Registrars of Companies turn up the heat on Nidhi companies for company law violations

New Delhi: Registrars of Companies (RoCs) across the country have turned up the heat on Nidhi companies and their directors for violations of company law, signalling close regulatory scrutiny over these non-bank lenders.

So far this year, 63 penalty orders have been issued against these companies and their directors for violations, against 33 over the same period a year ago, official data showed. These account for nearly a fourth of all adjudication orders issued by RoCs this year.

Breaches by Nidhi companies include not maintaining a registered office, not appointing a statutory auditor or filing audit reports, not reporting board resolutions to the RoCs, and operating without securing Nidhi company status from the government, the penalty orders issued by RoCs showed.

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A Nidhi company is a non-banking finance company that accepts deposits from its members and lends only to them. Operating under Section 406 of the Companies Act, it must have at least 200 members within a year of its incorporation and maintain a certain ratio of capital base to deposits to prevent excessive leverage.

‘Enhanced oversight’

RoCs have been keeping a close eye on these companies as they accept public funds and many of them operate in rural areas, making members of the community vulnerable to any failure or wrongdoing, said a person informed about the development.

“There are various other forms of mutual benefit and lending institutions in the country, including micro-finance companies, chit funds, cooperative societies and small non-bank lenders to address the financial needs of people,” said this person, who did not wish to be named. These entities are subject to oversight from state governments, the Reserve Bank of India (RBI) and the ministry of cooperation.

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“After the revamping of the statutory filing processes of companies, RoCs are now more focused on enforcement activities rather than spending their time and resources taking on record the statutory filings. This is leading to enhanced oversight of corporate governance,” the first person quoted above added. 

Subodh Dandawate, associate director - regulatory services at Nexdigm, a business advisory firm, said, “Nidhi companies are mutual benefit organisations that accept deposits and provide loans exclusively to their members. However, there have been instances where the Nidhi company structure has been misused for unauthorised and suspicious financial activities. To curb such malpractices, the ministry of corporate affairs has intensified its scrutiny of Nidhi companies."

‘Susceptible to misuse’

Nidhi companies deal with public funds, which makes them susceptible to misuse and necessitates robust oversight, said Chetan Gandhi, director at NPV Corporate Law Solutions Pvt. Ltd. In the case of Nidhi companies, the primary regulator is the ministry of corporate affairs, and these entities are largely exempt from the rigorous regulations of the RBI, because of which there is a potential area of concern for regulatory arbitrage or less stringent compliance, said Gandhi.

“Deposits with Nidhi companies are generally not covered by the Deposit Insurance and Credit Guarantee Corp (DICGC), which means that in case of failure, depositors have limited recourse for recovery of their funds. There have been historical instances of financial irregularities, mismanagement, and even outright fraud in some Nidhi companies, leading to loss of public money,” Gandhi said, adding that the heightened regulatory focus on them is a clear sign of a more proactive and stringent enforcement approach.

In 2023 the ministry set up a centralised agency for voluntary closure, allowing businesses keen to down shutters anywhere in the country to approach the Centre for Processing Accelerated Corporate Exit (CPACE) in Manesar. It also integrated its statutory filing portal MCA21 with the National Single Window System (NSWS), which offers various central and state approvals in one place, for registering new businesses. Besides, several statutory filings now require only an online acknowledgement, not approvals from RoCs, which allows them to focus on enforcement and adjudication.

Queries emailed to the ministry of corporate affairs spokesperson on Wednesday remained unanswered at the time of publishing.

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