General Restriction on Nidhi Companies (Nidhi Ltd) – Rule 6 of Nidhi Rules, 2014

Introduction

If you are thinking of incorporating a Nidhi Company, then you must look into the general restrictions on Nidhi Company as stated in Nidhi Rules, 2014. Nidhi Company is one of the categories of Non Banking Financial Company (NBFC) which does not require any approval from the Reserve Bank of India (RBI). It is bounded by the Nidhi Rules, 2014.

However, there are many restrictions on the working of Nidhi Companies as well. Let us discuss and explain the importance of each and every restriction.
 

1. No Nidhi Company shall carry on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate;

Analysis:

Nidhi Company for accepting deposits and providing loans to its members. It supports the principle of Mutuality. Hence, it is restricted from doing the business mentioned above. However, some of the above businesses require the RBI license.

Further, Nidhi Company cannot invest in any securities of the company which is doing the . Hence, we can see the clear intention of lawmaker which is prohibiting Nidhi Company for doing any business other than allowed.
 

2. No Nidhi shall issue preference shares, debentures or any other debt instrument by any name or in any form whatsoever;

Analysis:

Nidhi Company can deal only with its members, and that is also by issuing the equity shares of the company. Therefore, Nidhi is prohibited from issuing any other type of securities.
 

3. Nidhi Company shall not open any current account with its members;

Analysis:

Nidhi Company is a type of but it is not the substitute to fully fledged NBFC or a Bank. Hence, it is not allowed to open the current account.

The point to be noted here is that law does not prohibit Nidhi Company to open the saving account with its members.
 

4. No Nidhi Company shall acquire another company by purchase of securities or control the composition of the Board of Directors of any other company in any manner whatsoever or enter into any arrangement for the change of its management.

Unless it has passed a special resolution in its general meeting and also obtained the previous approval of the Regional Director having jurisdiction over such Nidhi;

Analysis:

Nidhi Company can only work within the state where its registered office is situated. However, people can buy another company outside the state and can run their operation there as well. Hence, the has blocked that way round. They have said that any buyout will require prior permission.
 

5. No Nidhi Company shall carry on any business other than the business of borrowing or lending in its own name:

Analysis:

As already discussed above, Nidhi Company can only do the business of borrowing and lending in its name. They cannot run any other business in its name.

Also, Nidhi Company can offer the locker facilities to its members.
 

6. No Nidhi Company shall accept deposits from or lend to any person, other than its members;

Analysis:

Nidhi is exempted from RBI approval due to this restriction because here it deals only with its members. If Nidhi has to deal with the general public, then it has to graduate itself to a fully fledged NBFC.
 

7. No Nidhi Company shall pledge any of the assets lodged by its members as security;

Analysis:

This point protects the rights of the member. Let us understand this by an example. Suppose Company provides a loan to one of its members against the gold. Now, Company holds the gold as As per this point, Nidhi Company cannot pledge this gold and raise a loan from any other entity or bank. 
 

8. No Nidhi Company shall take deposits from or lend money to any body corporate;

Analysis:

If we can read this point , it restricts the Nidhi Company from money or any deposit from any body corporate. However, investment into any other company is not subject to the points above.
 

9. No Nidhi Company shall enter into any partnership arrangement in its borrowing or lending activities;

Analysis:

Nidhi Company works on the principle of mutuality. It is not regarded as fully commercial financial company. Therefore, it cannot form a consortium with other lenders to finance a big project.
 

10. No Nidhi Company shall issue or cause to be issued any advertisement in any form for soliciting deposit:

Provided that private circulation of the details of fixed deposit Schemes among the members of the Nidhi carrying the words "for private circulation to members only" shall not be considered to be an advertisement for soliciting deposits.

Analysis:

Nidhi Company cannot advertise itself in the for deposits like other financial institution do.
However, Nidhi Company issue advertisement within its member group for any event like launching a new product etc.
 

11. No Nidhi Company shall pay any brokerage or incentive for mobilising deposits from members or for deployment of funds or for granting loans.

Analysis:

As stated above, it is the part of soliciting for deposits. A Nidhi Company cannot hire a person on the to get the deposits etc.

CONCLUSION

Nidhi Company is not flexible to work as much as other companies. There are restrictions on the working of this . since its deals in money related matters that too without the RBI approval, the restriction are bound to be there.

In case you still left with any other doubt, please contact us.