Why should you start a Nidhi Company?

Last Updated at: Sep 16, 2022
Why should you start a Nidhi Company in India_
In order to make the regulatory regime for Nidhi companies, which are kind of NBFCs, more effective and also to accomplish the objectives of transparency and investor friendliness, the government amended the provisions related to Nidhi firms under the Companies Act.

What is a Nidhi Company?

The term “Nidhi” means treasure in Indian traditional context. However, a Nidhi Company, in the Indian financial sector, refers to a type of company recognized u/s 406 of the Companies Act, 2013. There are other names such as Benefit Funds, Permanent Funds, Mutual Benefit Companies, and Mutual Benefit Funds. These companies are regulated by the Ministry of Corporate Affairs (MCA) and the RBI is empowered to direct them from time to time in matters related to their financial activities. Nidhi Companies are immensely popular in South India and almost 80% of such companies are present in Tamil Nadu itself.

The Nidhi Company rules

Nidhi Companies are types of mutual benefit societies. Their dealings (lending and receiving money) are strictly limited to the members and the memberships, in turn, are limited to individuals only. The contributions from the members constitute the primary source of a Nidhi Company. Moreover, the main objective of a Nidhi Company is to cultivate the habit of thrift and savings amongst its members. To establish a Nidhi Company, the following requirements are necessary:

  • It should have a paid-up share capital of at least Rs 5 lakhs.
  • The company looking to incorporate a Nidhi Business has to suffix the words ‘Nidhi Limited’ in its name.
  • A minimum of 7 members is necessary to initiate a Nidhi Company. 3 of these members must be from the directors of the established company.
  • Nidhi Companies are barred from issuing preference shares.

Nidhi Company registration

In India, Nidhi Company registration is less complex when compared to other types of financial companies such as NBFCs. However, a Nidhi Company must meet the following pre-registration criteria within 1 year of its incorporation, to be able to register itself.

  • It should have at least 200 members to its credit
  • It should have a net owned fund of Rs 10 Lakhs at least. Also, at least 10% of its outstanding deposits should come from un-encumbered term deposits.
  • The maximum ratio of NOF to deposits should be 1:20.
  • No corporate, minor or body shall be a member of the Nidhi Company

To complete the registration formalities, the Nidhi Company should furnish the below-mentioned documents-

  • Identity proof of its directors and shareholders– Copies of PAN cards for Indian nationals and passport (attested) for foreign nationals (if any).
  • Residential proof of its directors and shareholders- Copies of bank statement/passport/electricity bill/ Aadhar card/ driving license.
  • Proof of registered office- Copies of sale deed/rental agreement, property tax receipt, electricity bill, or an NoC from landlord to utilize his premises as an office.
  • Incorporation documents- Signed document of digital signature application and soft copies of other incorporation documents (signed).
  • Passport-sized photographs of shareholders and directors.

Advantages of starting a Nidhi Company

In addition to nurturing the noble habit of savings, there are several advantages of starting a Nidhi Company in India. Let’s have a look into some of these-

  • Limited capital requirement- As mentioned in the Nidhi Rules, 2014, the minimum capital requirement to register a Nidhi Company is Rs 10 Lakhs only.
  • Less RBI regulatory compliance- Nidhi Companies incorporates similar lines to that of Public Limited Companies. And hence, no RBI approval should register such a company. They need to comply with the less stringent Nidhi Rules, 2014 and the Companies Act 2013 for their activities. As RBI has exempted these companies from stringent compliance of its core provisions. They can benefit from the ease of regulatory compliance.
  • Simple procedure of formation– The process of initiating a Nidhi Company is fairly simple and is devoid of strict legal complications. You just need 7 members initially, a few simple documents and need to go through an easy registration process to incorporate your company with the MCA. However, you get one more year to accumulate the required amount of paid-up capital. Therefore, you are ready to roll on!
  • Uninterrupted operations- A Nidhi Company can ensure uninterrupted operational existence even at the death or departure of any member, thanks to the practice of perpetual succession. The Company will continue to exist irrespective of the inevitable change in any type of membership.
  • More certainty – Everyone likes to save in India and the primary objective of a Nidhi Company is to foster this habit of saving. However, this means the ‘Nidhi Business’ is a going concern and a certain business as the members always save.

The bottom line:

The Nidhi Company Business is trending in the Indian financial market these days. Considering the benefits associated with the Nidhi Companies, it’s no surprise to discover why more and more people are taking the “Nidhi Route” to start their financial businesses in India.

To know more about Nidhi Company : Click here

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