Introduction

A Nidhi Company is a non-banking financial entity recognized under Section 406 of the Companies Act, 2013, and governed by the Nidhi Rules, 2014. Unlike traditional banks and larger NBFCs, a Nidhi Company is formed with the primary objective of promoting thrift and savings among its members and offering financial assistance on a mutual benefit basis. All its financial activities are restricted to its members only. The scope of permitted financial operations is carefully defined by law to ensure that these companies remain secure, stable, and focused on their mutual benefit function. This explanation outlines the permitted financial activities of a Nidhi Company in detail.

Acceptance of Deposits from Members

Nidhi Companies are permitted to accept deposits exclusively from their registered members. These deposits can be in the form of savings deposits, fixed deposits (FDs), and recurring deposits (RDs). The maximum period for a fixed deposit is five years, and the minimum is six months. For recurring deposits, the period ranges from twelve months to sixty months. The rate of interest on savings deposits cannot exceed two percent above the rate offered by nationalized banks. This provision ensures that the company offers fair returns while maintaining financial discipline.

Granting Loans to Members

Nidhi Companies are allowed to lend money only to their members. The loans must be secured, and the securities can include gold, silver, immovable property, fixed deposit receipts, or government securities. The amount of loan that can be sanctioned to a single member is determined based on the value of deposits the company holds. The interest charged on loans cannot exceed seven and a half percent above the highest interest rate offered on deposits. These regulations ensure that lending remains affordable and within the financial capacity of the company.

Operation of Savings Accounts

Nidhi Companies may offer savings account facilities to their members. These accounts function similarly to traditional bank savings accounts but are governed internally by the company’s policies and the limits outlined in the Nidhi Rules. The objective is to encourage regular saving habits among members. The interest rate and withdrawal rules for such accounts must comply with applicable limits and must be disclosed to the members.

Issuance of Share Capital to Members

Every member of a Nidhi Company is required to subscribe to a minimum of ten equity shares or shares equivalent to at least one hundred rupees in value. This equity contribution forms a base for participation in the company’s operations and entitles the member to financial services such as deposit and loan facilities. The shares represent a member’s stake in the company but are generally non-tradable and non-transferable except under inheritance conditions.

Creation of Reserve Funds

Nidhi Companies are allowed and encouraged to create reserve funds from their profits. A specific portion of net profits must be transferred annually to a general reserve. This reserve acts as a financial cushion and is used to strengthen the company’s financial position. The accumulation of reserves helps the company maintain liquidity and absorb financial shocks without jeopardizing member deposits or the company’s ability to lend.

Collection of Nominal Fees

A Nidhi Company may collect nominal service charges, membership fees, or processing charges related to loans and account operations. However, such charges must be reasonable and disclosed to the members beforehand. The purpose of allowing these charges is to cover operational expenses and maintain administrative efficiency. These charges cannot be excessive or profit-oriented and must be used solely to support the mutual operations of the company.

Investment in Safe Instruments

Nidhi Companies are allowed to invest their funds in secure and approved instruments, such as government securities, fixed deposits in nationalized banks, or other approved institutions. These investments must be made conservatively to preserve capital and meet statutory liquidity requirements. The company is not allowed to invest in shares, debentures, or speculative financial instruments. This rule protects the company from market volatility and ensures member funds are not exposed to undue risk.

Restrictions on Borrowing and External Funding

Nidhi Companies are not allowed to borrow funds from external institutions, banks, or individuals who are not members. All funding for operations must come from the members themselves. This restriction reinforces the self-reliant nature of Nidhi Companies and prevents exposure to third-party financial obligations. It also ensures that all financial benefits remain within the circle of members.

Conclusion

The scope of financial activities allowed for a Nidhi Company is deliberately narrow and clearly defined to ensure that the institution remains focused on its original purpose of mutual financial support. By restricting activities to member-based deposits and loans, prohibiting external borrowings, and limiting investments to safe instruments, the regulatory framework maintains financial stability and protects member interests. These carefully structured permissions enable Nidhi Companies to function effectively in rural and semi-urban areas, where they offer an accessible, ethical, and community-driven alternative to commercial banking. Understanding and adhering to these permitted financial activities is essential for maintaining compliance, earning member trust, and ensuring long-term sustainability.

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