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Nidhi Company is a company registered under Companies Act and notified as a nidhi company by Central Government under Section 620-A of Companies Act. It is a non-banking finance company doing the business of lending and borrowing with its members or shareholders.

Nidhi Companies are companies registered under Section 620A of the Companies Act, 1956 (Section 406 of the new Companies Act, 2013) (both referred together as the “Act”) and is regulated by MCA. Even though Nidhi Companies are regulated by the provisions of the Act, they are exempted from certain provisions of the Act, as applicable to other companies, due to limiting their operations within their own shareholders/members.

Nidhi Companies are also included in the definition of Non-Banking Financial Companies (“NBFC”) under the regulatory ambit of the Reserve Bank of India (“RBI”). Non-banking financial entities partially or wholly regulated by the RBI include:

(i) NBFCs comprising equipment leasing (EL), hire purchase finance (HP), loan (LC), investment (1C) (including primary dealers (PDs)) and residuary non-banking (RNBC) companies;

(ii) Mutual benefit financial company (MBFC), i.e. nidhi company;

(iii) Mutual benefit company (MBC), i.e. potential nidhi company; i.e., A company which is working on the lines of a Nidhi company but has not yet been so declared by the Central Government; has minimum net owned fund (NOF) of Rs.10 lakh, has applied to the RBI for certificate of registration and also to Department of Company Affairs (DCA) for being notified as Nidhi company and has not contravened directions/ regulations of RBI/MCA.

(iv) Miscellaneous non-banking company (MNBC), i.e. Chit Fund Company.

Since Nidhi Companies come under one class of NBFCs, RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities. However, in recognition of the fact that these Nidhi Companies deal with their shareholder-members only, RBI has exempted the notified Nidhi Companies from the core provisions of the RBI Act and other directions applicable to NBFCs. As on date RBI does not have any specified regulatory framework for Nidhi Companies.

A Nidhi company is classified at present as “Mutual Benefit Financial Company” by RBI and regulated by RBI for its deposit taking activities and by DCA for its operational matters as also the deployment of funds. Nidhi Companies on account of being under the regulatory supervision of MCA enjoy exemption from core provisions of the RBI Act so as to prevent regulatory overlap. In relation to compliance with RBI norms, DCA has vide its Notification dated September 29, 2003 provided that, Nidhi Companies can’t offer interest on fixed and recurring deposits which exceeds the maximum rate of interest prescribed by the RBI that the NBFCs can pay on their public deposits.

Registration Procedure Of Nidhi Company

Incorporation/Registration procedure of Nidhi Company:

A company is not a Nidhi Company from inception and has to file with MCA to be granted status of a Nidhi Company. The process for incorporation is as follows:-

(i) Incorporation of a Public Limited Company;

(ii) Objects of the company mentioned in Memorandum of Association shall cover only those activities

permissible for Nidhi Companies as prescribed in DCA’s Notification GSR No. 555 (E) dated July 26, 2001 and GSR 308 (E) dated April 30, 2002 (details of are discussed later in this article);

(iii) Upon incorporation of the company, a proposal for application to MCA to declare the company as a Nidhi Company will have to filed to which extent a board resolution will need to be passed;

(iv) Apply to MCA in Form 63 for declaration as Nidhi Company. The other documents that need to be submitted along with Form 63 are as follows:-
1. Certificate from a chartered accountant is required if the company has complied with the directions contained in the notifications GSR No. 555 (E) dated the July 26, 2001 and GSR 308 (E) and 309 (E) dated the April 20, 2002;
2. Certificate from a chartered accountant regarding whether the ratio of loan on immovable property is within the prescribed limit;
3. Copy of resolution of the board of directors in support of the proposal of the company for recognition as a Nidhi Company;
4. Certificate signed by two directors regarding the number of members as on the date of application (membership should not be less than 500 at any time)
5. Certificate from the auditors of the company to the effect that the company has complied with the directions of MCA issued from time to time and has maintained its books of account according to the recognised principles of accounting; and
6. Any other information can be provided as an optional attachment.

Non Permissible Activities for Nidhi Companies

Pursuant to Notifications GSR 555 (E) dated July 26, 2011 and GSR 308 (E) dated April 30, 2002, MCA directed Nidhi Companies to not carry out certain activities such as:-

(i) Carrying on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of shares or debentures issued by anybody corporate except the shares of another Nidhi Company, if specifically permitted by MCA;

(ii) Opening any new current account with its members;

(iii) Admitting as member, anybody corporate or trust;

(iv) Issuing any equity share of nominal value less than rupees 10/- except in case of Nidhi Companies  incorporated on and after July 26, 2001:

(v) Levying service charge for issue of shares to members;

(vi) Making any preferential allotment of shares to any persons or group of persons but shall make only rights issue of shares and the unsubscribed portion can be apportioned by the Board of Directors in terms of Section 81 of the Companies Act, 1956;

1. provided that this restriction shall not apply to allotment of shares up to the face value of Rs.100/- to new deposit holders or borrowers  and in respect of qualification shares held by Directors.

(vii)   Acquiring another company by purchase of shares or control of composition of Board of Directors otherwise than through amalgamation or merger under the Act and subject to the regulations applicable to Nidhi Companies in force;

(viii)  Carrying on any business other than the business of borrowing or lending in its own name and allow use of its name by any other body corporate whose main object is to earn profit by borrowing and lending;

(ix) Entering into any financial dealing with any person other than its members;

(x)  Pledging any type of security lodged with it by its members;

(xi) Taking further deposits from or lend further money to any body corporate;

(xii) Entering into any partnership arrangement in its borrowing or lending activities;

(xiii) Issuing or causing issuance of any advertisement in any form for soliciting deposit. However, Private circulation of the details of fixed deposit schemes among the members shall not be considered to be “advertisement” inviting deposits;

(xiv) Paying any brokerage or incentive for mobilizing deposits from members or for deployment of funds or for granting loans;

(xv)  Issuing prepaid interest warrant; and

(xvi) Entering into any arrangement for the change of its management without a special resolution passed in its general meeting and approval of MCA.