Nidhi(Mutual Benefit Society)
A Nidhi Company, also known as a Mutual Benefit Society, is a type of non-banking financial institution (NBFC) recognised under Section 406 of the Companies Act, 2013. It operates primarily for the purpose of cultivating the habit of thrift and savings among its members and lending funds to them for their mutual benefit. Nidhi companies are unique to India and function as community-based savings and loan entities where transactions occur exclusively among members. They are regulated by the Ministry of Corporate Affairs (MCA) and governed by the Nidhi Rules, 2014.
Background and Evolution
The concept of Nidhi companies has its roots in traditional mutual benefit funds and self-help savings groups that have long existed in South India, particularly in the states of Tamil Nadu and Kerala. These institutions evolved as community-led mechanisms for providing small-scale credit and promoting savings among members.
To formalise and regulate their functioning, the Companies Act, 1956, under Section 620A, recognised Nidhi or Mutual Benefit Companies as a special class of companies. This provision was carried forward into the Companies Act, 2013, with more stringent oversight under the Nidhi Rules, 2014.
The primary rationale for recognising Nidhis as a distinct category was to provide a legal framework for member-based thrift and credit societies, while ensuring financial discipline and safeguarding public interest.
Legal Definition and Framework
According to Section 406 of the Companies Act, 2013, a Nidhi company is a company which:
- Has been incorporated with the object of cultivating the habit of thrift and savings among its members.
- Receives deposits from, and lends to, its members only, for their mutual benefit.
- Complies with the rules prescribed by the Central Government for its governance.
The Nidhi Rules, 2014 lay down the conditions and operational guidelines for incorporation, management, capital requirements, deposit limits, and prudential norms applicable to such entities.
Objectives of a Nidhi Company
The central objective of a Nidhi company is to promote the financial inclusion and welfare of its members. Its specific aims include:
- Encouraging savings and thrift habits among individuals.
- Providing low-cost credit to members for personal or small business needs.
- Reducing dependence on unorganised moneylenders and informal credit sources.
- Promoting self-reliance and community-based finance.
- Enabling members to collectively benefit from their pooled savings and resources.
Characteristics and Features
A Nidhi company possesses a set of distinctive characteristics that distinguish it from other financial institutions:
- Mutual Benefit Principle:Operations are confined to members only—deposits are accepted and loans are provided exclusively within the membership group.
- No External Borrowing or Lending:Nidhis cannot borrow funds from or lend to non-members.
- Regulation by MCA, Not RBI:Though they are a type of NBFC, Nidhi companies are exempted from the direct regulatory supervision of the Reserve Bank of India (RBI) since they deal only with members.
- Limited Financial Activities:They are restricted to accepting deposits, lending against security, and other member-beneficial financial services.
- No Involvement in Chit Funds or Hire Purchase:Nidhis are prohibited from engaging in businesses such as chit funds, insurance, or investment in securities.
- Community-Oriented Operations:They function mainly in local or regional communities, relying on trust, mutual support, and community discipline.
Incorporation and Registration Requirements
To establish a Nidhi company in India, certain statutory conditions must be fulfilled:
- Minimum Members:At least 7 members are required at the time of incorporation, of which 3 must be directors.
- Capital Requirement:A minimum paid-up equity share capital of ₹5 lakh is required at incorporation.
- Public Company Status:Every Nidhi must be incorporated as a Public Limited Company, using the word “Nidhi Limited” as part of its name.
-
Post-Incorporation Compliance:Within one year of incorporation, a Nidhi must:
- Have at least 200 members.
- Maintain Net Owned Funds (NOF) of ₹10 lakh or more.
- Have unencumbered term deposits of not less than 10% of outstanding deposits.
- Ensure that the ratio of net owned funds to deposits does not exceed 1:20.
Failure to meet these conditions can lead to cancellation of Nidhi status by the Ministry of Corporate Affairs.
Activities Permitted and Restricted
Permitted Activities:
- Accepting fixed deposits, recurring deposits, and savings deposits from members.
-
Granting secured loans to members, typically against:
- Gold or silver ornaments.
- Immovable property.
- Fixed deposit receipts or government securities.
- Declaring dividends to members out of legitimate profits.
Restricted Activities:
Nidhis are prohibited from:
- Carrying out chit fund, hire purchase, or leasing businesses.
- Issuing debentures or preference shares.
- Opening current accounts in the name of members.
- Engaging in advertisement or solicitation of public deposits.
- Dealing in non-member transactions or investment in shares or securities of other companies.
Governance and Management
The governance of a Nidhi company is structured on corporate lines but guided by mutuality principles:
- The Board of Directors, elected by members, manages operations and ensures compliance.
- The company must appoint a Nodal Officer to liaise with regulatory authorities.
- Annual returns and financial statements must be filed with the Registrar of Companies (ROC).
- Regular audits and inspections ensure adherence to Nidhi Rules and financial prudence.
The Ministry of Corporate Affairs monitors Nidhi operations, while the Registrar of Companies exercises oversight over registration, compliance, and reporting.
Financial and Operational Norms
The Nidhi Rules, 2014 prescribe detailed operational limits to ensure prudential management:
- Deposit Limits:The total deposits cannot exceed 20 times the Net Owned Funds (NOF).
-
Loan Limits:The maximum loan amount is linked to the member’s deposit and the Nidhi’s NOF:
- ₹2 lakh if NOF < ₹2 crore.
- ₹7.5 lakh if NOF between ₹2 crore–₹20 crore.
- ₹12 lakh if NOF between ₹20 crore–₹50 crore.
- ₹15 lakh if NOF > ₹50 crore.
- Interest Rates:The rate of interest on loans cannot exceed 7.5% above the rate of interest paid on deposits.
- Reserve Requirements:Every Nidhi must maintain a reserve fund equal to at least 10% of its outstanding deposits and deposit it in scheduled commercial banks.
Advantages and Benefits
For Members:
- Secure savings and credit facility within a trusted community.
- Lower interest rates on loans compared to informal sources.
- Higher returns on deposits relative to cooperative societies.
- Simplified documentation and procedures.
For the Economy:
- Promotes financial inclusion and savings among lower- and middle-income groups.
- Reduces reliance on unregulated moneylenders.
- Strengthens the community-based credit structure.
- Encourages local capital formation and small-scale entrepreneurship.
Challenges and Limitations
Despite their benefits, Nidhi companies face several challenges:
- Limited capital base restricts their ability to expand operations.
- Lack of professional management in smaller Nidhis.
- Risk of mismanagement or fraud in non-compliant entities.
- Geographical confinement reduces scalability.
- Stringent compliance norms under MCA may burden smaller organisations.
Instances of unauthorised deposit-taking and misrepresentation by certain entities have also prompted tighter government scrutiny and stricter compliance monitoring.
Recent Developments
To strengthen transparency and governance, the Ministry of Corporate Affairs introduced several amendments to the Nidhi Rules in 2022, including:
- Mandatory prior approval from the Central Government before commencing operations.
- Verification of promoters and directors through a fit-and-proper assessment.
- Enhanced reporting and disclosure norms, including periodic submission of returns on deposits and loans.
- Automatic disqualification of companies failing to comply with the prescribed financial and membership thresholds.
| Related | |
|---|---|
