There are several risks associated with Nidhi company in India that one should be aware of! Read on to find out all the Nidhi company risks!
There are some significant Nidhi company in India that Involves Few Risks! Business owners may plan to establish a Nidhi business based on the advantages that it provides.
However, there are some deposit conditions and restrictions when establishing a Nidhi business. Before that, knowing more about Nidhi business is very important. One must have a clear knowledge of the meaning of Nidhi business, especially when they are new to the Nidhi businesses.
What is Nidhi Company in India?
Nidhi business or company is a type of business structure that is governed by the Ministry of Corporate Affairs (MCA) and incorporated under Section 20A of the Companies Act, 1956.
There are some Nidhi Company in India terms to be followed. Nidhi business is mainly developed with the motive of advancing the habit of savings among the business owners for their benefit.
The main source of funding for the Nidhi business is the contribution that its members make towards it. The company structure is mainly popular in the south of India. Nidhi business is also known as Permanent Fund, Mutual Benefit Company, Mutual Benefit Fund, Benefit Fund, etc.
To provide the advantages of membership in the Nidhi company, loans are provided at fairly realistic rates to its members for purposes like repairs or construction, and these loans are generally secured. The idea of Nidhi company or business is not the same as several other companies, certain significant points must be followed before joining Nidhi company as a member.
What Can Nidhi Business Not do?
Nidhi businesses are a popular option for those looking to invest in India. What separates Nidhi businesses from other financial businesses is their focus on delivering financial facilities and advisory services to small businesses.
Here are some of the things that Nidhi company in India cannot perform as a non-banking financial business or company:
- Nidhi businesses cannot give financial facilities and products to their clients and customers.
- Nidhi company in India fail to provide credit products or loans to their clients and customers.
- Nidhi Business does not have the authority to accept deposits from their clients and customers.
- Nidhi companies do not offer investment advice to their clients and customers.
- Nidhi businesses cannot act as custodians or trustees for their customers’ assets.
- Nidhi businesses cannot play the role of agents for their customers in any transaction that is done with a third party.
- Nidhi companies do not lend money to their employees or directors.
- Nidhi company in India need to comply with every applicable law and regulation of India, along with the Prevention of Money Laundering Act, of 2002, the Banking Regulation Act, of 1949, the SEBI Regulations, of 1995, and other laws and regulations.
- Nidhi companies need to save full records of every transaction that is ever done with their clients and customers, including the customer’s personal details such as identity, nature of the transaction, account number, dates of the transaction, repayment details, etc.
- All information associated with a client’s or customer’s financial status needs to be available at all times for immediate access by those customers.
What Are The Risks Associated With Nidhi Business?
Due to its advantages, it might seem like a great choice to join Nidhi companies. However, one must remember that Nidhi businesses come with some limitations as well. One should be aware of them before becoming a member of it, Following are a few of the risks or disadvantages of establishing a Nidhi company in India:
- As mentioned above, Nidhi business can only lend money and accept deposits from its shareholders and members. No third party gets the advantage of depositing money in a Nidhi business. Because of this, Nidhi business receives a limited number of funds raised. Since Nidhi Business doesn’t accept deposits from any third party other than its shareholders and members, it receives fewer funds, which limits its capacity to lend money to the members. Moreover, if the lending ability of a Nidhi business is limited, it strikes down the whole purpose of the formation of the Nidhi business.
- According to the Nidhi Rules 2014 [1] and Section 406 of the Companies Act 2013, a Nidhi business must make sure that before the end of the first year post-incorporation, it retains at least two-hundred members in the company, while the Net Owned Fund needs to be at least ₹ 10 lakh or more than ₹ 10 lakh. Meeting these prerequisites within the first year of incorporation often turns out to be a bit tricky.
- Except for other financial companies, Nidhi businesses do not have the authority to advertise their deposit plans or schemes. Nidhi businesses can advertise their deposits only among their members only.
- Nidhi businesses are limited to running only one type of business other than borrowing and lending on its name.
- A Nidhi business can not carry on its deposit schemes for any more than a period of 5 years.
What Are The Advantages Of Nidhi Company in India?
Beside knowing all the risks associated with Nidhi business, one must also learn about its advantages. This will help one to make right decisions when considering establishing a Nidhi business. There are many advantages that the members can enjoy and benefit from, such as:
No Third-Party Interference
The entire operation of a Nidhi Company registration in India is concerned only with its members. No outside party gets to deposit money; they also cannot intervene in administration-associated decisions or meetings in the company.
Perpetual Succession
Even when a member retires or dies, its operations do not stop, and it continues irrespective of any kind of changes in the business. Nidhi business maintains a habit of perpetual succession, which allows the Nidhi Company to keep operating until things get legally dissolved.
Easy Formation
The process of registration is quite easy in a Nidhi Company in comparison to other Non-banking financial institutions. To establish a Nidhi business, only 7 persons are needed wherein three people would be allocated as Director. Plus, the registration procedure needs less paperwork and documentation, which makes it relatively easy to register a Nidhi business.
Conclusion
Even though the benefits provided by the Nidhi business outweigh its risks, its disadvantages are relatively concerning when it comes to establishing one. In recent years, Nidhi business has been trending in the financial markets due to the many benefits it provides.
However, unlike non-banking financial companies, it lacks the ability to provide many facilities to its members. It also has some strict regulations which become quite troubling for investors to deal with.
If you are also someone who is looking to start a permanent and a mutual benefit fund, or a mutual benefit company, then you can get in touch with Vakilsearch to make your Nidhi company registration smooth & hassle free!
Read More:-
