10 Things that a Nidhi company cannot do as an NBFC

Last Updated at: February 11, 2020
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10 Things that a Nidhi company cannot do as an NBFC

Nidhi scheme is a beneficial Central Government Scheme which mainly aims in starting a business or a company with less capital. there are several advantages that one can enjoy under this scheme. But there are certain things that you cannot do with this scheme. You must have a clear idea about the common restrictions of the Nidhi Scheme

Companies under the Nidhi scheme are regulated by the Ministry of Corporate Affairs along with the Reserve Bank of India and have been set up to encourage people to save money.

If you’re looking for specific legal services related to tax registration or startup business,, you might want to browse the services below to see how our team of experts that assures you to run the business smoothly.

 

The source of funding is the contribution given by the members and though this does not amount to as much capital is seen within the banking sector, loans are given out to members from the money raised.

Meanwhile, NBFCs are financial institutions which give out loans, acquire stocks, but they do not engage in transactions related to agricultural or industrial sectors. They work complementary to the banking sector and provide buyer-oriented services. NBFCs also come under the jurisdiction of the Reserve Bank of India.

Register Your MSME for FREE

Nidhi Companies serve as the cheapest and most convenient way to register a Non-Banking Financial Company (NBFC) in India. While NBFC’s require a net worth amounting to at least Rs.2 crore to operate, Nidhi companies may be founded with a base capital of just five lakhs. While Nidhi Companies possess certain advantages, they do have certain restrictions. Here’s a look at ten things that an NBFC can do but a Nidhi Company cannot.

Can Conduct No Other Business

A Nidhi company does not have the right to undertake any other transaction or business other than the Nidhi scheme. This means that they cannot conduct a chit fund business or hire leasing or purchase finance insurances of any kind. Such companies also do not have the right to acquire securities in the form of stock or share that has been issued by a corporate Body. These rules have been made mandatory as the Nidhi company is an independent financial institution that has been set up with particular financial responsibilities in mind and hence must work adhering to those guidelines only. They are specialised companies that have their own modus operandi and are therefore not allowed to carry on any other business. Registration of chit fund and microfinance-related institutions require separate paperwork and licence as issued by the RBI.

Current Accounts

As the Nidhi Company is a mutual benefit institution, the government is against the commercialisation of such companies and hence does not give it the authority to start current accounts. Therefore, users do not have the option of opening a current account under the Nidhi Scheme.

No Advertisements

Nidhi Companies are not allowed to advertise or solicit anyone in the hope of gaining a deposit. However, they are allowed to advertise their capacity to grant loans. Several discussions have been held regarding this matter because the law does not restrict a Nidhi company from advertising for money lending making it a significant loophole that is utilised by most of these companies.

Preference Share Capital or Debentures

A Nidhi Company is not allowed to use preference share capitals or debentures to raise funds for itself.  As these companies accept money in the form of deposits from the public, they are not allowed to raise funds through any other method.

Brokerage

Such companies are not allowed to provide any incentive or brokerage for mobilising deposits or granting loans. However, they are given the option of employing people on a fixed salary basis.

Membership

A Nidhi Company does not have the right to accept deposits from individuals who are not members of the Company. Lending and depositing are features that are available only to members, and hence the circulation and handing over of money occur only within members of the community.

Service Charge

The Company does not have the right to charge any member a service charge for acquiring membership to the Company.  Issuing of shares for the members is also strictly forbidden. However, a Nidhi Company does have the authority to charge processing fees on loans.

Membership Restrictions

A Nidhi Company cannot add a corporate body as its member and hence taking deposits from such institutions is not allowed within the framework of the Nidhi Scheme. They are also restricted from accepting inter-corporate deposits from members.

Branches

A Nidhi Company is not allowed to open a second office as a subsidiary branch in India until it attains a profit three years in a row. This mandatory regulation holds good even if an owner is able to procure permission from the Registrar of Companies (ROC).

Boundary

A Nidhi Company is not allowed to open a branch outside

its state of origin in India. This has been mentioned in the Nidhi Rules, 2014 and hence restricts these companies to within state boundaries. Though Nidhi Companies possess several restrictions, they are becoming a thing of value, especially in South India thanks to their ease of formation and convenience of investment.

One must be aware of the above restrictions mentioned above about the Nidhi Scheme. Some of the restrictions mentioned above would affect the growth of your business. This would help you to decide whether to start your company under this scheme. Thus it is up to the owner for the company to decide.

 

10 Things that a Nidhi company cannot do as an NBFC

2693

Nidhi scheme is a beneficial Central Government Scheme which mainly aims in starting a business or a company with less capital. there are several advantages that one can enjoy under this scheme. But there are certain things that you cannot do with this scheme. You must have a clear idea about the common restrictions of the Nidhi Scheme

Companies under the Nidhi scheme are regulated by the Ministry of Corporate Affairs along with the Reserve Bank of India and have been set up to encourage people to save money.

If you’re looking for specific legal services related to tax registration or startup business,, you might want to browse the services below to see how our team of experts that assures you to run the business smoothly.

 

The source of funding is the contribution given by the members and though this does not amount to as much capital is seen within the banking sector, loans are given out to members from the money raised.

Meanwhile, NBFCs are financial institutions which give out loans, acquire stocks, but they do not engage in transactions related to agricultural or industrial sectors. They work complementary to the banking sector and provide buyer-oriented services. NBFCs also come under the jurisdiction of the Reserve Bank of India.

Register Your MSME for FREE

Nidhi Companies serve as the cheapest and most convenient way to register a Non-Banking Financial Company (NBFC) in India. While NBFC’s require a net worth amounting to at least Rs.2 crore to operate, Nidhi companies may be founded with a base capital of just five lakhs. While Nidhi Companies possess certain advantages, they do have certain restrictions. Here’s a look at ten things that an NBFC can do but a Nidhi Company cannot.

Can Conduct No Other Business

A Nidhi company does not have the right to undertake any other transaction or business other than the Nidhi scheme. This means that they cannot conduct a chit fund business or hire leasing or purchase finance insurances of any kind. Such companies also do not have the right to acquire securities in the form of stock or share that has been issued by a corporate Body. These rules have been made mandatory as the Nidhi company is an independent financial institution that has been set up with particular financial responsibilities in mind and hence must work adhering to those guidelines only. They are specialised companies that have their own modus operandi and are therefore not allowed to carry on any other business. Registration of chit fund and microfinance-related institutions require separate paperwork and licence as issued by the RBI.

Current Accounts

As the Nidhi Company is a mutual benefit institution, the government is against the commercialisation of such companies and hence does not give it the authority to start current accounts. Therefore, users do not have the option of opening a current account under the Nidhi Scheme.

No Advertisements

Nidhi Companies are not allowed to advertise or solicit anyone in the hope of gaining a deposit. However, they are allowed to advertise their capacity to grant loans. Several discussions have been held regarding this matter because the law does not restrict a Nidhi company from advertising for money lending making it a significant loophole that is utilised by most of these companies.

Preference Share Capital or Debentures

A Nidhi Company is not allowed to use preference share capitals or debentures to raise funds for itself.  As these companies accept money in the form of deposits from the public, they are not allowed to raise funds through any other method.

Brokerage

Such companies are not allowed to provide any incentive or brokerage for mobilising deposits or granting loans. However, they are given the option of employing people on a fixed salary basis.

Membership

A Nidhi Company does not have the right to accept deposits from individuals who are not members of the Company. Lending and depositing are features that are available only to members, and hence the circulation and handing over of money occur only within members of the community.

Service Charge

The Company does not have the right to charge any member a service charge for acquiring membership to the Company.  Issuing of shares for the members is also strictly forbidden. However, a Nidhi Company does have the authority to charge processing fees on loans.

Membership Restrictions

A Nidhi Company cannot add a corporate body as its member and hence taking deposits from such institutions is not allowed within the framework of the Nidhi Scheme. They are also restricted from accepting inter-corporate deposits from members.

Branches

A Nidhi Company is not allowed to open a second office as a subsidiary branch in India until it attains a profit three years in a row. This mandatory regulation holds good even if an owner is able to procure permission from the Registrar of Companies (ROC).

Boundary

A Nidhi Company is not allowed to open a branch outside

its state of origin in India. This has been mentioned in the Nidhi Rules, 2014 and hence restricts these companies to within state boundaries. Though Nidhi Companies possess several restrictions, they are becoming a thing of value, especially in South India thanks to their ease of formation and convenience of investment.

One must be aware of the above restrictions mentioned above about the Nidhi Scheme. Some of the restrictions mentioned above would affect the growth of your business. This would help you to decide whether to start your company under this scheme. Thus it is up to the owner for the company to decide.

 

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