Introduction

A Nidhi Company is a type of company formed with the objective of cultivating the habit of thrift and savings among its members and lending funds to them for their mutual benefit. Unlike banks and finance companies that serve the general public, Nidhis operate in a closed circle — they accept deposits only from members and grant loans only to members.

The Nidhi model has been popular in India for decades, especially in Southern states, due to its simplicity, trust-based structure, and regulatory framework under the Companies Act, 2013 and Nidhi Rules, 2014. This article will guide you through every detail — from what a Nidhi is, its benefits, incorporation process, declaration procedure, timelines, compliance requirements, deposit and membership rules, and even risks associated.

What is a Nidhi Company?

The word “Nidhi” means treasure. A Nidhi Company is a Public Limited Company incorporated under the Companies Act, 2013 and declared as a Nidhi under Section 406 of the Act.

Key Characteristics:

• Accepts deposits only from members.
• Grants loans only to members.
• No RBI registration required, but regulated by MCA through Nidhi Rules, 2014.
• Main objective: encourage savings and mutual benefit lending.

Example:

Imagine a small community of 1,000 people. Instead of depending on banks, they pool their savings into a Nidhi Company. Members can earn interest on deposits and also borrow loans against gold, property, or deposits at lower rates than moneylenders.

Benefits of a Nidhi Company

1. Encourages Financial Discipline
   Nidhis promote the habit of saving among members and channel these funds into productive lending.
2. Ease of Formation
   Since Nidhis are public companies, incorporation is straightforward and does not require RBI approval.
3. Low-Cost Credit
   Loans are available to members at reasonable interest rates, often lower than private financiers.
4. Trust-Based Model
   Because operations are limited to members, the risk of default is lower compared to open-market NBFCs.
5. Exemption from RBI Regulations
   RBI has exempted Nidhis from most provisions of the RBI Act, 1934, as their operations are restricted to members.
6. Community Upliftment
   Nidhis often operate in semi-urban and rural areas, providing easy credit access to people who may otherwise fall into the trap of high-interest moneylenders.

How Does a Nidhi Company Work?

Deposit Side

• Members deposit money as Fixed Deposits, Recurring Deposits, or Savings Deposits.
• Nidhis cannot accept deposits from the general public.

Lending Side

• Funds collected are lent only to members.
• Loans are usually secured against gold, silver, jewellery, property, fixed deposits, or government securities.

Regulatory Safeguards

• Deposits cannot exceed 20 times the Net Owned Fund (NOF).
• Minimum 10% of deposits must be invested in unencumbered term deposits with scheduled commercial banks.
• Interest rates are capped by law (loans cannot exceed 7.5% above the highest deposit rate).

Steps to Incorporation of a Nidhi Company

1. Digital Signatures (DSC) and DIN
   All directors must have a Digital Signature Certificate and Director Identification Number.
2. Name Reservation
   • Apply through the RUN service or SPICe+ Part A.
   • The name must end with “Nidhi Limited.”
3. Drafting MOA & AOA
   • MOA (Memorandum of Association): Must have the main object of cultivating thrift and lending among members.
   • AOA (Articles of Association): Must align with Nidhi Rules.
4. Filing SPICe+ (INC-32)
   • File along with e-MOA (INC-33), e-AOA (INC-34), and supporting documents.
5. Certificate of Incorporation
   • Issued by Registrar of Companies (ROC).

At this stage, the company is incorporated but not yet recognised as a Nidhi. To start business, declaration is necessary.

Procedure for Declaration as a Nidhi Company

• File Form NDH-4 with the Central Government within 120 days of incorporation.
• Attach declarations from promoters and directors confirming compliance with fit and proper criteria.
• Government examines application and conveys decision within 45 days.
• If approved, the company is notified in the Official Gazette as a Nidhi.
• If no decision is taken in 45 days, the application is deemed approved.

Timeline to Declare a Nidhi Company

• 120 days – Time available from incorporation to file NDH-4.
• 45 days – Time available for Central Government to approve/reject.
• Deemed Approval – If no decision is taken, declaration is automatically approved.

If a company does not comply with Rule 3A or 3B requirements, it cannot file Form SH-7 (share capital changes) or PAS-3 (allotment), nor can it raise deposits or provide loans.

Compliance Overview of a Nidhi Company

1. Membership – Must have 200 members within one year.
2. Net Owned Fund – Minimum ₹20 lakh.
3. Deposit Restrictions – Deposits capped at 20x NOF.
4. Unencumbered Deposits – Maintain 10% of deposits in scheduled banks.
5. Loan Limits – Loan eligibility based on deposits. Example:
   • If deposits < ₹2 crore → Loan limit ₹2 lakh per member.
   • If deposits > ₹50 crore → Loan limit ₹15 lakh per member.
6. Returns to be Filed:
   • NDH-1 – Statutory compliance return.
   • NDH-2 – Extension application, if required.
   • NDH-3 – Half-yearly return.
7. Audit Certificate – Auditor must certify compliance each year.

Risks Associated with a Nidhi Company

1. Restricted Scope – Activities are limited to members; growth potential is slower.
2. Strict Compliance – Multiple forms and timelines; penalties apply for defaults.
3. Liquidity Risk – Funds depend only on member deposits; sudden withdrawals may cause strain.
4. Regulatory Scrutiny – MCA can reject NDH-4 applications if directors/promoters fail the “fit and proper” test.
5. Reputational Damage – Any mismanagement directly affects members who are also depositors.

Deposit Taking Powers of Nidhis

Nidhi Companies are allowed to accept deposits from members but within strict limits. These powers are clearly outlined in the Nidhi Rules, 2014:

1. Types of Deposits Allowed

• Fixed Deposits (FD):
  • Minimum period: 6 months
  • Maximum period: 60 months
• Recurring Deposits (RD):
  • Minimum period: 12 months
  • Maximum period: 60 months
  • Can also be linked to repayment of mortgage loans.
• Savings Deposits:
  • Balance cannot exceed ₹1,00,000 per member.
  • Interest cannot exceed 2% above savings bank rate of nationalised banks.

2. Interest on Deposits

• Nidhis can offer interest on FDs and RDs, but the rate cannot exceed what NBFCs are allowed to offer.
• This ensures members get fair returns without exposing the company to high interest burden.

3. Ceiling on Deposits

• Total deposits accepted cannot exceed 20 times of Net Owned Fund (NOF).
• Example: If NOF is ₹20 lakh, maximum deposits allowed = ₹4 crore.

4. Unencumbered Term Deposit Requirement

• At least 10% of outstanding deposits must be invested in scheduled commercial banks or post office deposits.
• This acts as a liquidity buffer in case of sudden withdrawal demands.

5. Premature Withdrawals

• Deposits cannot be repaid within 3 months of acceptance.
• If repaid between 3–6 months, no interest is payable.
• If repaid after 6 months but before maturity, the interest rate is reduced by 2%.
• In case of death of a depositor, premature repayment with applicable interest is allowed.

Membership Provisions

Membership Provisions

Membership is the foundation of a Nidhi Company. Rules ensure that membership is broad-based and genuine.

1. Minimum Membership Requirement

• Every Nidhi must have at least 200 members within one year of incorporation.
• If not achieved, the company must apply to the Regional Director for an extension via Form NDH-2.

2. Who Can Become a Member?

• Only individuals can be members.
• Bodies corporate, trusts, and minors are not allowed.
• However, deposits can be accepted in the name of a minor if made by a guardian who is a member.

3. Shareholding Requirement

• Each member must hold a minimum of:
  • 10 equity shares, or
  • Shares worth ₹100 (face value minimum ₹10 each).

4. Restrictions on Transfer of Shares

• A member cannot transfer more than 50% of his shareholding while having an active loan or deposit.
• The member must always retain the minimum number of shares required for membership.

5. Equal Rights and Obligations

• All members enjoy equal voting rights (one share = one vote).
• Members are both depositors and potential borrowers, creating a mutual benefit society.

6. Importance of Membership Growth

• Strong membership base = larger pool of deposits.
• Larger deposits = higher lending power.
• Therefore, every Nidhi must focus on expanding membership while ensuring compliance with Ru

Conclusion

A Nidhi Company is a low-cost, member-driven financial model ideal for communities, small towns, and groups seeking an organised structure for savings and loans. While incorporation is relatively easy, the real challenge lies in timely declaration (NDH-4) and continuous compliance.

For entrepreneurs, professionals, or community leaders, a Nidhi Company can be a powerful tool for financial inclusion and community welfare, but it must be managed with prudence, discipline, and transparency