Restrictions on NIDHI Company

Non-banking Indian Finance Sector is governed by NIDHI Rules and recognized under Companies Act, 2013 and regulated by Ministry of Corporate Affairs. These NIDHI companies work on the principal of ‘Paraspara Sahayta’ generally borrowing and lending money to its members. Most of the NIDHI companies (80 %) are established in Tamil Nadu. Moreover, Reserve Bank of India has exempted this category to comply with its core procedures of registration. It is also known as Permanent Fund, Benefit Fund, and Mutual Benefit Funds. It cannot issue preference shares and shall have a minimum paid-up equity share capital of Rs. 500000/-. Some restrictions on NIDHI company are as follows:- Restricted business- No NIDHI company shall carry a business in the field of chit fund, leasing finance and hire purchase business and invest in securities of companies. The reason is ‘MUTUALITY’. NIDHI companies work on a trust basis, flowing money among its members only. Restrictions on issuance of preference shares, debentures or any other debt instrument- it deals with its own members which prohibit it to issue preference shares or other types of securities. Restrictions on current account- a NIDHI company shall not open its current account with its members because RBI exempts it to follow procedures of banking regulations. However, it can open a savings bank account. Restrictions on acquiring other companies- NIDHI companies don’t have control over the securities of other companies and Board of Directors. It cannot enter into any agreement unless it has passed a special resolution in its general meeting or acquired the approval of Regional Director having jurisdiction over that particular NIDHI company. The reason is these companies work within their state. Restrictions on carrying other business- borrowing or lending money to its members are the only business it can run in its name. As money transactions take place, it becomes necessary to provide locker facilities. Restrictions on the money- No taking/giving of money to outsiders. If NIDHI violates the rule, then it will have to proceed for a fully fledged NBFC. Restrictions on pledging assets- as money belongs to members, NIDHI company cannot pledge assets and raise a loan for any other entity or bank. Restrictions on money to body corporate- NIDHI company cannot borrow/lend money to a body corporate. The reason is obvious, private dealing of money. Restrictions on entering into an agreement- these companies cannot enter into partnership agreements because these are non-commercial companies working on the principle of mutuality. So, they cannot enter into big finance projects. Restrictions on advertisement- it cannot advertise like others for depositing schemes. However, among its members only, it can do so. Restrictions on paying brokerage- for assembling deposits from members, NIDHI cannot hire a person for this purpose nor offer brokerages and incentives. Since NIDHI companies deal in money matters and work without RBI approval, risks chances are high. Now, Nidhi Company Registration can be done through LegalRaasta in 30-40 working days.