Nidhi Company
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Nidhi Company
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Digital Signature Certificate (DSC)
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Filing Form NDH-1
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Limited Liability
Nidhi Company
A Nidhi Company is a type of non-banking financial company (NBFC) in India that is recognized under Section 406 of the Companies Act, 2013. The primary objective of a Nidhi Company is to borrow and lend money among its members, promoting the habit of savings and financial security among its members.
Meaning and Purpose
- Nidhi Companies are mutual benefit companies, meaning that their transactions are limited to their members (shareholders) only.
- They operate to promote the habit of thrift and savings among their members and provide loans to them at reasonable interest rates.
Key Features
Members Only: Loans and deposits are restricted to members of the Nidhi Company.
Limited to Certain Activities: The company cannot deal with any business activities apart from borrowing and lending to its members.
No External Involvement: A Nidhi Company cannot accept deposits or lend money to any entity other than its members.
No RBI Involvement: Unlike other NBFCs, a Nidhi Company does not require a license from the Reserve Bank of India (RBI). It is governed by the Ministry of Corporate Affairs (MCA).
Requirements for Nidhi Company Registration
Minimum Shareholders: At least 7 members (shareholders) are required to start a Nidhi Company.
Directors: Minimum 3 directors.
Capital Requirement: Minimum paid-up equity share capital of ₹5 lakh.
Unique Name: The company’s name must include “Nidhi Limited.”
Net-Owned Fund Requirement: The company must maintain at least a 1:20 ratio between its net-owned funds and deposits.
No Preference Shares: Nidhi Companies cannot issue preference shares.
Procedure for Incorporation
Apply for Digital Signature Certificate (DSC) for all directors.
Director Identification Number (DIN) application for the proposed directors.
Name Reservation: File Form INC-1 for name reservation.
Submit Form SPICe+: This is the integrated form for incorporation, including PAN and TAN application.
File MOA (Memorandum of Association) and AOA (Articles of Association).
Incorporation Certificate: Once all documents are approved, the Registrar of Companies (RoC) issues a Certificate of Incorporation.
Post-Incorporation Requirements
Within 1 year of incorporation, the company must:
- Have at least 200 members.
- Maintain net-owned funds of at least ₹10 lakh.
File a declaration in Form NDH-1 confirming compliance with Nidhi rules.
Nidhi Rules, 2014
The Nidhi Rules of 2014 provide additional regulations that a Nidhi Company must comply with:
- Deposits: A Nidhi Company can only accept deposits from its members. The total amount of deposits cannot exceed 20 times its net-owned funds.
- Loans: Loans can be provided only to members and are to be secured.
- Prohibited Activities: Nidhi Companies are prohibited from engaging in chit funds, leasing finance, insurance, and similar businesses.
Advantages of a Nidhi Company
- No RBI Approval Needed: Simplified compliance.
- Encourages Savings: Primarily promotes a culture of saving among members.
- Limited Liability: Shareholders’ liability is limited to the amount they contribute.
Limitations of a Nidhi Company
- Limited Membership: Nidhi Companies can only accept funds from their members, limiting growth potential.
- Restricted Activities: The company is only allowed to carry out activities related to borrowing and lending.
- Geographical Restrictions: It cannot open branches outside the state in which it is incorporated without prior approval.
Compliance Requirements
- Annual Compliance: Like other companies, Nidhi Companies must file annual returns and financial statements with the RoC.
- Filing Form NDH-1: Declaring the number of members and deposits annually.
- Filing Form NDH-2: If the company fails to meet compliance requirements, an extension application should be filed.
- Internal Audits: Periodic internal audits are required to ensure compliance.
Taxation of Nidhi Companies
- Nidhi Companies are taxed as per the regular corporate tax rates in India.
- The income earned from lending operations is subject to income tax under the Income Tax Act, 1961.
Loans by a Nidhi Company
Types of Loans:
- Loans can be provided only to members and must be secured, typically against immovable property or gold.
- Common loans include gold loans, property loans, and mortgage loans.
Loan Limits:
- The loan amount depends on the deposits made by members.
- For a Nidhi Company, the lending limits are as follows:
- Up to 2 lakh deposit: Maximum loan amount is ₹2 lakh.
- For deposits between ₹2 lakh to ₹20 lakh: Maximum loan amount can go up to ₹15 lakh.
Interest Rates: The maximum interest rate for loans is capped and should not exceed 7.5% above the highest rate of interest the company offers on its deposits.
Membership and Shareholding in a Nidhi Company
Membership Structure:
- A Nidhi Company is required to have a minimum of 200 members within one year of its incorporation.
- Shares: To become a member, individuals must purchase shares of the company.
- The company must issue equity shares to each member with a minimum value of ₹10 per share. However, each member cannot hold more than 10% of the total share capital.
Individual Membership: Nidhi Companies are limited to individuals only as members; other entities or companies cannot become members.
Family Membership: Members from the same family are treated as individual members.
Advantages of Forming a Nidhi Company
- Limited Liability: The liability of members is restricted to the amount they have invested in the company.
- Simplified Compliance: Nidhi Companies are regulated by the Ministry of Corporate Affairs (MCA), reducing the regulatory burden compared to other financial entities.
- Cost-Effective: It is a cost-effective structure for providing microfinance services to members.
- Encourages Savings: Promotes the habit of thrift and savings among members.
Disadvantages of Forming a Nidhi Company
- Limited to Members: The company’s activities are restricted to its members only, limiting potential business expansion.
- Stringent Compliance: Failure to meet membership and deposit requirements can lead to penalties.
- Limited Products: A Nidhi Company is restricted to loans and deposits and cannot offer a wide range of financial services like other NBFCs.
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