Nidhi Company | Section 406 of the Companies Act 2013

Venkat Raj | Last updated: 20 January 2021

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Quick Summary

Nidhi Companies, governed by Section 406 of the Companies Act 2013, operate similarly to non-profit organisations, encouraging thrift and savings among members. They must be public companies with a paid-up capital of at least £5 lakhs and cannot issue preference shares. Key compliance includes a net owned fund of £10 lakhs, 200 members, and specific deposit ratios within a year of incorporation.

The same has been explained in section 406 of companies act 2013.

The stringent rules laid down for Auditors directors corporate governance rule are suomoto applicable . erstwhile 623 of companies act 1956 is now replaced and a further concept under section 406 is applicable.

This is a concept developed more like concept of non profit organisation . It is done like concept of cultivating habit of thrift and saving among members receiving deposit and lending to its members only for mutual benefit

Features

A Nidhi company shall be public company and have paid up equity share capital of 5 lakhs. After act is commenced no Nidhi company can issue preference shares.

If preference shares have been issued before the commencement of the act it shall be redeemed in accordance with the rules laid down.

Nidhi company shall have Nidhi Limited as part of its name .

Nidhi company shall ensure within 1 year from date of incorporation shall ensure the following compliance is duly complied.

• Net owned fund of 10 lakhs or more

• At least 200 members

• Unencumbered term deposit of not less 10% of outstanding deposit

• Ratio of net owned fund of not less than 1:20.

The statutory requirement are to be duly complied within 90 Days from the close of Financial year duly certified by a CA /CS /CWA in practice .

Nidhi Company Rules: Companies Act 2013 Explained

Rules of Nidhi company

• Director shall be a member of Nidhi company .Director shall hold office for term up to 10 consecutive years. The director shall be eligible for reappointment only after the expiry of 2 years of ceasing to be director. In order to be appointed as a director due compliance has to be done as laid down under section 152 ,164.

• The rotation of auditors shall also be applicable for Nidhi company . In case of sole proprietor only one term of 5 consecutive years . In case of partnership firm two term of 5 consecutive years shall be appointed . A 2 year cooling period is also in force.

• The rules as against dividend is also envisaged clearly .A Nidhi company shall not declare dividend exceeding 25% or any higher amount as specifically approved by regional director for reasons to be recorded in writing and further subject to conditions such as

• Amount is transferred to general reserve

• No default in repayment of matured deposit and interest

• Complied with rules of Nidhi

• The auditor (statutory) shall also give a certificate that all rules have been complied and certificate shall be annexed to audit report .

CARO Reporting

The statutory auditor is bound to give CARO reporting

As per CARO 2016 the following is to be reported

Clause Xii

• Whether Nidhi company has complied with net owned funds to deposit in ratio of 1.20 to meet liability .

• Whether Nidhi company is maintaining 10% unencumbered term deposit as laid down under rules . Whether there has been default in repayment of interest and deposit .

Penalty

A fine of Rs 5000 and further fine of Rs 500 for every officer who is default or contravened the provisions.

FAQ :

A Nidhi Company aims to cultivate habits of thrift and saving among its members, receiving deposits and lending to them for mutual benefit.

A Nidhi Company must be a public company with a paid-up equity share capital of at least £5 lakhs. It must also have 'Nidhi Limited' as part of its name.

Within one year, a Nidhi Company must have a net owned fund of £10 lakhs or more, at least 200 members, an unencumbered term deposit of not less than 10% of outstanding deposits, and a net owned fund to deposit ratio of not less than 1:20.

Directors must be members of the Nidhi Company and can hold office for up to 10 consecutive years, requiring a two-year break before reappointment.

A fine of £5,000 can be imposed, with an additional fine of £500 for every officer in default or who contravenes the provisions.