What Is a Nidhi Company? Meaning, Features and How It Works

Nidhi company meaning, in one line: it is a mutual benefit company that accepts deposits from its members and lends only to those same members, with the aim of encouraging thrift and savings. If you have heard about it from a neighbour, a relative or an agent and want the plain version, this is about a nidhi company the way we explain it to clients. Registration steps sit in our Nidhi company registration guide.

In this guide

• Meaning of a Nidhi company
• Main features
• How a Nidhi company works
• The Central Government declaration
• What a Nidhi cannot do
• FAQs

Meaning of a Nidhi company

“Nidhi” means a fund. A Nidhi company is a small community lender. Members put their savings in as deposits, and the company lends that money back to members who need it, usually against gold, property or a fixed deposit. The profit stays within the company and is shared with members through dividend, subject to the limits in the Rules.

The legal basis is Section 406 of the Companies Act, 2013, read with the Nidhi Rules, 2014. We have a separate note on Section 406 and the Nidhi company, and one on the Nidhi Rules, 2014.

Main features

• It must be a public company, and the name ends with “Nidhi Limited”.
• The single object is cultivating thrift and savings among members.
• Deposits come from members only, and loans go to members only.
• At incorporation it needs 7 members, at least 3 directors and Rs 10 lakh paid-up equity capital.
• It cannot issue preference shares.
• It is not a bank and cannot offer cheque or current account services to the public.

How a Nidhi company works

The working of a Nidhi company is simple on paper. A person becomes a member by buying shares. The member can then open a savings account, a fixed deposit (6 to 60 months) or a recurring deposit (12 to 60 months). The company lends to members against security such as gold, immovable property, fixed deposits, government securities or insurance policies.

Two ratios keep it in check. Net owned funds to deposits should not be more than 1:20, and unencumbered term deposits of at least 10% of outstanding deposits must be kept with a scheduled commercial bank in the Nidhi’s own name. Read the current Rules for exact wording before you plan around them.

The Central Government declaration

Incorporation alone does not let a Nidhi operate. The company applies in Form NDH-4 within 120 days, showing at least 200 members and net owned funds of Rs 20 lakh. Until the declaration comes, it cannot take deposits or lend. There is no RBI licence involved. The “licence” people talk about is this declaration.

What a Nidhi cannot do

The Rules prohibit chit funds, hire purchase, leasing, insurance business, buying securities, accepting deposits from non-members and lending to other companies. A Nidhi also cannot advertise to attract deposits or pay brokerage for them. How it differs from a finance company is covered in Nidhi company vs NBFC, and the mutual idea itself in what the mutual benefit term means.

The structure of members and directors is explained in our post on the Nidhi limited company.

Related reading

• Nidhi Company Registration in India: Process, Documents, Cost and Timeline
• Nidhi Limited Company: Members, Directors and Structure
• Nidhi Act and Nidhi Rules 2014 Explained
• Nidhi Company Under the Companies Act 2013 (Section 406)
• Nidhi Company vs NBFC: Which Should You Start?
• Nidhi Mutual Benefit Company: What the Term Means

Need help with your Nidhi company? See our Nidhi company registration service, call +91 93117 95484, or write to mail@taxhint.in.

FAQs

What is a Nidhi company in simple words?

It is a company owned by its members that takes their savings as deposits and lends to them. Outsiders cannot deposit or borrow, and profits are kept within the member group.

Is a Nidhi company the same as a bank?

No. A bank is licensed by RBI and deals with the public. A Nidhi works only with its own members, is regulated through MCA, and cannot offer current accounts or cheque services to the public.

Does a Nidhi company need an RBI licence?

It does not. It is not registered with RBI as an NBFC. What it needs is the Central Government declaration through NDH-4 after incorporation.

Who can run a Nidhi company business?

Any group that can form a public company with 7 members and at least 3 directors, meet the Rs 10 lakh capital rule and later qualify at NDH-4. Promoters and directors must meet fit and proper criteria.

More in this Nidhi series