Nidhi Company

About Nidhi Company

A Nidhi Company is a type of Non Banking Financial Companies (NBFC) and Banking Companies. Their core business is borrowing and lending money between their members. They are also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit Company.

However, in recognition of the fact that these companies deal with their shareholder-members only. Nidhi means a company which has been incorporated with the object of developing the habit of thrift and reserve funds amongst its members and also receiving deposits and lending to its members only for their mutual benefit. 

Regulatory and Governing Bodies

Nidhis companies are incorporated in the nature of Public Limited company and recognized 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). Nidhi companies are governed by Nidhi Rules, 2014. They have to comply with two sets of norms, one of Public limited company as per Companies Act, 2013 and another is for Nidhi rules, 2014.

Reserve Bank of India is empowered to issue directions to them in matters relating to their deposit acceptance activities. Hence, no RBI approval is necessary to register the company, as RBI has specifically exempted this category of NBFC in India to comply its core provisions such as registration with RBI etc.

Incorporation of a Nidhi Company

Nidhi company registration is simple and less complex as compared to other types of finance companies like NBFC which require RBI license to start. A nidhi company can be started with an initial capital of Rs. 5 lakh and requires at least seven people to start with (minimum 7 members) and also requires three directors initially. 

It is compulsory for Nidhi Company to have at least 200 members, within one year of its existence. Additionally, the Net Owned Funds should be Minimum Rs. 10 Lakh or more, and unencumbered term deposits should be not less than 10% of the outstanding deposits. The ratio of Net Owned Funds to deposits of not more than 1:20. 

Conditions to Deposit

The conditions that every Nidhi Company should comply with before granting loans are as follows- 

• The deposits which are accepted by the Nidhi Company should not surpass 20% of its net owned funds.
• The fixed deposit amount can be accepted for a minimum of six months and maximum sixty months while the periodic deposits can be accepted for a minimum of 12 months and maximum 60 months.
• The interest rate on deposit should never exceed 2% above the rate presented by the Nationalized Bank.

Loans

The loans given by a Nidhi to a member shall be subject to the following limits, namely:-

• Loan amount 2 lakhs – If the deposit is two crores.
• A loan amount of 7.50 lakhs – If the deposit is more than two crores but less than 20 crores.
• A loan amount of 12 Lakhs – If the deposit is more than 20 crores but less than 50 crores.
• Loan amount 15 lakhs – If the deposit is more than 50 crores.

Compliance

Filing of requisite Annual Forms with ROC by Nidhi Companies:

• Form NDH-1 within 90 from the close of financial year;
• Form NDH-3 within 30 days from the conclusion of each half year;
• Form AOC-4 within 30 days of the annual general meeting;
• Form MGT-7 within 60 days of the annual general meeting.

Advantages of Nidhi Company

1. Limited RBI Regulatory Compliance: Nidhi companies can be incorporated as Public Limited Company. But there is no need to require an RBI license to operate.
2. Less risky proposition: A Nidhi company can provide loans and accept deposits, with its members only.
3. Limited capital requirement: As per Nidhi Rules, 2014, the minimum capital requirement to register a Nidhi Company is Rs. 5 Lakh only.
4. Simple procedure: All you need are 7 members, and a few basic documents to register a company with the MCA.
5. Uninterrupted Operation: Operations remain uninterrupted during the death, insolvency or retirement of any member due to the practice of perpetual succession. 

Restrictions on Nidhi Company

No Nidhi shall-

(a) carry on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by anybody corporate;
(b) issue preference shares, debentures or any other debt instrument by any name or in any form whatsoever;
(c) open any current account with its members;
(d) acquire another company by purchase of securities or control the composition of the Board of Directors of any other company in any manner whatsoever or enter into any arrangement for the change of its management, unless it has passed a special resolution in its general meeting and also obtained the previous approval of the Regional Director having jurisdiction over such Nidhi;
(e) carry on any business other than the business of borrowing or lending in its own name:
(f) accept deposits from or lend to any person, other than its members;
(g) pledge any of the assets lodged by its members as security;
(h) take deposits from or lend money to any body corporate;
(i) enter into any partnership arrangement in its borrowing or lending activities;
(j) issue or cause to be issued any advertisement in any form for soliciting deposit:
(k) pay any brokerage or incentive for mobilising deposits from members or for deployment of funds or for granting loans.

Understanding of Non-Banking Financial Company (NBFC)

About NBFC

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 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 of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

Categories of NBFCs

NBFCs are categorized in terms of

• Liabilities into Deposit and Non-Deposit accepting NBFCs,
• Non Deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
• By the kind of activity they conduct.

Within this broad categorization the different types of NBFCs are as follows:

1. Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lather machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising there from is not less than 60% of its total assets and total income respectively.

2. Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities.

3. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

4. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75% of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

5. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities.

6. Infrastructure Debt Fund - Non- Banking Financial Company (IDF-NBFC): IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

7. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

• loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding  Rs 1,00,000 or urban and semi-urban household income not exceeding Rs 1,60,000;
• loan amount does not exceed Rs 50,000 in the first cycle and Rs 1,00,000 in subsequent cycles;
• total indebtedness of the borrower does not exceed Rs 1,00,000;
• tenure of the loan not to be less than 24 months for loan amount in excess of Rs 15,000 with prepayment without penalty;
• loan to be extended without collateral;
• aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
• loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

8. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50% of its total assets and its income derived from factoring business should not be less than 50% of its gross income.

9. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is Rs 100 crore.

10. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.

Procedure for Incorporation of NBFC

The procedure to incorporate an NBFC is:

1. A company should first be registered under Companies Act 1956 or under the Companies Act 2013.
2. The minimum net owned funds of the Company should be Rs. 2 Crore.
3. There should be a minimum of 1 director from the same background or a Senior Banker as a full-time director in the Company.
4. The CIBIL records of the Company should be clean.
5. After all of the above conditions have been satisfied the online application on the website of RBI should be filled and submitted along with the requisite documents.
6. A CARN Number will be generated.
7. A hard copy of the application also has to be sent to the regional branch of the Reserve Bank of India (RBI).
8. After the application is properly scrutinized, the License will be given to the Company.

Compliance

A.   Returns to be submitted by deposit taking NBFCs

1. NBS-1 Quarterly Returns on deposits in First Schedule.
2. NBS-2 Quarterly return on Prudential Norms is required to be submitted by NBFC accepting public deposits.
3. NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.
4. NBS-4 Annual return of critical parameters by a rejected company holding public deposits. (NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)
5. NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets of ₹ 100 crore and above.
6. Half-yearly ALM return by NBFC holding public deposits of more than ₹ 20 crore or asset size of more than ₹ 100 crore
7. Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
8. Branch Info Return.

B.   Returns to be submitted by NBFCs-ND-SI

1. NBS-7 A Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC-ND-SI.
2. Monthly Return on Important Financial Parameters of NBFCs-ND-SI.
3. ALM returns: Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly, Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly, Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly.
4. Branch Info return

C. Quarterly return on important financial parameters of non deposit taking NBFCs having assets of more than ₹ 50 crore and above but less than ₹ 100 crore

Basic information like name of the company, address, NOF, profit / loss during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between ₹ 50 crore and ₹ 100 crore.

If you do have any questions, queries or need any help related to NBFCs feel free to ask us.