5 Things To Keep In Mind Before Starting A Nidhi Company

The Ministry of corporate affairs (MCA) has recently tightened the compliance norms for Nidhi companies. The Ministry has also advised investors to verify the status of a Nidhi company from the notification issued by the Centre in official gazette before making any investment or deposit.

There are certain important basics in starting a Nidhi company. Business owners can decide to start a Nidhi company based on the benefits that you can enjoy. There are certain restrictions and deposit conditions when starting a Nidhi company. Before that, Nidhi company registration is the most important. You need to get a clear idea of the meaning of Nidhi company when you’re new to the business.

What is Nidhi Company?

Nidhi Company is a business structure incorporated under Section 20A of the Companies Act, 1956 and is governed by the Ministry of Corporate Affairs (MCA), and there are certain Nidhi company rules to be followed in India. Nidhi Company is mainly formed for developing the habit of savings among its members only for their mutual benefit. The major source of funding for the Nidhi Company is the contribution from the members.

In order to deliver benefits of membership, the loans are granted at relatively realistic rates for purposes such as construction or repairs and are generally secured. As the concept of Nidhi Company is quite different from many other companies, there are some important points that should be followed before becoming its member.

This business structure is majorly popular in South India and is also known as Benefit Funds, Permanent Fund, Mutual Benefit Fund, Mutual Benefit Company etc. In this article, we discuss some of the important things to keep in mind before starting a Nidhi Company.

1. Incorporation

  1. Nidhi Company is generally incorporated as a Public Limited Company.
  2. The main aim of Nidhi Company can only be of nurturing the habit of caution and savings among its members, receiving deposits from them and lending money to its members only for their mutual benefit.
  3. It is compulsory for Nidhi Company to have at least 200 members, within one year of its existence.
  4. Additionally, within one year of its existence, the Net Owned Funds should be minimum Rs.10 lakhs or more. The ratio of Net Owned Fund to deposit should not be more than 1:20.

2. Restrictions on Nidhi Company

A Nidhi Company is restricted from undertaking any of the activities stated below-

  1. To undertake the business of hire purchase, chit fund, leasing finance, acquisition of securities or insurance.
  2. Also to issue preference debentures or shares.
  3. To open the current account of the company member.
  4. Restricted to accept, lend or deposit money to any individual other than its members.
  5. To issue any type of advertisement.
  6. To enter into any kind of agreement or pay brokerage to implore any kind of deposits.
  7. Promising any of the assets submitted by the company members as security.

3. Conditions to Deposit

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

  1. The deposits which are accepted by the Nidhi Company should not surpass 20% of its net owned funds.
  2. 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.
  3. The interest rate on deposit should never exceed 2% above the rate presented by the Nationalized Bank.

4. Branches

  1. Nidhi Company branches can be opened only when it has earned a net profit after tax constantly during the three preceding years.
  2. After the span of three years has lapsed the Nidhi Company can open up to three branches in the district.
  3. Nidhi Company can open its branches only when it has submitted a financial statement and the annual return on the time with the Registrar.

5. Loans

For permitting the loans following limits are set against the deposit made-

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

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