A Nidhi Company is a legal structure incorporated by the Ministry of Corporate Affairs under Section 20A of the Companies Act, 1956. NIDHI stands for National Initiative for Developing and Harnessing Innovations. It is a non-banking investment corporation performing the business of lending and investing with its members.
The Nidhi Company is specifically established primarily for mutual benefit and developing the habit of savings among its members. The contribution from the members is the main source of financing for the Nidhi Company.
Requirement of a Nidhi Company
The Nidhi Organization is obliged to have at least 200 members within one year of its existence. In addition, the Net Owned Funds should be at least Rs 10 lakhs or more within one year of their existence. The ratio between the Net Owned Fund and the deposit does not exceed 1:20.
Restrictions on Nidhi Company
A Nidhi Corporation is prohibited from performing any of the following operations-
- To conduct the hire purchase business, chit fund, lease financing, securities acquisition, or insurance. It cannot issue preference debentures or shares.
- They are not allowed to open the current account of the company member.
- It is prohibited from receiving, lending, or depositing money to any person other than its members.
- The Nidhi company is not allowed to enter into any kind of agreement or pay brokerage to implore any kind of deposits.
- They can't promise any of the assets submitted by the company members as security.
Members can avail Loan
Nidhi company can lead loan to its members, following limits are set against the deposit made-
- Nidhi company can grant a loan of Rs 2 lakhs if the deposit amount is Rs 2 crores.
- A loan amount of Rs 7.50 lakhs can be provided if the deposit is more than Rs 2 crores but less than Rs 20 crores.
- A loan amount of Rs 12 Lakhs can be granted if the deposit is more than Rs 20 crores but less than Rs 50 crores.
- For the loan amount of Rs 15 lakhs, the deposit should be more than Rs 50 crores.
- As per the last audited financial statements, it will not allow deposits above 20 times of its Net Owned Asset.
- The tenure will be for a minimum period of 6 months and a cumulative period of 60 months.
However, investing in Nidhi companies is considered risky due to less monitoring from the Government
Investors are advised to check the background/status of the Nidhi Company, in particular, their declaration of their status as a Nidhi Company by the Central Government before becoming a member and investing their hard-earned money in such businesses.