Nidhi companies may be bound by stricter norms

New Delhi, March 11 | Updated: Mar 12 2005, 05:30am hrs
Nidhi companies, distinguished from non-banking finance companies (NBFCs) in being out of the purview of RBI, are set to come under a stricter regulatory regime. The ministry of company affairs has commenced a thorough review of the norms governing Nidhi companies, which is likely to result in defining their lending capacity, in relation to their net owned funds. The move is prompted by cases of these companies going bust, leaving the shareholders in quandary, due to lack of organised regulation, an official source said.

Currently, as many as 230 firms are notified as Nidhi companies or mutual benefit societies under Section 620-A of the Companies Act and are, therefore, enititled to a lot of exemptions. These companies, which can operate only in defined localities and with a few branches, take desposit from and lend to their own shareholders. They are not allowed to lend to anybody who is not a shareholder.

The source said that company affairs minister Prem Chand Gupta had ordered a complete review of the existing system for granting approval for Nidhi companies. The aim, he said, was to safeguard the interst of the shareholders. While the matter has been referred to the Irani Commitee reviewing the Concept Paper for the proposed Companies Act amendment, the minister has also asked the four regional directors under his ministry to have an organised appraisal of the financial position of Nidhi companies.

The government will also examine if there is a need to make legislative changes to make the regulation of Nidhi companies more meaningful.

NBFCs, whose functions are comparable to that of Nidhi companies, are under the RBI regulations. They are mandated to maintain specified liquid assets, reserves, and are required to comply with central banks disclosure norms. Whereas Nidhi companies, being not registered with the RBI, are not subject to these regulations at present.

These companies are mostly located in South India. The government has recently appointed its nominees on the Board of a major company in this category RBF Nidhi as it had defaulted in repaying the shareholders money. The move followed an order by the Company Law Board.