On 19th April 2022, the Ministry of Corporate Affairs issued a notification amending the Nidhi Rules 2014. The Nidhi (Amendment) Rules 2022 has amended the existing rules keeping in mind public interest. A brief look at the Nidhi company entity in light of the amendments.

About Nidhi companies

Basics

• A Nidhi company is a type of Non-banking financial company (NBFC). 
• This type of company thrives on the basic principle of encouraging savings of people / public. The company also borrows and lends between its members. It accepts deposits from its members and lends to other members. The objective is to be mutually beneficial to all members. It deals with its funds of its members only. 
• They are typically known as “Benefit Funds” or “Mutual Benefit Funds” etc. This type of company is found mostly in Southern India. Tamil Nadu has the maximum number of Nidhi companies in India.     
• The functioning of the Nidhi company is governed by the Ministry of Corporate Affairs. The MCA has power to issue directions / make regulations. It was governed by section 620 under the (erstwhile) Companies Act 1956 and Section 406 of (present) the Companies Act 2013. Such companies are additionally governed by Nidhi Rules 2014.

Pre – requisites 

• A Nidhi company is registered as a Public company.
• The name of the company should contain “Nidhi Limited” or “Benefit Fund Limited” or “Mutual Benefit Fund Limited” or “Permanent Fund Limited”
• Being in the nature of a Public company, it requires a minimum of 3 directors and 7 members/ shareholders. 
• Being a type of NBFC, RBI approval is not required.
• It has not less than 200 members
• The minimum paid up capital is Rs. 5 lakhs.   
• Its Net Owned Funds shall be Rs. 10 Lakhs or more. (Net owned funds are the aggregate of paid up capital and free reserves (-) the intangible assets on the last balance sheet. 
• The aggregate Net owned funds shall not exceed 1:20
• The unencumbered term deposits should not be less than 10% of the total outstanding deposits as specified in Rule 14 of the Nidhi Rules.

The Nidhi (Amendment) Rules 2022 

Some of the major amendments that have been made effective 19th April 2022:

Proviso to Rule 3A

A company which has not complied with requirements of declaring itself as a Nidhi company in the requisite Form (NDH-4) on or after the commencement of the Nidhi (Amendment) Rules 2022 or in case the application submitted in Form NDH-4 has been rejected by the Central government, then such company shall not raise any deposit from its members or provide any loan to its members from the date of non-compliance or the date of rejection of Form NDH-4, whichever is later.

A company which has not complied with requirements of declaring itself as a Nidhi company in the requisite Form (NDH-4) on or after the commencement of the Nidhi (Amendment) Rules 2022 or in case the application submitted in Form NDH-4 has been rejected by the Central government, then such company cannot raise deposit(s) after the date of non-compliance, or the date of commencement of the above said rules, or the date of rejection of the application in Form NDH-4, whichever is later. If such company raises deposits, then provisions of Chapter V of the Companies Act 2013 shall become applicable.  

Provided also that nothing in this rule shall apply to companies incorporated as Nidhi on or after the commencement of the above said rules.

Rule 3B

(1) On and after the commencement of Amendment Rule 2022, public company desirous to be declared as a Nidhi shall apply, in Form NDH-4, within 120 days of its incorporation, if it fulfils the following conditions –

(i) it has not less than 200 members; and
(ii) it has Net Owned Funds of 20 Lakh rupees or more.

(2) Along with Form NDH-4, the company shall attach a declaration with regard to fulfilment of fit and proper person criteria by all the promoters and directors of the company.

(3) For the purpose of determining as to whether any promoter or director is a “fit and proper person”, the following shall be considered, namely:

(a) integrity, honesty, ethical behaviour, reputation, fairness and character of the person; and
(b) the person not incurring any of the following disqualifications, namely:

(i) criminal complaint or information under section 154 of the Code of Criminal Procedure, 1973 (2 of 1974) has been filed by a person authorised by the Central Government against such person and which is pending;

(ii) charge sheet has been filed against such person by any enforcement agency in matters concerning economic offences which is pending;

(iii) an order of restraint, prohibition or debarment has been passed against such person by any regulatory authority or enforcement agency in any matter concerning company law, securities laws or financial markets which is in force;

(iv) an order of conviction has been passed against such person by a court for any offence involving moral turpitude;

(v) such person has been declared insolvent and not been discharged;

(vi) such person has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force;

(vii) such person has been categorised as a wilful defaulter;

(viii) such person has been declared a fugitive economic offender;

(ix) such person is a director in five or more companies incorporated or declared as Nidhi or is a promoter of three or more companies incorporated or declared as Nidhi.

(4) The Central Government shall examine the application filed in Form NDH-4 and convey its decision within 45 days to the company. In case a decision on filed Form NDH-4 is not taken by the within the said period by the Central government, the same shall be deemed as approved.

(5) On being satisfied that the company meets the requirements as stated above, the Central government shall notify in the official gazette declaring the company as a Nidhi company. Such approval given by the Central government has to be filed by the company with the Registrar of Companies in Form 20A. Provided that such company shall commence its business only once the decision of the Central Government approving is obtained.

(6) A company that does not comply with the requirements of this sub- shall not be allowed to file Form No. SH-7 (Notice to Registrar of any alteration of share capital) and Form PAS-3 (Return of allotment).

(7) The provisions of this rule shall not be applicable to a public company incorporated under the Act before the date of commencement of the Nidhi (Amendment) Rules, 2022.

Rule 4

1. A Nidhi company shall be a public company with a minimum paid up equity share capital of Rs. 10 lakhs (prior to the amendment it was Rs. 5 Lakhs)
2. Every Nidhi company existing as on the date of commencement of the Nidhi Amendment Rules,2022, shall comply with this requirement within 18 months from the date of such commencement of the amendment Rules

Rule 6
(d) a Nidhi company shall not acquire or purchase securities of any other company or control the composition of the Board of Directors of any other company in any manner or enter into any arrangement for change of its Management.  

(k) a Nidhi company shall not raise loans from banks or financial institutions or any other source for advancing loans to members of the Nidhi company. 

Rule 8
(4) A member shall not transfer more than 50% of his shareholding (as on the date of availing of loan or making of deposit) during the subsistence of such loan or deposit, as the case may be. Provided that the member shall retain the minimum number of shares required under the sub rule at all times.

Rule 9
Every Nidhi company shall maintain Net Owned funds of not less than Rs. 20 Lakhs or such higher amount as the Central government may specify from time to time. (Prior to this amendment, the NOF was Rs. 10 Lakhs). Provided that every Nidhi existing as on the date of commencement of the Nidhi (Amendment) Rules,2022 shall comply with this requirement within 18 months from the date of such commencement.

Rule 20
The norms relating to classification of assets in respect of mortgage of loans or jewellery loans including gold loans have been modified to include “gold” or “silver”.  

Making it mandatory to obtain prior approval / permission to function as Nidhi company (after incorporation) is an important step in ensuring such companies stay within the radar of the Ministry of Corporate affairs for effective regulatory supervision. Directors and Promoters having to mandatorily meet the “fit and proper person” criteria only lends credibility and value to the management of such Nidhi companies. The timeline of government giving approval being streamlined to 45 days is to ensure speedy disposal of applications and effective compliance of the provisions of the Act and Rules.

The Nidhi (Amendment) Rules 2022 is effective keeping in mind the interests of the public and in order to prevent illegal use or misuse of public funds. There have been increasing instances of fraudulent activities by which innocent public is duped off their hard-earned money. The amendments seem to be the need of the hour as they address issues of the hour.

For full text of the Nidhi (Amendment) Rules 2022:

https://www.mca.gov.in/bin/dms/getdocument?mds=LTZyclKMNK0LX6JwM%252BaPeA%253D%253D&type=open