About PURVANCHAL MUTUAL BENEFIT NIDHI INDIA LIMITED
“Nidhi” is a Hindi word, which means finance or fund. Nidhi means a company which has been incorporated exclusively with the object of developing the habit of thrift and reserve funds amongst its members, receiving deposits, and lending to its members only for their mutual benefit. Nidhi Companies are monetary business companies operating in India and can be classified as Non Banking Financial Companies (NBFC) and Banking Companies. However, unlike NBFCs and Banking Companies a Nidhi company does not require a license from the Reserve Bank of India (RBI) to operate. A Nidhi Company works through its members. Any person who is a member of a Nidhi can make deposits and borrow or take loans when need be.
Nidhis are also known as ‘Mutual Benefit Societies’ or ‘Mutual Benefit Companies’, terms given to it by the ‘Sabanyagam Committee on Nidhis’ and the ‘Expert Committee on Nidhi’ to distinguish it from other Co-operative societies and Banks which may engage in a similar kind of activity. The basic function of a Nidhi is to promote the savings and utilization of funds by its members and to safeguard the financial conditions of its members.
Nidhi is Public Limited Company formulated with the primary object to carry on the business of accepting deposits and lending money to member-borrowers only against jewels, mortgage of immovable property and fixed deposit receipts. Nidhis are not permitted to engage themselves in the business of Chit Fund, hire purchase, insurance or in any other business including investments in shares or debentures. Thus, Nidhis do their business only with Members. Such Members are only individuals. Bodies Corporate or Trusts are never to be admitted as Members. The Nidhis cater to the needs of middle class and lower middle class persons, who are all the members of the Nidhi generally operate in a small local area and the members, are very often known to each other.
Nidhis are companies registered under Section 406 of the Companies Act, 2013 (or Section 620A of the Companies Act, 1956) and are regulated by the Ministry of Corporate Affairs (MCA). NBFCs are wholly or partially regulated by the RBI. Nidhis are one such class of NFBCs that is only partially regulated by the RBI i.e. in reference to the matters relating to their deposit acceptance activities. Unlike section 620A of the 1956 Act, the 2013 Act under Section 406 finally defines Nidhi Companies. This definition was first recommended to be added by the Sabanyagam Committee on Nidhis. It was observed by the ‘Expert Committee’ that since Nidhis operate in a small area and cater the needs majorly of the middle and lower middle section of the society and the members are often well known to each other, certain norms prescribed for the NBFCs should be diluted when applied to these institutions.
For a Nidhi to be incorporated under the Companies Act, it has to be incorporated as a public company with a minimum paid up equity share capital of five lakh rupees. Except as provided under the proviso to sub-rule (e) to Rule 6, no Nidhi can have any object in its Memorandum of Association other than the “object of cultivating the habit of thrift and savings amongst its member, receiving deposits from, and lending to, its members only, for their mutual benefit.” And lastly, Rule 4(5) makes it mandatory for every company incorporated as a Nidhi to have the last words “Nidhi Limited” as part of it name.
Rule 5 of the Nidhi Rules, 2014 specifies the requirements of the minimum number of members and net owned funds that a Nidhi company must have. The rule stipulates that it must have not less than 200 members at any point of time of the existence of the company after its incorporation, have Net Owned Funds of ten lakh rupees or more and the ratio of the net owned funds to deposits should not be more than 1:20. Other than this, the provisions with regard to share capital and allotment, membership, net owned funds, branches, acceptance of deposits, loans, rate of interests, rules relating to directors, dividend, auditors, prudential norms are provided in the rules 7- 20.
Nidhi companies, with its unique institutional structure, offer a profitable path for organizing a lending business without getting into the regulatory web of ordinary financial services. Though there exist a dedicated gamut of legislation governing Nidhi Companies carefully crafted to plug possible loopholes, this structure is advantageous with its relatively easier formation and limited regulation. Nidhi Companies being mutual benefit organizations is devoted strictly to its members, pro lower and middle class. Bulks of members are attracted with the benefit of easy documentation and favorable rates. Thus, in a country like India having a high percentage of unbanked population and with a society still not fully equipped with a sound banking culture, these companies are a solid alternative to a traditional banking system to align the interests of many within a closed unit. However, these companies are still not common uniformly throughout India with the bulk of them in Southern India. Though the concept of such companies is quite old, the recent tightening of regulation for interests of depositors is a positive step to promote yet another means of financial inclusion.
