Introduction

Nidhi Company play a unique role in India’s financial ecosystem by encouraging savings among members and providing loans within the group. Because they handle public deposits, the law is particularly careful about who can act as a director in such Nidhi Company.

The eligibility and disqualification criteria for directors are not defined only in the Nidhi Rules, 2014, but also in the Companies Act, 2013, which governs all companies in India. In addition, Rule 17 of the Nidhi Rules provides specific requirements relating to the tenure and eligibility of directors.

In this article, we examine the complete legal framework covering who can be a director in a Nidhi Company, with specific reference to Sections 164, 167, and 169 of the Companies Act, 2013, Rule 3B of the Nidhi (Amendment) Rules, 2022, and Rule 17 of the Nidhi Rules, 2014.

Section 164 – Disqualifications for Appointment

Section 164 of the Companies Act, 2013 lays down the grounds on which a person cannot be appointed as a director in any company, including a Nidhi. A person shall not be eligible if:

1. Unsound Mind / Insolvency
   • Declared of unsound mind by a competent court.
   • Undischarged insolvent.
   • Applied to be adjudicated as insolvent.
2. Conviction
   • Convicted of an offence and sentenced to imprisonment for more than six months.
   • If convicted for any offence involving moral turpitude and sentenced for at least seven years, he is permanently disqualified.
3. Failure to Pay Calls
   • If calls in respect of shares held by him are not paid within six months from due date.
4. Director in Defaulting Companies
   • If he is a director in a company that has not filed financial statements or annual returns for three continuous years.
   • If he is a director in a company that has failed to repay deposits, interest, redeem debentures, or pay dividends for one year or more.

Section 167 – Vacation of Office

Even if a person is appointed as a director, he may have to vacate office if he later incurs disqualification. Section 167 provides that a director must vacate office if:

• He incurs any of the disqualifications under Section 164.
• He absents himself from all board meetings held during twelve months.
• He acts in contravention of Section 184 (related to disclosure of interest in contracts).
• An order disqualifying him is passed by a court or tribunal.
• He is removed under Section 169.
• He fails to disclose interest in related party transactions.

For a Nidhi Company, strict adherence to attendance and disclosure rules becomes mandatory to retain depositor trust.

Section 169 – Removal of Directors

While Sections 164 and 167 deal with disqualification and vacation, Section 169 gives members the power to remove a director even before the expiry of his term. Removal can be carried out through an ordinary resolution, provided a special notice is given and the director concerned is given an opportunity to be heard.

This mechanism is particularly important for members of a Nidhi Company, because it allows them to remove directors who may not be acting in the best interests of depositors, even if no technical disqualification under Section 164 or 167 has arisen.

Rule 3B of the Nidhi (Amendment) Rules, 2022 – Fit and Proper Criteria

Apart from the general disqualifications under the Companies Act, Rule 3B of the Nidhi (Amendment) Rules, 2022 introduces additional conditions specific to Nidhi Companies.

For promoters and directors to be considered eligible, they must be “fit and proper persons.” This includes:

• Integrity and Character: The person must have honesty, ethical behaviour, fairness, and reputation.
• No Pending Criminal Cases: No criminal complaint under Section 154 of CrPC or charge sheet for economic offences.
• No Regulatory Bar: No restraint, prohibition, or debarment order by SEBI, RBI, MCA, or any financial regulator.
• No Conviction: Not convicted of any offence involving moral turpitude.
• No Insolvency / Unsound Mind: Not declared insolvent or of unsound mind by a competent court.
• No Financial Defaults: Not categorised as a willful defaulter or fugitive economic offender.
• Limits on Directorship: Cannot be a director in more than five Nidhis or a promoter in more than three Nidhis.

This “fit and proper” test is unique to Nidhis and ensures that individuals with questionable financial or legal backgrounds cannot manage companies handling deposits.

Rule 17 of the Nidhi Rules, 2014 – Rules Relating to Directors

Rule 17 further strengthens governance by providing specific rules applicable only to directors of Nidhis:

1. Membership Requirement – A director must be a member of the Nidhi. Outsiders cannot serve as directors.
2. Tenure – A director may hold office for a maximum period of ten consecutive years.
3. Cooling-Off Period – After completing ten years, the person can be reappointed only after a two-year break.
4. Extended Tenure – If the Central Government had previously granted an extension to a director, such tenure ends when the extension expires.
5. Compliance with Companies Act – Any person appointed as a director must comply with Section 152(4) (requirement of DIN and consent to act as director) and must not be disqualified under Section 164.

This rule ensures that directors rotate over time, preventing indefinite control and encouraging fresh participation.

Combined Effect of the Provisions

When these provisions are read together, it becomes clear that eligibility to act as a director in a Nidhi Company is subject to both general corporate law and specific Nidhi regulations.

• Section 164 ensures that only individuals with financial discipline and clean records are appointed.
• Section 167 ensures that a person cannot continue if he later becomes disqualified or fails in his duties.
• Section 169 empowers members to remove a director who may not be acting in their interest.
• Rule 3B imposes additional safeguards specific to Nidhis, emphasising depositor protection.
• Rule 17 ensures that directors are members themselves, limits their tenure, and mandates a cooling-off period to avoid concentration of power.

Thus, a person who wishes to be a director in a Nidhi Company must not only be free from disqualifications under the Companies Act but must also meet the higher bar of the fit and proper criteria and the tenure restrictions under the Nidhi Rules.

Conclusion

Being a director in a Nidhi Company is not just about holding office — it is about trust, responsibility, and compliance with a strict legal framework. The combined application of Sections 164, 167, and 169 of the Companies Act, 2013, along with Rules 3B and 17 of the Nidhi Rules, 2014, ensures that only credible, reliable, and responsible individuals can take charge of such companies.

For promoters and members alike, the message is clear: choose directors carefully, verify their backgrounds, and ensure compliance with both the Companies Act and the Nidhi Rules. Only then can a Nidhi Company function smoothly, safeguard depositor interests, and build long-term credibility.

Frequently Asked Questions (FAQs) on Directors in Nidhi Companies

Q1. Who is eligible to become a director in a Nidhi Company?
Any person who is a member of the Nidhi, holds a valid Director Identification Number (DIN), gives written consent to act as director under Section 152(4) of the Companies Act, 2013, and is not disqualified under Section 164 or Rule 3B of the Nidhi Rules.

Q2. What are the disqualifications under Section 164 of the Companies Act, 2013?
A person is disqualified if he is of unsound mind, an undischarged insolvent, convicted of certain offences, or is a director in a company that has defaulted in filing financial statements, repaying deposits, redeeming debentures, or paying dividends.

Q3. What happens if a director becomes disqualified after appointment?
Under Section 167, the director must vacate his office immediately. Continuing in office despite disqualification would be illegal and may attract penalties.

Q4. Can members remove a director before his term ends?
Yes. Under Section 169, members may remove a director through an ordinary resolution, provided that special notice is given and the director is given an opportunity to be heard.

Q5. What is the “fit and proper” criteria under Rule 3B of the Nidhi Rules, 2022?
Promoters and directors must have integrity, honesty, and ethical behaviour. They must not have pending criminal cases, regulatory prohibitions, convictions for moral turpitude, insolvency, or be categorised as wilful defaulters or fugitive economic offenders. They also cannot be a director in more than five Nidhis or a promoter in more than three Nidhis.

Q6. What does Rule 17 say about the tenure of directors in a Nidhi Company?
A director can hold office for up to ten consecutive years. After that, he must step down and can be reappointed only after a two-year cooling-off period.

Q7. Can an outsider (non-member) become a director of a Nidhi Company?
No. Rule 17(1) specifically requires that a director of a Nidhi must be a member of the company.

Q8. What if the Central Government has already granted an extension to a director’s tenure?
If a director’s tenure was extended by the Central Government earlier, it shall automatically end on expiry of such extended tenure.

Q9. Is there any limit on how many Nidhi Companies a person can be a director in?
Yes. A person cannot be a director in more than five Nidhis at the same time, as per Rule 3B.

Q10. Why are director rules stricter for Nidhis compared to other companies?
Because Nidhis handle public deposits, depositor protection is the top priority. Strict rules ensure that only trustworthy and financially disciplined individuals are in charge of managing the company.