10 Things That A Nidhi Company Cannot Do As An NBFC

Nidhi Company is basically a company that aims to start a company with less capital. Whereas a Non-Banking Financial Company (NBFC) company requires huge capital investment at the start. In India, NBFC Companies and Nidhi Companies are working at an expansive and restricted scale respectively. In this article, we will discuss the Restrictions on Nidhi Company as an NBFC.

There are some certain advantages that one can enjoy by opting for a Nidhi but with advantages comes certain restrictions where Nidhi company cannot perform activities that NBFC can perform. This is what makes Nidhi Companies different from NBFCs. NBFC’s extended roles and benefits that it provides to the customer are a plus point that is prevailing over the Nidhi Companies.

What is a Nidhi Company?

• Nidhi Company is a company governed under section 406 of the Companies Act 2013.
• It is a company incorporated with the sole object of encouraging the habit of thrift and saving among its members, receiving deposits, and also lending the same to its members only.
• A Company that is incorporated under section 406 of the Companies Act,2013 shall mandatorily have the last words’ Nidhi Limited’ as a part of its name.

Requirements for a Nidhi Company

• The minimum capital required to start is Rs 5 lakh.
• A Minor cannot be a member.
• A minimum of 3 directors and 7 members is required.
• The deposit made shall not be less than 10% of the outstanding deposits.
• The Number of members in the company should increase to at least 200 members within 1 year of its incorporation.
• A Net owned fund should be Rs 10 lakh.

What is an NBFC Company?

• NBFC Company is a company which is established under the Companies act 2013 intending to provide a long term and specialized credit facility to the customers.
• NBFC working is similar to the bank in meeting the financial needs of the corporate as well as caring for the weaker section of the society.
• NBFC cannot start its business without obtaining an NBFC registration from the Reserve Bank of India (RBI).

Requirements for NBFC

• An NBFC shall be incorporated under the Companies Act,2013, or any other previous Act.
• A Minimum net owned fund should be Rs 2 crore.
• The business activity of NBFC should be defined under Section 45I(a) of the RBI Act,1934.

Things which a Nidhi company can’t do as an NBFC / Restriction on Nidhi Company as an NBFC

1. Can’t do business other than Nidhi business

A Nidhi company does not have the right to undertake any other transaction or business other than the Nidhi scheme. This means that they cannot organize a chit fund business or can hire leasing or purchase finance insurances of any kind. Such companies also do not have any right to acquire securities in the form of stock or shares. This is valid for all stocks and shares issued by a corporate company.

These rules are there because the Nidhi is an independent financial institution that has been set up with particular financial responsibilities in mind and hence it must work according to those guidelines only. They are specialized companies that have their own approach and are therefore not allowed to carry on any other business.

2. Current Accounts

The Nidhi is a mutual benefit institution and the government is against the commercialization of such companies. Hence, it does not give the authority to start current accounts. Therefore, the companies do not have the option of opening a current account under the Nidhi Scheme.

3. No Promotions

Nidhi Companies are not allowed to promote or advertise to anyone in the hope of gaining a deposit. Although, they are allowed to advertise their capacity to grant loans. Several discussions have taken place regarding this matter because the law does not restrict a Nidhi from advertising for money lending thus making it a huge loophole that is being utilised by most of these companies.

4. No Preference Share Capital or Debentures

A Nidhi is not permitted to use preference share capitals or debentures to raise funds for itself. These companies can only accept money in the form of deposits from the public and they are not allowed to raise funds through any other method.

5. No Brokerage or Incentive

Nidhi companies are not allowed to provide any incentive or brokerage for stimulating deposits or granting loans. Although, they are given the option of employing people on a fixed salary basis.

6. No deposit on Membership

A Nidhi does not have the right to accept deposits from individuals who are not members of the Company. Lending and depositing are features that are only available for the members. Hence, circulation and handing over of cash occurs only within the members of the community.

7. No Service Charge is applied on Membership

Nidhi does not have any right to charge any member a service charge for acquiring membership to the Company. Issuing shares for the members is also strictly prohibited. However, a Nidhi Company also does not have the authority to charge processing fees on loans.

8. Membership limitations

A Nidhi cannot add a corporate body as its member. So taking deposits from such institutions is not at all permitted within the framework of the Nidhi Scheme. They are also restricted from accepting inter-corporate deposits from other members.

9. No Branches before 3 years

A Nidhi Company cannot open a second office as a subsidiary branch in India until it attains a profit three years in a row. This compulsory regulation holds well even if an owner is able to procure permission from the Registrar of Companies (ROC).

10. Can not cross the Boundary

A Nidhi is not allowed to open a branch or office outside its state of origin in India. This has also been mentioned in the Nidhi Rules, 2014 and hence restricts these companies to within state boundaries.

One must be aware of the limitations mentioned above about the Nidhi Scheme. It is strictly prohibited for Nidhi Companies to grant loans to people other than members of the Company.

Suggested Read: Provisions for Nidhi Company Loans