Regulatory action against Nidhis, non-disclosure of beneficial ownership jump

RoCs across the country issued as many as 131 adjudication orders, mostly imposing penalties for the alleged breaches, against Nidhi companies in calendar year 2024, about 72% more than last year's 76 notices. The focused regulatory action against Nidhi companies is very pronounced, given that only three notices were recorded in 2022 against Nidhis, and five in 2021, as per data from the ministry of corporate affairs (MCA) that regulates these entities.

Surge in regulatory action

The RoC action against defaulters of beneficial ownership disclosures also skyrocketed in 2024, with 79 adjudication notices to companies under sections 89 and 90 of the Companies Act in 2024, a massive surge compared to three notices sent the year before, MCA data showed.

Most adjudication notices are penalty orders, which levy a penalty on both the company and the persons running the company. Penalties imposed in the case of Nidhi companies ranged from ₹10,000 to about ₹30 lakh for the company and the individuals named for multiple years, and in the case of defaults on reporting significant beneficial ownership ranged from ₹50,000 to about ₹12.5 lakh.

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The regulatory glare on Nidhis this year followed last year's drive to weed out illegal lending by the Bihar RoC. In February 2023, the Bihar RoC issued notices to about 550 Nidhis in its territorial jurisdiction after complaints of them allegedly duping investors, Mint reported on 27 Feb last year.

Nidhis are a sort of non-banking financial companies (NBFC) that are allowed to take deposits from and issue loans only to their members without being licensed as an NBFC by the Reserve Bank of India (RBI). These companies are specially created under Section 406 of the Companies Act, 2013, and have to comply with strict disclosure mandates. They also have to include the word "Nidhi Limited" in the company name, and have to be registered as a public limited company.

Not complying with these disclosure mandates is a breach of the law, and can lead to regulatory action. Nidhi companies should have a minimum of 200 members within one year of registration, and at least ₹20 lakh in net-owned funds, along with a minimum paid-up equity share capital of ₹10 lakh.

"The heightened scrutiny stems from multiple risk factors - Nidhi companies operate without RBI oversight despite handling public deposits, have a low entry barrier, and recent instances show widespread non-compliance with basic financial reporting requirements. This combination creates significant vulnerability for small retail investors, who are the primary members," said Amit A. Tungare, managing partner, Asahi Legal.

Nidhis have a large network in eastern India, especially Bihar, Jharkhand and West Bengal, and generally cater to the needs of people from the middle and lower middle classes and help to cultivate the habit of thrift and savings among its members, besides facilitating financial intermediation.

"A Nidhi company is a mutual benefit company which accepts deposits and lends money only to its members, but there were instances of Nidhi company structure being misused to carry on non-banking financial and suspicious activities," explained Subodh Dandawate, associate director - regulatory services at Nexdigm, a business and professional services company. “Hence, to curb malpractices, MCA is scrutinizing Nidhi companies," said Dandawate.

MCA's focus on beneficial ownership

MCA's regulatory action against non-disclosure of beneficial ownership also shot up this year. Experts told Mint that the rapid surge in scrutiny of beneficial ownership of a company is because the government is keen to have transparency in corporate ownership. The penalties enshrined in the law are indicative of the gravity of the issue, they said.

The penalties imposed by the Ministry of Corporate Affairs emphasizes the importance of complying with statutory requirements by diligently disclosing the beneficial interest in the companies, explained Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.

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“From the tremendous surge in adjudication orders issued by ROCs for sections 89 & 90 of the Companies Act in the past few months, it can be considered that the department is going beyond the letter of law and looking at the intent while analysing the corporate structures keenly to identify potential significant beneficial owners or SBOs," said Maheshwari.

The increase in adjudication cases underscores the significance of transparency and stringent adherence to such regulatory requirements to prevent legal and financial consequences for companies, said Maheshwari.

Company law requires declaration of the significant beneficial owner in an Indian company and it is also an obligation of the reporting Indian company to report the natural person who is significant beneficial owner of the shares.

“Of late, Indian regulators have tightened the provisions relating to beneficial owner to instil transparency and to lift the corporate veil to ascertain the real owner behind the company," said Dandawate of Nexdigm.

Global standards and FATF impact

Lifting the corporate veil refers to looking beyond a company's legal identity to identify the real individuals who own, control, or benefit from it, often by unravelling complex corporate structures.

Even rules under Prevention of Money Laundering Act (PMLA) have been changed significantly to lower the threshold limits for beneficial owners, drawing from the Financial Action Task Force (FATF) recommendations in this regard and stressing upon the importance of these disclosures, said Maheshwari.

Paris-based FATF, an intergovernmental agency that develops policies to combat money laundering and terror financing, placed India in its ‘regular follow-up category’ after an evaluation during 2023-24, which the Union finance ministry described as an “outstanding outcome" and a distinction shared by only four G20 countries, Mint reported on 28 June.

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Legal experts demonstrated the stakes of not taking regulatory action against defaulters of beneficial ownership disclosures. "Failure to disclose beneficial ownership has profound legal and operational implications, as it conceals the true individuals exercising control over a company, facilitating illegal activities such as money laundering, terrorism financing, and tax evasion," said Harshita Agarwal Sharma, founder, Lexlevel Services, adding that such opaqueness undermines corporate governance by limiting stakeholder oversight and exposing minority shareholders to potential exploitation or fraud.