“Nidhi” is a Hindi word, which means finance or fund. Nidhi means a company which has been incorporated exclusively with the object of developing the habit of thrift and reserve funds amongst its members, receiving deposits, and lending to its members only for their mutual benefit. Nidhi Companies are monetary business companies operating in India and can be classified as Non Banking Financial Companies (NBFC) and Banking Companies. However, unlike NBFCs and Banking Companies a Nidhi company does not require a license from the Reserve Bank of India (RBI) to operate. A Nidhi Company works through its members. Any person who is a member of a Nidhi can make deposits and borrow or take loans when need be.

Nidhis are also known as ‘Mutual Benefit Societies’ or ‘Mutual Benefit Companies’, terms given to it by the ‘Sabanyagam Committee on Nidhis’ and the ‘Expert Committee on Nidhi’ to distinguish it from other Co-operative societies and Banks which may engage in a similar kind of activity. The basic function of a Nidhi is to promote the savings and utilization of funds by its members and to safeguard the financial conditions of its members.

Objectives of Nidhi Companies

Nidhi is Public Limited Company formulated with the primary object to carry on the business of accepting deposits and lending money to member-borrowers only against jewels, mortgage of immovable property and fixed deposit receipts. Nidhis are not permitted to engage themselves in the business of Chit Fund, hire purchase, insurance or in any other business including investments in shares or debentures. Thus, Nidhis do their business only with Members. Such Members are only individuals. Bodies Corporate or Trusts are never to be admitted as Members. The Nidhis cater to the needs of middle class and lower middle class persons, who are all the members of the Nidhi generally operate in a small local area and the members are very often known to each other

Legal framework and regulatory bodies regulating the functioning of Nidhi Companies

Nidhis are companies registered under Section 406 of the Companies Act, 2013 (or Section 620A of the Companies Act, 1956) and is regulated by the Ministry of Corporate Affairs (MCA). NBFCs are wholly or partially regulated by the RBI. Nidhis are one such class of NFBCs that is only partially regulated by the RBI i.e. in reference to the matters relating to their deposit acceptance activities. Unlike section 620A of the 1956 Act, the 2013 Act under Section 406 finally defines Nidhi Companies. This definition was first recommended to be added by the Sabanyagam Committee on Nidhis. It was observed by the ‘Expert Committee’ that since Nidhis operate in a small area and cater the needs majorly of the middle and lower middle section of the society and the members are often well known to each other, certain norms prescribed for the NBFCs should be diluted when applied to these institutions.

Nidhi Rules, 2014

• Nidhi companies are governed by Nidhi Rules, 2014. They are incorporated in the nature of Public Limited Company and hence, they have to comply with two set of norms, one of Public limited company as per Companies Act, 2013 and another is for Nidhi rules, 2014. Nidhis are regulated by the provisions of the Companies Act in force
• They also come under one class of NBFCs and hence RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. RBI has in recognition of the fact that these Nidhis deal with their shareholder-members only exempted the noticed Nidhis from the core provisions of the RBI Act and other directions applicable to NBFCs.
• However, unlike other NBFCs, no RBI approval is necessary to register the company, as RBI has specially exempted this category of NBFC in India to comply with its core provisions such as the noticed 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 noticed nidhi companies

Question regarding the regulatory powers of RBI upon a Nidhi was raised in the case of Puraswalkam Santhatha Sanga Nidhi Ltd. v. Reserve Bank of India wherein restrictions were placed on Nidhi Companies by a notification issued by the RBI under Section 45-I of the RBI Act, 1934. The notification placed restrictions on the rate of interest and payment of brokerage and commission etc on Nidhi Companies. The Madras High Court in this case held that RBI hold power to issue directions to all financial institutions carrying on trading or activities relating to advancing of loans. The Court stated that since Nidhis are engaged in the activity of advancing loans to its members it falls squarely within the definition of a ‘Financial Institution’ and there RBI was empowered to issue directions with intention to regulate credit system of the country.

Further, S. 406 empowers the Central Government to notify a company to be a Nidhi company. Central Government is also empowered to notify the which all provisions of the Companies Act may or may not be applicable to a Nidhi Company along with any modification or exception to any procedure that may apply to it.

Incorporation of a Nidhi Company

For a Nidhi to be incorporated under the Companies Act, it has to be incorporated as a public company with a minimum paid up equity share capital of five lakh rupees. Except as provided under the proviso to sub-rule (e) to Rule 6, no Nidhi can have any object in its Memorandum of Association other than the “object of cultivating the habit of thrift and savings amongst its member, receiving deposits from, and lending to, its members only, for their mutual benefit.” And lastly, Rule 4(5) makes it mandatory for every company incorporated as a Nidhi to have the last words “Nidhi Limited” as part of it name.

Membership

Rule 5 of the Nidhi Rules, 2014 specifies the requirements of the minimum number of members and net owned funds that a Nidhi company must have. The rule stipulates that it must have not less than 200 members at any point of time of the existence of the company after its incorporation, have Net Owned Funds of ten lakh rupees or more and the ratio of the net owned funds to deposits should not be more than 1:20. Other than this, the provisions with regard to share capital and allotment, membership, net owned funds, branches, acceptance of deposits, loans, rate of interests, rules relating to directors, dividend, auditors, prudential norms are provided in the rules 7- 20.

General restriction imposed on Nidhi Companies

• Nidhis are barred from issuing of any preference shares, debentures or any other debt instruments. Preference Shares issued before the commencement of the Act are, however, permitted to be redeemed as per the terms of their issuance.
• Nidhis are barred from opening any current accounts with its members. The objective of Nidhis is to promote savings and thus they are permitted to only open savings accounts with their members.
• There is an absolute restriction on a Nidhi to extend loans or allow deposits to any person who is not its member. Nidhis cannot carry on any business other than the business of borrowing or lending in its own name.
• Further, Nidhis are restricted from accepted any deposits or advancing loans to any persons (including body corporates) other than its members, pledge any of the assets ledged by its members as security, enter into any partnership arrangements, pay any brokerage or incentives for mobilizing deposits from members or for granting loans.
• At present, Nidhi Companies are barred from payment of brokerage on deposits and making advertisements in any manner. The only stipulation of RBI presently applicable to Nidhis pertains to the ceiling on interest rate payable on the deposits.

Conclusion

Nidhi companies, with its unique institutional structure, offer a profitable path for organizing a lending business without getting into the regulatory web of ordinary financial services. Though there exist a dedicated gamut of legislation governing Nidhi Companies carefully crafted to plug possible loopholes, this structure is advantageous with its relatively easier formation and limited regulation. Nidhi Companies being mutual benefit organizations is devoted strictly to its members, pro lower and middle class. A bulk of members are attracted with the benefit of easy documentation and favorable rates. Thus, in a country like India having a high percentage of unbanked population and with a society still not fully equipped with a sound banking culture, these companies are a solid alternative to a traditional banking system to align the interests of many within a closed unit. However, these companies are still not common uniformly throughout India with the bulk of them in Southern India. Though the concept of such companies is quite old, the recent tightening of regulation for interests of depositors is a positive step to promote yet another means of financial inclusion.