- The company must have earned Net Profits after Deducting Tax (PAT), continuously for the preceding three financial years.
- This business structure is permitted to open up to three branches only. Moreover, it shall be pertinent to take into consideration that all these branches must have opened within the same district.
- If in case it wants to set up more than three branches, it needs to seek and acquire prior permission from the RD (Regional Director). Further, these branches can be opened either within territorial limits in the same district or in a separate district.
- The Registrar of Companies (ROC) has to be informed about the same within a period of 30 days of the opening of its branches.
Factors to Consider while Choosing Name
In India, the factors to be considered while a name for the company are as follows:
- Short and Simple;
- Not Similar to any already existing Company’s Name;
- Legal character;
- Should not be offensive or illegal in nature;
- Should not include the phrase “British India.”;
- Suffix portion is essential.
Restrictions applicable to a Nidhi Company
In India, the Restrictions applicable to Nidhi Companies in terms of their activities are as follows:
- Chit funds,
- Leasing finance,
- Advertise themselves to invite deposits,
- Hire-Purchase finances,
- Sell, Mortgage or Pledge the assets kept with it as collateral security for a loan,
- Getting into Partnerships in order to carry out lending and borrowing activities,
- Accepting deposits or lending funds to any other person than its own shareholders,
- Issuance of preference shares, debentures or any other type of debt instruments,
- Issue of Equity Shares of the nominal value at over Rs. 10/- each,
- Offer its deposit holders equity shares that, too, more ten shares or shares of the worth of more than Rs. 100/-,
- Open a current account together with its members (although it is permitted to open a Savings Account),
- Lend to or accept a deposit from a corporate,
- Pay commission, incentive or fee for the mobilization of deposits,
- Carry out any other business than lending or borrowing from its members,
- Hire a Purchase Financer,
- Pay any brokerage amount for granting a loan to its members.
Rules regarding the Acceptance of Deposits
The rules regarding acceptance of deposits can be summarised as:
- Nidhi Companies are not allowed to accept deposits exceeding the threshold of twenty times of its NOF (Net Owned Funds).
- They can accept Fixed Deposits (FD) for a minimum period of six months and a maximum period of sixty months.
- Similarly, these companies are qualified to accept Recurring Deposits (RD) for a minimum period of twelve months and a maximum period of sixty months.
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Frequently Asked Questions
An average period of 15 business working days is required for setting up of a Nidhi Company.
Yes, it is necessary to use the word “Nidhi Limited” in the name of the company. However, the term “Mutual Benefit” can also be used.
A minimum of three directors and seven shareholders are needed for incorporating a Nidhi Company.
No, a minor is not allowed to become director of a Nidhi Company. Only a person who is a minimum of 18 years old can become the Director of a Nidhi Company.
No, there is no need for anyone to visit our office personally, as the process of Nidhi Company Registration is completely online.
The primary documents required for Nidhi Company Registration are ID proofs, Address proofs, latest bank statements, and Address proof of the Registered Office.
No, there is no upper limit prescribed for the maximum number of members. However, it is mandatory for a Nidhi Company must have a minimum of two hundred members by the end of the 1st financial year.
No, a convicted person is not eligible to become a director or shareholder in a Nidhi Company.
A DIN or Director Identification Number is a unique identification number given to every director by the Ministry of Corporate Affairs. It has lifetime validity, and a director can never be allotted with two DINs.
A Certificate of Incorporation has lifetime validity, or till the time the company’s name is not struck off by the ROC (Registrar of Companies).
No, a person who has earlier defaulted in a loan from Nidhi Company cannot borrow again from the Nidhi.
The government fees differ from state to state. Hence, there is no uniform costing. However, the whole process cost ranges from Rs 16000 to Rs 30000.
No, Nidhi Company is not qualified to issue unsecured loans. However, it can issue Secured Loans to its shareholders or members.
No, a Nidhi Company is not allowed to operate outside the state in which it is registered.
No, the profits earned from a Nidhi Company cannot be invested in any other business.
A minimum of 6 months and a maximum of 60 months period is prescribed for fixed deposits in a Nidhi Company.
A minimum of 12 months and a maximum of 60 months period is prescribed for recurring deposits in a Nidhi Company.
The maximum qualifying balance in a savings deposit account at any given time qualifying for interest shall not exceed Rs 1 lakh, and the rate of interest provided on such deposits shall not exceed 2% above the rate of interest payable on the savings bank account by nationalized banks.
No, Nidhi Companies are exempted from the core NBFC provisions of the Reserve Bank of India.
A Nidhi Company is not regulated and governed by the provisions of RBI. Moreover, Nidhi Company Registration requires a much smaller amount of capital than Rs 2 Crore paid-up capital requirement for NBFCs.
The regulations passed by the Ministry of Corporate Affairs and the provision of Nidhi Rules, 2014 act as the regulating authority for Nidhi Company.
A Nidhi Company can accept deposits only from its Registered Members.
No, only an NBFC after the approval from RBI can start Micro Finance Business in India.
No, a Nidhi Company is not allowed to issue Preference shares and Debt Securities.
No, a Nidhi Company cannot purchase securities and shares from any other organisation.
No, a Nidhi Company is not allowed to open a Current Bank Account with its shareholders or members.
No, a Nidhi Company is not allowed to carry out any activity other than Lending and Borrowing.
The primary objective of a Nidhi Company is to carry out the business of accepting deposits and lending money to its registered members. This company must aim to inculcate the habit of thrift and savings amongst its shareholders.
A director of Nidhi Company can hold his/her office for a period of 10 consecutive years. However, he is eligible for re-appointment only after the expiry of 2 years starting from the date of cessation of his term.
A Nidhi Company cannot accept deposits exceeding the limit of twenty times its NOF (Net Owned Funds).
DSC is the acronym for Digital Signature Certificate. This means digitally or electronically signing the documents by an authorized person. Moreover, DSC is used for signing the electronic forms and statements. However, it cannot be used in the case of physical documents.
A Nidhi Company is allowed to open only three branches within a district. However, to open more than three branches, the said company is must seek prior approval of the RD (Regional Director) for every additional branch.
A Director is firstly required to be a member of the said company, and then, he must comply with the requirements prescribed under Section 152(4) of the Companies Act, 2013.
No, a Body Corporate is not allowed to be admitted as the member or shareholder of a Nidhi Company.
A Nidhi company is required to be incorporated under the provisions of Companies Act, 2013, and shall acquire the status of a Public Limited Company.
No, such rules have been prescribed banning a salaried person from becoming a director of a Nidhi Company. However, the employment agreement of the said person may place some restrictions on him or herein doing so.
The term NOF is the acronym form for the Net Owned Funds. Further, NOF or the Net Owned Fund = Aggregate Paid up share capital + Free Reserves – Accumulated losses (Deferred Revenue Expenditure), and Other Intangible Assets appearing in the Last Audited Balance Sheet.