A Study of Legal Framework and Regulations Governing Nidhi Companies As Recoznized Under Companies Act, 2013

A STUDY OF LEGAL FRAMEWORK AND
REGULATIONS GOVERNING NIDHI

COMPANIES AS RECOZNIZED UNDER
COMPANIES ACT, 2013.
INTRODUCTION
 THE WORD “NIDHI” IN THE INDIAN CONTEXT STANDS FOR “ TREASURE” OR

“FUND”
 NIDHI IS A COMPANY FORMED WITH THE EXCLUSIVE OBJECT OF

CULTIVATING THE HABIT OF THRIFT, SAVINGS AND FUNCTIONING FOR THE
MUTUAL BENEFIT OF MEMBERS BY RECEIVING DEPOSITS ONLY FROM
INDIVIDUALS ENROLLED AS MEMBERS AND BY LENDING ONLY TO
INDIVIDUALS, ALSO ENROLLED AS MEMBERS
 NIDHI COMPANIES WORK ONLY THROUGH ITS MEMBERS AND ONLY THESE
MEMBERS ARE ALLOWED TO DEPOSIT FUNDS OR BORROW LOANS ONLY
AGAINST CERTAIN COLLATERALS SUCH AS JEWELRY, MORTGAGE OF
IMMOVABLE PROPERTY, FIXED DEPOSIT RECEIPTS ETC
 THEY ARE KNOWN BY DIFFERENT NAMES SUCH AS MUTUAL BENEFIT

FUNDS COMPANIES, MUTUAL BENEFIT COMPANIES, PERMANENT FUNDS
COMPANIES, BENEFIT FUNDS COMPANIES ETC
ROLE OF SABANAYAGAM COMMITEE
PERTAINING TO LACK OF GOVERNMENT POLICY, LEGAL PROVISIONS AND
THEORETICAL FRAMEWORK WITH RESPECT TO THE MEANING AND
OPERATIONS OF NIDHI COMPANIES, CENTRAL GOVERNMENT OF INDIA ON
MARCH 23, 2000, FORMED SABANAYAGAM COMMITTEE UNDER THE
CHAIRMANSHIP OF SHRI P. SABANAYAGAM, FORMER UNION SECRETARY, CHIEF
SECRETARY, GOVT. OF TAMIL NADU,CHENNAI.
THE COMMITTEE WAS FORMED TO:

1. EXAMINE THE VARIOUS ASPECTS OF FUNCTIONING OF NIDHI COMPANIES
2. TO SUGGEST APPROPRIATE POLICY FRAMEWORK FOR OVERALL
IMPROVEMENT OF THE NIDHI COMPANIES
3. TO INSTILL AND RESTORE THE CONFIDENCE OF THE INVESTING PUBLIC
ESPECIALLY THE SMALL DEPOSITORS AND THEREBY FACILITATE THE
HEALTHY FUNCTIONING OF THE NIDHI COMPANIES
LANDMARK CASE DECIDING THE
CATEGORY OF NIDHI COMPANIES:
 IN THE CASE OF PURASWALKAM SANGATHA SANGA NIDHI LTD V. RESERVE

BANK OF INDIA, THE HIGH COURT OF MADRAS IN THIS CASE HELD THAT
THE RBI HAS THE POWER TO ISSUE DIRECTIONS TO ALL SORTS OF
FINANCIAL INSTITUTIONS CARRYING ON BUSINESS RELATING TO
ADVANCING OF LOANS
 THE COURT SAID THAT NIDHI COMPANIES COME UNDER THE PURVIEW OF
“FINANCIAL INSTITUTIONS” AND HENCE THE RBI WAS EMPOWERED TO
ISSUE DIRECTIONS WITH RESPECT TO REGULATION OF CREDIT SYSTEM IN
THE COUNTRY
OBJECTIVES
 THE PRIMARY OBJECTIVE IS TO CARRY ON THE BUSINESS OF

ACCEPTING DEPOSITS AND LENDING MONEY TO MEMBER-
BORROWERS ONLY AGAINST JEWELS, MORTGAGE OF IMMOVABLE
PROPERTY AND FIXED DEPOSIT RECEIPT.
 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
 ONLY A MEMBER CAN AVAIL THE FINANCIAL SERVICES OFFERED BY A
NIDHI COMPANY. THESE SERVICES INCLUDE DEPOSITING FUNDS,
BUYING BONDS AND SHARES, AND AVAILING LOANS
NIDHI COMPANIES UNDER
COMPANIES ACT, 2013
SECTION 406 DEFINES “NIDHI” OR “MUTUAL BENEFIT SOCIETY” AS:
• A COMPANY WHICH CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN

THE OFFICIAL GAZETTE , DECLARES TO BE A NIDHI OR MUTUAL BENEFIT
SOCIETY, AS THE CASE MAYBE
• THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFICIAL

GAZETTE , DIRECT THAT ANY OF THE PROVISIONS OF THIS ACT SPECIFIED
IN THE NOTIFICATION:
1. SHALL NOT APPLY TO ANY NIDHI OR MUTUAL BENEFIT SOCIETY; OR
2. SHALL NOT APPLY TO ANY NIDHI OR MUTUAL BENEFIT SOCIETY WITH
SUCH EXCEPTIONS, MODIFICATIONS AND ADAPTATIONS AS MAY BE
SPECIFIED IN THE NOTIFICATION
NIDHI RULES, 2014
THE NIDHI RULES WERE NOTIFIED BY THE MINISTRY OF CORPORATE AFFAIRS
IN 2014 WHICH BECAME THE FIRST GOVERNMENT POLICY EXCLUSIVELY
MADE FOR THE OPERATIONS OF NIDHI COMPANIES. THE MOST IMPORTANT
RULES MANDATED BY THE NIDHI RULES OF 2014 IN BRIEF ARE AS FOLLOWS:
• INCORPORATION: TO BE INCORPORATED AS A PUBLIC COMPANY WITH A

MINIMUM PAID UP CAPITAL OF RS. 5 LAKHS. A NIDHI COMPANY HAS TO
ENSURE 200 MEMBERS WITHIN 1 YEAR OF ITS INCORPORATION. THE NET
OWNED FUNDS OF THE COMPANY HAVE TO BE 10 LAKHS OR MORE. THE
RATIO OF NET OWNED FUND TO DEPOSIT SHALL NOT BE MORE THAN 1:20
• SHARE CAPITAL : ALL NIDHI COMPANIES TO ISSUE EQUITY SHARES OF

NOMINAL VALUE AMOUNTING NOT LESS THAN RS.10 EACH. EACH DEPOSIT
HOLDER SHALL HOLD A MINIMUM OF 10 EQUITY SHARES OF RS 10 EACH.
EACH SAVING ACCOUNT HOLDER AND RECURRING DEPOSIT HOLDER SHALL
HOLD 1 EQUITY SHARE OF RS 10
• DEPOSITS: A NIDHI COMPANY SHALL NOT ACCEPT DEPOSITS THAT
ARE MORE THAN 20% OF ITS NET OWNED FUNDS. FIXED DEPOSITS
CAN BE ACCEPTED FOR A PERIOD RANGING FROM 6 TO 60 MONTHS.
RECURRING DEPOSITS CAN BE ACCEPTED FOR A PERIOD RANGING
FROM 12 MONTHS TO 60 MONTHS. MAXIMUM BALANCE IN SAVING
DEPOSIT ACCOUNTS SHALL NOT EXCEED RS 1 LAC. RATE OF INTEREST
ON SAVING DEPOSITS SHALL NOT EXCEED 2% ABOVE RATE OF
NATIONALIZED BANKS. RATE OF INTEREST ON FIXED AND RECURRING
DEPOSIT ACCOUNTS SHALL NOT EXCEED THE MAXIMUM RATE
PRESCRIBED BY RBI FOR NBFCS
• LOANS: THE NIDHI RULES SET LIMITS OF LOAN AMOUNT WHICH CAN
BE GIVEN TO A MEMBER ON THE BASIS OF THE TOTAL AMOUNT OF
DEPOSITS IT HAS. THE MAXIMUM RATE OF INTEREST THAT CAN BE
CHARGED ON LOAN TO THE MEMBERS SHALL NOT EXCEED 7.5%
ABOVE THE HIGHEST RATE INTEREST OFFERED BY IT ON THE DEPOSITS
CONCLUSION
 NIDHI COMPANIES PERTAINING TO ITS UNIQUENESS OFFER A VERY

PROFITABLE PATH FOR CARRYING OUT A LENDING AND BORROWING
BUSINESS WITHOUT GETTING INTO A WEB OF REGULATIONS AND
COMPLICATIONS UNLIKE OTHER KINDS OF FINANCIAL COMPANIES.
 NIDHI COMPANIES, DUE TO THE AFOREMENTIONED REASONS AND FOR
THE REASON OF BEING A MUTUAL BENEFIT SOCIETY GOES A LONG WAY
FOR MOBILIZATION OF FUNDS AND AVAILABILITY OF CREDITS FOR THE
LOWER MIDDLE AND THE LOWER INCOME GROUPS OF THE SOCIETY.
 IN A COUNTRY LIKE INDIA WHERE A HIGH PERCENTAGE OF NON
BANKING POPULATION RESIDES, SUCH TYPE OF INSTITUTIONS CAN HELP
IN ALIGNING THE INTEREST OF PEOPLE IN THE PROCESS OF
MOBILIZATION OF FUNDS.
 IN RURAL PARTS OF THE COUNTRY WHERE A FORMAL BANKING CULTURE
STILL DOES NOT EXIST, THESE COMPANIES CAN ATTRACT PEOPLE BY WAY
OF THEIR EASE OF DOCUMENTATION AND FAVORABLE RATES.

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A STUDY OF LEGAL FRAMEWORK AND

REGULATIONS GOVERNING NIDHI

 THE WORD “NIDHI” IN THE INDIAN CONTEXT STANDS FOR “ TREASURE” OR

 NIDHI IS A COMPANY FORMED WITH THE EXCLUSIVE OBJECT OF

 THEY ARE KNOWN BY DIFFERENT NAMES SUCH AS MUTUAL BENEFIT

THE COMMITTEE WAS FORMED TO:

 IN THE CASE OF PURASWALKAM SANGATHA SANGA NIDHI LTD V. RESERVE

 THE PRIMARY OBJECTIVE IS TO CARRY ON THE BUSINESS OF

SECTION 406 DEFINES “NIDHI” OR “MUTUAL BENEFIT SOCIETY” AS:

• A COMPANY WHICH CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN

• THE CENTRAL GOVERNMENT MAY, BY NOTIFICATION IN THE OFFICIAL

• INCORPORATION: TO BE INCORPORATED AS A PUBLIC COMPANY WITH A

• SHARE CAPITAL : ALL NIDHI COMPANIES TO ISSUE EQUITY SHARES OF

 NIDHI COMPANIES PERTAINING TO ITS UNIQUENESS OFFER A VERY

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