The Ministry of Corporate Affairs (MCA) has advised the public to conduct a proper background check before making investment decisions involving Nidhi companies, particularly where unusually high returns are promised.
The advisory follows the MCA’s examination of applications filed in Form NDH-4, during which it found that several Nidhi companies were not complying fully with applicable provisions of the Companies Act and Nidhi Rules.
Declaration required for Nidhi status
It also noted that some companies had not submitted NDH-4 applications within the prescribed timeframe.
Every company seeking to function as a Nidhi is required to file an application in Form NDH-4 to be declared or updated as a Nidhi under the applicable provisions.
Verify facts independently
The MCA said members of the public should not rely solely on promises of unusually high returns made by agents or on informal assurances.
They should independently verify whether the company has been declared as a Nidhi by the Central Government and carefully examine the terms before making financial decisions.
Deposits not covered by DICGC
Deposits accepted by Nidhi companies are not insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
In the event of a company failure or fraud, recovery of deposited money could be difficult or incomplete.
Nidhi can provide loans only to their members
Nidhi companies are mutual-benefit companies regulated by the MCA under the Companies Act, 2013 and Nidhi Rules, 2014. They can accept deposits and provide loans only to their members.
Under Section 620A of the erstwhile Companies Act, 1956, companies seeking to function as Nidhis were required to be declared as Nidhis by the Central Government.
Rules strengthened from 2019
Under Section 406 of the Companies Act, 2013, a company could initially be incorporated as a Nidhi and function as one while complying with the Nidhi Rules, 2014.
However, Section 406 and the Nidhi Rules were amended with effect from August 15, 2019, reintroducing the requirement for Central Government declaration.
MCA publishes list of declared Nidhis
The MCA said a list of 395 companies declared as Nidhis by the Central Government under the Companies Act, 1956 and 2013 is available on its website for public information.
The advisory is intended to encourage prospective depositors and members to independently verify the status of a Nidhi company and understand the risks and applicable terms before committing their money.