What is a Nidhi company and should you invest in it?

What is a Nidhi Company? A Nidhi Company is a kind of Non-Banking Financial company. However, such companies do not require any license from Reserve Bank of India, making it an easier form to start and operate. Nidhi companies are majorly found in Southern India. 

It needs to have ‘Nidhi limited’ as its last words and is registered as a public company. The purpose behind the formation of Nidhi company is:

• To borrow and lend money to its members,
• To encourage the habit of saving among its members and
• Works on the principle of mutual benefit.

Before investing in a Nidhi company go through a few important facts about them:

Primary Features-

1. Minimum seven number of members are required to start a Nidhi Company. Of which three must be the directors. It should have at least 200 members within a year of its inception.
2. The net owned funds should be at least Rs.10 lakhs or more within one year of its existence. The maximum ratio between the Net Owned Fund and deposits should not exceed 1:20.
3. It cannot accept deposits from or lend funds to anybody else other than its members. They cannot promise any of the assets submitted by the company members as security.
4. They are not permitted to open the current account of the member of the company.
5. It cannot deal with chit funds, hire-purchase finance, leasing finance, insurance or securities business.
6. It cannot advertise itself to ask for any deposits. The Nidhi company is not allowed to enter into any kind of agreement of pay brokerage to get any kind of deposits.
7. The share capital for minimum Rs.5 lakh is needed to start a Nidhi company.
8. It cannot issue preference shares.

How does a Nidhi company grant loans to its members against deposits?

• If the deposit amount is Rs.2 crores, it can grant a loan of Rs.2 lakh.
• If the deposits are more than Rs.2 crores but less than Rs.20 crores, it can grant a loan of Rs.7.5 lakhs.
• A loan of Rs.12 lakhs can be granted if the deposit is more than Rs.20 crores but less than Rs.50 crores.
• If deposits are more than Rs.50 crores, a loan amount of Rs.15 lakhs can be granted.
• A minimum period of 6 months to a cumulative period of 60 months’ tenure is permitted.
• It cannot allow deposits above 20 times of its Net Owned Asset as per its last audited financial statements.

A Nidhi company is required to make a declaration of its status as a Nidhi company, which it receives from the Central Government. 

Before making any decision to invest and thereby becoming a member, all investors are advised to check the details of the Nidhi Company. Investing in such companies is risky as it does not require any strict monitoring from the Government.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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