This article has been written by Anubhav Garg, a student of Delhi Metropolitan Education. In this article, he has talked about recent amendments made in NidhiRules and its implications on already existing and under formalities companies seeking the status of Nidhi.
What are Nidhi companies?
The word Nidhi means ‘Treasure’ in Hindi. As the name suggests, it relates to finance and funds. Nidhi Companies are governed by the Nidhi Rules, 2014 (the ‘Rules’) and are incorporated under the Companies Act, 2013 (the ‘Act’). As per Section 406 of the Act, Nidhi companies are incorporated with the goal of inculcating the habit of thrift and savings among its members. Nidhi companies accepts deposits and lends to its members exclusively, for the purpose of their mutual benefit. Also referred to as ‘Mutual Benefit Society’, the core business of Nidhi companies is borrowing and lending from its members. In addition to the Nidhi Rules, Nidhi companies are also governed by the Central Government, who has the power to issue notifications, in accordance with the Act, pertaining to any modification, exception and/or adaptations for Nidhi Companies.
Nidhi companies are one kind of Non-Banking Finance Companies and only public companies can be declared as Nidhi companies under Rule 4(1) of the Rules and enjoy the freedom from central provisions of the Reserve Bank of India Act, 1934 (RBI Act) like mandatory registration,creation of reserve fund, maintenance of liquid assets and other RBI instructions under Section 45-IA of the RBI Act. However, there are certain provisions of the RBI Act which Nidhi companies have to comply with. These provisions include interest per cent on deposits, prohibition from paying brokerage on deposits, ban on advertisements and the requirement of submission of certain returns. It is pertinent to note that while certain provisions of the RBI Act are applicable to the Nidhi companies, it doesn’t mean that the RBI is the regulatory authority for Nidhis. The Ministry of Corporate Affairs (MCA) is the regulatory authority for Nidhi companies.
What are the amendments made to Nidhi Rules, 2014?
Nidhi Rules is the code which regulates the functioning of the Nidhi compani,es. Recently, on 1st July, 2019 the Ministry of External Affairs issued an official gazette introducing certain amendments to the Rules,naming it Nidhi (Amendment) Rules, 2019. Discussed below are the major amendments and its implications made in the Rules.
A new clause 2(d) has been inserted which further elucidates the applicability and jurisdiction of Nidhi Rules, The clause provides, “every company declared as Nidhi or Mutual Benefit Society under sub-section(1) of section 406 of the Act”. The substantial amendment is that now, any company declared as ‘Mutual Benefit Society’ under section 406(1) of the Companies Act, 2013 will also come under the purview of NIdhi Rules.
2. Definition of Nidhi Companies
Definition of Nidhi companies has been added as section 3(da) to give a clarity of what kind and nature of companies fall under the definition of Nidhi and under the jurisdiction of Nidhi Rules. Section 3(da) provides that “Nidhi” are those companies which have been incorporated with the aim of inculcating the habit of rational utilization of money and savings amongst its members,and accepting deposits and lending the same to its members in need only, in order to mutually benefit its members. This class of companies are governed by the Ministry of External Affairs, which acts under the authority of an agent on the behalf of the Central Government.This is the same text from section 406(1) of the Companies Act, 2013 but in this amendment it has been moved to the definition clause of Nidhi Rules for the sake of comprehension and clarity.
3. Form NDH-4
A new application form NDH-4 has been introduced for those companies, which wish to get the status of Nidhi by the way of insertion of a new section namely 3A. It is one of the major alterations which have been introduced under these amendments. On receiving an application of a public company under Form NDH-4 along with the prescribed fees, if fully convinced that the company has complied with all the requirements under these Rules, the Central Government may declare the company as a Nidhi company In the official gazette.
All the Nidhi companies incorporated under the Companies Act, 2013 on or after the commencement of the amended rules, are required to mandatorily file Form NDH-4 within sixty days from:
- The last date of the one-year time span from the date of its incorporation; or
- The stipulated time period put to which extension of time has been granted by the Regional Director under sub(3) of Rule 5.
It is envisaged in section 3A that nothing contained in it stops Nidhi companies from filing Form NDH-4. It is also been laid down in the new provisions that the Nidhi Company not abiding the Nidhi Rules shall not be allowed to fill form SH-7 (Notice to Registrar of any alteration of share capital) and Form PA93 (Return of Allotment) form.
4. Particulars pertaining to incorporation and its incidental matters
Some parts of Rule 4 of the Rule have been omitted under the amendment. This rule relates to the incorporation and incidental matters pertaining to the Nidhi companies. Rule 4 lays down the provisions including, the kind of company which can be incorporated as Nidhi, the minimum equity share capital for Nidhi, when can Nidhi issue preference shares, Memorandum of Association of Nidhi and Nidhi Limited’ after Nidhi company’s name.
In sub-rule (1) of Rule 4 of the Rules, “to be incorporated under the act” has been removed and in sub-rule(2) of Rule 4 of the Rules, “company incorporated as a” has been stroked-off.
The said amendment has been done to give better clarity of the applicability of the Rules and to cut-off the ambiguous and unnecessary information and make it more subject friendly the Rules.
5. Time frame provided to ensure compliance of prescribed requirements
Under Rule 5(1) of the Rules, the words “from the commencement of these rules” have been substituted with “from the date of its incorporation”. In this way, Nidhi companies have been given a period of one year from the date of incorporation instead of the date of commencement (which was unviable) to ensure that they have:
- A minimum two-hundred members;
- Net Owned Funds of INR Ten lakhs or more; and
- Unencumbered term deposits of at least ten per cent of the total outstanding deposits as prescribed in Rule 14 of the Rules and a ratio of Net Owned Funds to deposits of not more than 1:20.
Further, Rule 5(3) of the Rules has been expanded and has been made more comprehensive. When a Nidhi company fails to gather minimum two-hundred members or arrange a Net Owned Fund of Ten lakhs or more, they have to apply to the Regional Director in Form NDH-2 along with fee specified in Companies (Registration Offices and Fees) Rules, 2014 for more time within thirty days from the close of the first financial year. The Regional Director has to pass the order considering the said application within thirty days of its receipt. But before, there was no specified limit about how much extension the regional director can grant. With these amendments, it has been made one year maximum from the date of receiving the application of extension.
In Rule 5(4) of the Rules, after “contained in sub-Rule (1)”, “and gets itself declared under sub-section (1) of Section 406” has been inserted. This means that, when a Nidhi company fails to comply with the Rule 5(1) of the Rules, beyond the extended time of one year. Such company shall not accept any further deposits from its members until it has complied with the required provisions and also gets itself declared as a Nidhi company under Section 406(1) of the Companies Act, 2013, if not declared already.
6. Issue of equity shares
Under Rule 7(1) of the Rules, after “shall issue”, the words “fully paid-up” have been added. It means that, now Nidhi companies can issue only fully paid-up equity shares of the minimum value of INR ten each. This means that Nidhis can’t issue the equity shares on a pro-rata basis etc.
Rule 7 of the Rules provides the provisions relating to the minimum nominal value of equity shares it issues, the minimum amount of equity shares every Nidhi has to allot to the deposit holders and the minimum amount of equity shares every savings account holder and recurring deposit account holder shall retain.
7. Application form for placing a deposit
Rule 12(1) of the Rules states that every application form for placing a deposit with Nidhi, must contain certain particulars. In addition, 12(1)(ba) has been inserted, which provides that the application shall also contain the date of declaration or notification as Nidhi.
Further, in Rule 12(2)(a) of the Rules, the “Registrar of Companies” has been replaced with “National Companies Law Tribunal”. This means that the depositor will now approach National Companies Law Tribunal (NCLT) instead of Registrar of Company in case of non-payment (in whole or partly) as per the terms and conditions of such deposits. This provision will give depositors of Nidhis’ more confidence as the NCLT has wider jurisdiction to grant reliefs and remedies.
9. Power of the Central Government
Under Rule 23(2) of the Rules, the word “Regional Director” has been replaced with “Central Government”. Hence, now if any Nidhi fails to comply with the provisions of the Rules or to operate in terms of Article of Association (AOA), then the Central Government will be will appoint and direct a special officer and not the Regional Director to take over the control of that Nidhi company. Also, the Central Government will be the one to hear the plea under such circumstances.
Rule 23 of the Rules provide for the enforcements and powers of the Central Government over the Nidhi companies to make them comply with Nidhi Rules. These powers include calling for information or returns from Nidhi as government may deem necessary and may engage the services of chartered accountants, company secretaries, cost accountants, or ant firm from time to time to assist itself in carrying out its duties. It also provides the appointment of special officer by the Central Government when a Nidhi company fails to comply with its Memorandum of Association or AOA.
10. Declaration as Nidhi company
Rule 23A states that:
- Every company functioning as Nidhi or Mutual Benefit Society but which hasn’t yet applied or not yet notified as Nidhi; and
- The companies which have been incorporated under section 406 of the Companies Act,
have to get themselves declared as Nidhi in accordance with the newly inserted Rule 3A. This is to be done within the period of one year from its incorporation or within six months from the commencement date of these Rules i.e. 15th August, 2019, whichever is later.
Further, it has been mentioned that the company not abiding the said provision will not be allowed to file Form No. SH-7 (Notice to Registrar of any alteration of share capital) and Form PA9-3 (Return of Allotment).
11. Form to be filled by already registered Nidhis
The companies which have already been declared as Nidhi under Section 620A(1) of the Companies Act, 1956, they are required to file Form NDH-4 along with the fees prescribed in Companies (Registration Offices and Fees) Rules, 2014, in order to update their status under the new provisions.
No fees will be charged if the said companies make their registration within six months from the incorporation of the new Rules i.e. 15th August, 2019. The consequences for non compliance is again, not being allowed to file Form No. SH-7 (Notice to Registrar of any alteration of share capital) and Form PA9-3 (Return of Allotment).
Nidhi (Amendment) Rules, 2019 has focused on comprehending the regulations and smooth functioning of corporate machinery and statutory framework by way of elucidating and introducing provisions pertaining to definition, applicability and jurisdictional authority for Nidhi companies. Further, it has also emphasized on provisions pertaining to raising capital, appointment of Special Officer, requisites for incorporation of a Nidhi company and other provisions. All the amendments are likely to contribute positively towards achieving better legal enforceability of the Rules and for the smooth functioning of companies assisting the rural and conservative people to manage their finances more effectively.
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