10 things a Nidhi Company cannot do as an NBFC in India

Introduction

Nidhi Companies are getting famous day by day in India as they are the cheapest way to register a Non-Banking Financial Company (NBFC) in India. In India, NBFC’s are governed by Reserve Bank of India (RBI) and need the net worth of atleast Rs.2 crore to start the finance business.

However, under Nidhi Company you need only 5 lakh capital to start with. Hence, we can say that Nidhi Companies really have an advantage of being cheap.

Like every coin has two sides, so is the Nidhi Company has. Apart from various advantages it carries, there are restrictions which hampers the smooth functioning of the Nidhi Company in India.

Here are the 10 things a Nidhi Company can’t do as an NBFC in India:

#Point No.1 - No Business other than Nidhi business: A Nidhi Company cannot carry a business of chit funds, hire purchase finance, leasing finance, insurance or acquisition of securities issued by the Body corporate. This is because Nidhi Company is itself a special type of company which carries a predefined business and hence it is not allowed to carry on business as any other type.

Further, to register the vehicle finance business, chit fund companies or microfinance companies, you need separate licenses from local body or RBI, which depends upon case to case basis.

#Point No.2 - No Preference Share Capital: A Nidhi Company cannot raise funds by ways of Preference share capital or debentures. Since Nidhi Company is allowed to take deposits from the general public, it has been restricted to raise funds from any other source.

#Point No.3 - No Current Account: A Nidhi Company has been restricted to open the current account with the members. Nidhi Company is not treated as a commercial company rather it is a mutual benefit company and hence government does not want it to commercialise it.

#Point No.4 - Deal only with Members: A Nidhi Company cannot deal with any person other than its members. In other words, a Nidhi company can only take money or lend money to its members only.

#Point No.5 - No Body Corporate as a Member: A Nidhi Company cannot add body corporate like private limited companies as their members and hence cannot accept deposit from them. Further, they are even restricted to accept money as an inter-corporate deposit from another company.

#Important Point No.6 - Cannot advertise or Solicit:  A Nidhi Company cannot advertise to solicit any person for deposits. However, a Nidhi Company can advertise for granting of loan to different people. This has been an issue of discussion, however, as per the law a Nidhi Company is not restricted to advertise for money lending.

This is an important loophole for Nidhi Company business.

#Point No.7 - No Brokerage or incentive: A Nidhi Company is not allowed to pay any brokerage or incentive for mobilising deposits from members or for deployment of funds or for granting loans.  However, a person can keep employees on fixed salaries, as the same has not been restricted by law.

#Point No.8 - No Service Charge on Membership: A Nidhi Company cannot charge a service charge on an issue on shares from the members. However, a Nidhi Company can charge processing fees on loans as the same has not been restricted by Nidhi Rules.

#Point No.9 - No Branch before three years: A Nidhi Company cannot open a branch in India until it has earned profit continuously in three preceding years. This is a mandatory condition and which cannot be compromised even if any permission is sought from Registrar of Companies (ROC).

#Point No.10 - No Brand outside State: A Nidhi Company cannot open a branch outside the state in India. This has been specifically restricted by the Nidhi Rules, 2014.

Conclusion

Through Nidhi Companies has so many demerits, restriction but it is still being seen as a rising concept in India especially in South India. However, a Nidhi company is still a mystery for a lot of people and hence you must seek advice from the right source.

The author is CA Paras Mehra who is professionally associated with Hubco.in, a brand to register and manage Nidhi Companies in India and can also be reached at paras@hubco.in or agam@hubco.in.