Nidhi Company : An Overview by CS Devershi Gupta

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Nidhi Company : An Overview by CS Devershi Gupta

 

 

Nidhi Company

Nidhi as the Hindi word denotes “sampatti” is a type of public company which may be incorporated with an exclusive object of cultivating the habit of thrift and savings amongst its members, deposits from, and lending to, its members only, for their mutual benefit.

 

What is a Nidhi Company?

Nidhi Company is incorporated under Section 406 of the Companies Act, 2013, read with the applicable rules, as a public company with a minimum paid-up equity share capital of Rs. 5 lakhs. Although the activities of a Nidhi company is similar to that of a non-banking financial company, as to accepting deposits and granting loans, however, they have been exempted from the purview of the RBI Act, 1934 by virtue of the “RBI Master Direction- Exemptions from the provisions of RBI Act, 1934”.

 

Statutory requirements for a Nidhi Company

Every Nidhi company shall, within a period of one year from the date of its incorporation, ensure that it has-:

  1. not less than 200 members;

 

  1. Net Owned Funds of Rs. 10 lakhs or more;

 

  1. Unencumbered term deposits of not less than 10% of the total outstanding deposits;

 

  1. Ratio of Net Owned Funds to deposits not more than 1:20;

 

  1. To allot a minimum of 10 equity shares having nominal value not less than Rs. 10 each or shares equivalent to Rs. 100.

 

 

(Note: Net Owned Funds= aggregate of paid up equity share capital + free reserves – accumulated losses and intangible assets appearing in the last audited balance sheet)

Operational requirements for a Nidhi Company

As mentioned above, the objective of a Nidhi company is to take deposits and provide loans to its members. The Ministry of Corporate Affairs (“MCA”) being the regulator of Nidhi companies has regulated the norms for taking deposits and providing loans which are as follows:

  1. Deposits

A Nidhi Company shall not accept deposits exceeding twenty times of its Net Owned Funds (NOF) as per its last audited financial statements.

The Nidhi Company is allowed to accept deposits with the following timelines:

Savings deposit- There is no time limit

Fixed deposits- 6 to 60 months

Recurring deposits- 12-60 months

Recurring deposits relating to mortgage loans- Maximum period shall correspond to the repayment period of loans granted.

Interest rate on deposits:

Savings Account- Maximum 2% above the rate allowed by nationalized banks, but maximum balance in a savings deposit account at any given time qualifying for interest shall not exceed Rs. 1 lakh.

Fixed and Recurring deposits- Maximum rate of interest a NBFC can pay on its public deposits as prescribed by the RBI.

 

  1. Loans

A Nidhi shall provide loans only to its members.

The loans given by a Nidhi to a member shall be subject to the following limits, namely:-

Total deposits Ceiling limit on loan
< Rs. 2 Cr Rs. 2 lakhs
Rs. 2 Cr – Rs. 20 Cr Rs. 7.50 lakhs
Rs. 20 Cr – Rs. 50 Cr Rs. 12 lakhs
>Rs. 50 Cr Rs. 15 lakhs

 

A Nidhi shall give loans to its members only against the following securities, namely:-

(a) gold, silver and jewellery:

(b) immovable property:

(c) FDR, NSC, other Government Securities and insurance policies:

Interest rates of loans:

The interest charged on any loan given by a Nidhi company shall not exceed 7.5% above the highest rate of interest offered on deposits by Nidhi and shall be calculated on reducing balance method.

 

General restrictions or prohibitions

Similar to a NBFC, there are certain restrictions or prohibitions on Nidhi companies as well. Some of the major restrictions or prohibitions of a Nidhi company are that it shall not:

  1. carry on the business of chit fund, hire-purchase finance, leasing finance, insurance or acquisition of securities issued by any corporate;

 

  1. open any current account with its members;

 

  1. accept deposits from or lend to any person, other than its members;

 

  1. carry on the business other than the business of borrowing or lending in its own name;

 

  1. take deposits or lend money to any body corporate;

 

  1. issue of advertisements in any form soliciting deposits;

 

  1. pay brokerage in order to mobilize deposits from members or for deployment of funds or for granting loans

 

Compliances to be made by Nidhi Companies

Nidhi companies shall be required to do the following compliances:

  1. Filing of return of statutory compliances in e-Form NDH-1– Within 90 days of the close of first F.Y. and where applicable, the second F.Y.

 

  1. Filing of non-compliance with the conditions mentioned w.r.t incorporation of a Nidhi company such as minimum no. of members, Net Owned Funds etc. in e-Form NDH-2– Within 30 days of the close of first F.Y.

 

  1. Filing of half-yearly return in e-Form NDH-3– Within 30 days of the conclusion of each half year.
Note: This article is purely for academic purpose and shall not be acted upon as a professional advice. The provisions of law referred to in this article may be amended at any time. Thus, I assume no responsibility for the consequences of use of such information without any professional advice. In no event, shall I be liable for any direct, indirect or incidental damage arising in connection with the use of information here in contained.

 

 

The economy of India is an agriculture centric economy. But, the primary producers and farmers have had a long struggle in India. In the new era where India inc. is flourishing, agriculture is struggling to catch up with it. In the light of recent legislature development, it has become our duty as finance & legal professionals to make sure that our farmers have the knowledge and power to negotiate with the Big Corporate players entering the Agriculture sector. In such scenario, concept of Producer Company has become much more important. In this article I have tried to explain certain basic features of Producer Company.

 

What is a Producer Company?

A producer company can be defined as a legally recognized body of farmers/ agriculturists with the aim to improve the standard of their living, and ensure a good status of their available support, incomes and profitability. A Producer Company can be formed by 10 individuals or 2 institutions or by a combination. The main objective of the producer company is to facilitate the formation of co-operative business as companies and to make it possible to convert existing co-operative business into companies. In terms of Sec 465 of the Companies Act, 2013 the provisions of Part IX-A of the Companies Act, 1956 shall be applicable mutatis mutandis to a produce company. The objects of Producer Company shall conform to the activities included sec 581B of Companies Act, 1956

 

Authorized activities of Producer companies

The Producer Company is required to deal with the produce of its members and is authorized to carry on any of the following activities:

 

  • Processing (processing also includes, preserving, brewing, venting, drying, distilling, canning and packaging) of the produce of its members;
  • Manufacture, sale or supply of equipment, machinery or consumables to its producer members;
  • To provide education on the mutual assistance principles to the producer members of the producer company and others;
  • To render consultancy services, technical services, training, R&D and all other required activities for promoting the interests of producer members;
  • Generation, transmission and distribution of power, conservation and communication relatable to primary produce, revitalisation of land and water resources,
  • Insurance of the primary produce and its producer;
  • To promote the techniques of mutuality and mutual assistance;
  • The welfare of members as may be decided by the Board;
  • Financing of procurement, marketing, processing or other activities such as extending of credit facilities or any other financial assistance to its producer members.
  • Any other activity (ancillary or incidental to the main objectives of the producer company)

 

Benefits for Producer Companies

The following are the benefits enjoyed by a Producer Company:-

  • It can have a single registration and operate throughout India including exporting business in contrast to co-operatives.

 

  • No political intervention by the government / local authorities, which will enable the entity to run
  • The Producer Company can have an unlimited count of shareholder members unlike any other company or form of business but with a condition that the member should only and only be a primary producer / farmer.
  • It can enter into JVs, alliances and also have subsidiaries, which is not the case for a society.
  • It can distribute its earnings back to members (unlike NPO /Section 8 companies no requirement to plough back the profits) in the proportion of contribution and not necessarily as per the shareholding pattern.
  • Every member has one vote irrespective of number of shares held by him which is the essence of co-operative society.
  • It can be run by professionals by designating them on board which is not the case for a

 

Special features

As mentioned above the Producer Company consist of individuals who are primary producers, and thus, are in need of financial support from time to time. Hence, a special provision under the Companies Acts, 1956 was passed for giving loans to producer members. A Producer Company can provide financial assistance to its members through:-

  • Credit facility: A Producer Company can provide to any of its members for a period not exceeding six months.
  • Loans and advances: These are provided to the producer member against security, repayable within a period not exceeding seven years from the date of disbursement of such loans or advances.

 

  • NABARD Loan: NABARD provides support and financial assistance to meet the needs of Producer Companies. In 2011, NABARD set up a Rs. 50 crore Producer Organisation Development Fund (PODF), out of its operating surplus.

 

Tax Benefit (Taxability of Producer Company)

To overcome the undue hardship and the bias in the taxation, the Government in the Union Budget 2018-19, had provided a tax benefit to the Producer Company. It is, therefore, been proposed to extend the 100% tax deduction to Producer Company having a total turnover up to Rs. 100 crores. In other words, any Producer company making a turnover of up to 100 Crores and earning profit out of the same, need not pay any corporate tax, 100% tax deduction had been allowed by proposing an extension to section 80P by inserting section 80PA to the Act. The benefit shall be available till Assessment Year 2024-25. The benefit will be available in respect of the following activities of the Producer Companies:

  • the marketing of agricultural produce grown by the members; or
  • the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to the members; or
  • the processing of the agricultural produce of the members.

 

Note: This article is purely for academic purpose and shall not be acted upon as a professional advice. The provisions of law referred to in this article may be amended at any time. Thus, I assume no responsibility for the consequences of use of such information without any professional advice. In no event, shall I be liable for any direct, indirect or incidental damage arising in connection with the use of information here in contained.

 

 

 

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