How to start a Nidhi Company in India – Legal Sahayak

How to Start a Nidhi Company in India?

As the name suggests, Nidhi means a company that has been incorporated with the prime objective of cultivating the habit of thrift and savings among its members. In Indian language, Nidhi refers to treasure. In Indian financial sector, Nidhi is a mutually beneficial society notified by the central government. The companies pursuing Nidhi business borrow money from its members and lends to members only. This form of business is more popular in South India. They have highly localized offices as their dealings are restricted to members, and membership is limited to individuals.

The Reserve Bank of India (RBI) has the powers to issue directions to these companies in matters pertaining to deposit acceptance activities. However, since Nidhi companies deal with only members, RBI has exempted them from the core ‘provisions’ of the Reserve Bank of India Act. This means that the RBI does not have a regulatory framework for Nidhi’s. Therefore, the central government has made Nidhi Rules in 2014 applicable to:

• Every company declared as a Nidhi or a benefits company under Section 620 A (1) of the Companies Act, 2023.
• Every company functioning along the lines of the Nidhi company or mutual benefit society. Such companies should apply for notification under Section 620 A (1) of the Companies Act, 2013.
• Every company incorporates as a Nidhi must comply with the provisions of Section 406 or the Companies Act, 2013.

Reasons to begin a Nidhi Company:

Registered under the Companies Act, 2013 the Nidhi Company is a class of Non-banking Financial Institutions (NBFC). The sole objective here is to cultivate the habit of thrift and savings among its members.

Here is a list of few reasons to register a Nidhi company:

1. Separate legal entity: A juristic person established under the Act, a Nidhi company is a legal entity. It has a wide legal capacity and can own property as well as incur debts. Moreover, the members of the Nidhi company do not have any liability to the creditors of the company.
2. Easy Management: In the Nidhi company, the Board of management is the controller of the activities. The management can be changed by the simple process of filling forms at the Registrar of the Companies.
3. On-going concern: No person has the right to claim the property of the Nidhi company till the time the company is running operations. The Nidhi company has the right to acquire, own, and alienate property in its own name.
4. Uninterrupted existence: Perpetual succession allows the uninterrupted existence of a Nidhi company. This means the company remains unaffected by the death or departure of any member. The existence of the company shall continue irrespective of the change in any kind of membership.
5. Better credibility: Better credibility is enjoyed by a Nidhi company in comparison with a kind of Mutual Benefit Organization. Nidhi company is registered and monitored under the control of central government.

Basic Requirements to start a Nidhi Company

It is important to note that a Nidhi company is incorporated as a Public Company under the Companies Act, 2013.

It shall fulfil the following basic requirements:

• A minimum paid up equity share capital of INR 5 lakhs.
• It requires a minimum of 3 members.
• Nidhi company cannot issue preference shares. In case it has done it in the past, such preferences shares shall be redeemed in accordance with the terms of the issue of such shares.
• The words Nidhi limited shall be suffixed in its name.
• The company shall work with the objective of cultivating the habit of savings among is members. Receiving and lending money shall be done only among the members.

The following are the documents required for Incorporation include:

1. Identity Proof of Directors and Shareholders: PAN card for Indian Nationals, notarized Passport copy for foreign nationals.
2. Address Proof of Directors and Shareholders: Passport, driving license, Aadhar card, Bank statement, electricity bill. At least 2 documents must be valid, recent, and less than 2 months old.
3. Proof of Registered Office in India: Rental Agreement or Sales Deed, Copy of the electricity bill, property tax receipt, NOC from landloard for use of premises an registered office.
4. Signed Incorporation Documents: Signed Digital Signature Application documents in hard copy, other incorporation documents signed and uploaded in soft copy.

Requirements post incorporation includes:

• A minimum number of members to be 200.
• Net owned funds or the aggregate paid up equity share capital reduced by the accumulated and intangible assets appearing in the last audited balance sheet shall be INR 10 lakhs or more.
• The ratio of net owned funds to the deposits shall not be more than 1:20.
• Also, the unencumbered term deposits shall not exceed 10% of the outstanding deposits.

Nidhi Company Registration:

In order to Start a Nidhi Company in India, it is important to incorporate a limited company under the Companies Act, 2013. For this purpose, a minimum of 3 members and 1 shareholders are required to being the incorporation process. Usually, the process may take around 45 days.

The steps for Nidhi Company Registration are:

1. Apply for Director Identification Number (DIN) and Digital Signature Certificate (DSC). Procurement of DSC easily takes 2 days in most cases. It is required by all directors, shareholders and the witness to MOA and AOA. DIN is issued by the Ministry of Corporate Affair to the directors of the company. Since the registration process in India is online, all the documents have to be submitted online. It is important to verify the authenticity of the documents.
2. Once DIN and DSC are received, one may begin to file an application in INC-1 to Ministry of Corporate Affairs for reservation of name of the Nidhi company. It is important that the name does not resemble the name of other companies nor should it be undesirable in the opinion of the Central Government. Also, the name of the company is preceded by the suffix Nidhi Limited.
3. Once the name is approved by MOCA, the next step is to prepare for Memorandum of Association (MOA) and Articles of Association (AOA). For this, the objective of the company must be kept in mind.
4. Further, apply for incorporation.
5. After the issuance of Incorporation Certificate, one may apply for the PAN and Tan of the company. The application for this has to be made separately, other than the SPICe.
6. GST registration: The GST Registration is mandatory process that needs to be followed for all those persons or business entities in India which exceed the threshold limit of profits or turnover. Failure to do so for the purpose of tax evasion is a criminal offense that is subjected to penalties, prosecution and jail term.
7. Opening of a current bank account.

The Ministry of Corporate Affairs has issued an integrated incorporation form. This form is available online. Further, the ministry has simplified the process by providing Simplified Proforma for Incorporating Company Electronically, also known as SPICe. However, simple it may appear to be, one-day company registration is not possible as it involves drafting and submission of various documents to MOCA. There is assured processing of SPICe forms within 1 day. The incorporation application processing is provided within a day at the Central Registration Centre.

Filing of Returns by a Nidhi Company:

1. HDH – 1: This return is filed as a statutory compliance within 90 days from the closure of the first financial year post incorporation. If applicable, in the second financial year, the Nidhi company shall file this return along with a fee prescribed by the Registrar.
2. NDH – 2: The application has to file with the regional director for an extension of time if the company is not able to comply with NDH – 1. One shall file this return along with a fee for extension of time to the regional director, who shall consider the application and pass orders within 30 days of receipts of application.
3. NDH -3: This half yearly return is filed with the registrar along with a fee within 30 days from the conclusion of each half year. This requires certification by the company secretary in practice or chartered accountant in practice or the cost accountant in practice.

Restrictions on Nidhi Companies:

According to the Nidhi Rules, 2014, a Nidhi Limited Company shall not carry on business activity related to chit fund, hire or purchase finance, leasing finance, insurance, and acquisition of securities issued by the corporate bodies. However, locker facilities can be provided on rent to its members. This rental income should exceed 20% of the gross income of the Nidhi at any point in time. A Nidhi company is restricted from paying any brokerage or incentive for mobilizing deposits to its members for the purpose of deployment of funds or granting loans.

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