Nidhi Companies are a distinct type of Non-Banking Financial Company (NBFC) in India. They seek to inspire saving within their members and promote member borrowing and lending. Unencumbered term deposits are among the significant elements of a Nidhi Company’s financial operations. They are fixed deposits without financial or legal restrictions that the company may utilise efficiently and freely. This article discusses unencumbered term deposits, their significance and their operation for a Nidhi Company.
What Are Unencumbered Term Deposits?
Unencumbered term deposits are fixed deposits without any legal claims or financial liabilities. In other words, they’re deposits free of any hold or claim and available for the Nidhi Company to work with. Unlike other deposits which might be bound up by other obligations or loans, unencumbered term deposits are open to the company.
Importance of Unencumbered Term Deposits
This is why Unencumbered Term Deposits are significant for Nidhi company registrations in India:
1. Financial Stability
Unencumbered term deposits provide a steady source of funds to Nidhi Companies. This particular stability is vital to enable the company to fulfil its financial obligations and go on running smoothly.
2. Operational Flexibility
With unencumbered term deposits, Nidhi Companies can utilise the funds as required while not worrying about legal restrictions. This flexibility is necessary to respond to their members ‘immediate financial needs.
3. Facilitation of Loans
Nidhi Companies primarily offer loans and financial assistance for their members. Unencumbered term deposits ensure they have the money to make the loans.
4. Legal & Financial Security
Unencumbered term deposits can also be free of legal claims. This particular security is indispensable to keep the trust and confidence of the people of the Nidhi Company.
How Nidhi Companies Use Unencumbered Term Deposits
Nidhi Companies utilise unencumbered term deposits in a few ways to support their operations and serve their members. Here are some important uses:
- Making Loans to Members: The unencumbered term deposits primarily serve as loans to members. Simply because these funds are available immediately, Nidhi Companies can offer loans immediately to members in need.
- Meeting Operational Costs: Running a Nidhi Company entails administrative expenses, salary increases & various other overheads. Unencumbered term deposits can provide the money to cover those costs.
- Financial Planning & Investment: Unencumbered term deposits may be utilised by Nidhi Companies for financial planning and investment. This ‘strategic use of funds ‘can help the company grow and better serve its members.
- For Compliance: Nidhi Companies require regulatory compliance. They can keep a specific percentage of unencumbered term deposits, as permitted by regulation, and stay away from penalties.
Nidhi Companies Pre Incorporation Requirements
A Nidhi Company has several pre-incorporation requirements before it can begin operating. This includes:
- Minimum Members and Directors: A Nidhi Company has to have seven members and three executives.
- Naming: The company name must end with ‘Nidhi Limited’ and it must be a public company.
- Capital Requirements: The company should have a share Capital of five lakh fully subscribed and paid up.
- Membership Restrictions: No minors, companies or trusts can join a Nidhi Company.
- Income Requirements: In the past 3 financial years the company has to have a positive net income to expand into new locations.
- Interest Rate Cap: The interest on loans might not exceed 7.5% over the highest rate on deposits.
Post Incorporation Compliance for Nidhi Companies
Following an incorporation, a Nidhi Company has many ongoing requirements to maintain its status:
- Membership Growth: The company should have more than 200 members within 1 year from incorporation.
- Net Owned Funds: As per The Nidhi (Amendment) Rules, 2022 the company needs to have more than 20 million in Net Owned Funds.
- Deposit Ratio: The ratio of net owned money to deposits mustn’t be in excess of 1: 20.
- Term Deposits Unencumbered: At least 10% have to be in unencumbered term deposits.
- Record Keeping: The company shall keep statutory registers and books of accounts.
- Legal Meetings: As permitted by law, regular meetings have to be held.
Special Rights & Exemptions Under the Companies Act of 2013
Nidhi Companies enjoy certain special exemptions and rights under the Companies Act, 2013:
- Legal Notices: Legal papers may be served upon any Nidhi member by post, personal delivery or courier.
- Private Placements: A Nidhi Company can place private placements to any number of individuals without it becoming a public offer.
Refund of Deposits Policy
Nidhi Companies has specific policies regarding refunds of deposits:
- There is no deposit Limit: Total deposits accepted mustn’t exceed twenty times Net Owned Assets.
- Term of Deposits : Fixed deposits are usually six to 60 months and recurring deposits 12 to sixty months.
- Interest Rates: Interest on savings deposits is capped at 2% above that offered by nationalised banks.
- Deposit Maintenance: At least 10% has to be held in unencumbered term deposits in a scheduled commercial bank or post office.
Loan Regulations for Nidhi Company
Loans from Nidhi Companies are available only to members:
- Loan Limits: The maximum loan amounts are based on member total deposits with various caps depending on deposit ranges.
- Collateral: Loans are usually secured by silver or gold, real estate, jewellery, or some policies or securities.
- Repayment Terms: The duration of loans backed with precious metals is one year and also the maximum for real property loans is 7 years.
Returns to be Filed by Nidhi Company
Nidhi Companies file different returns to be in compliance:
- Form NDH-1: Filed within ninety days of the very first financial year, certified by a practising professional.
- Form NDH-2: Application for extension of time to satisfy requirements if needed.
- Form NDH-3: Semi-annual return due by April 30 and October 30 certified by an experienced attorney.
- Form NDH-4: Filed within a year of formation or six months following the implementation of the Nidhi (Amendments) Rules, 2019.
Conclusion
Unencumbered term deposits are a significant element of Nidhi Companies. They offer financial stability, operational flexibility and legal security to these companies so they can continue their primary function of fostering savings and loans among their members. Understanding and complying with the regulations and requirements concerning unencumbered term deposits will ensure smooth operations and growth for Nidhi Companies.
FAQs
What are Unencumbered term deposits in Nidhi Company?
Unencumbered term deposits are fixed deposits without legal claims or financial obligations that Nidhi Companies can utilise efficiently and freely for loans along with other financial operations.
Can Nidhi Companies take deposits?
Yes, Nidhi Companies accept deposits from members. They may hold deposits as much as twenty times their net owned funds and also provide a good foundation on which to lend and borrow from member to member.
What exactly are Nidhi Companies limitations?
Nidhi Companies may not be involved in chit funds, hire buy finance, leasing finance, insurance or securities trading. They can only accept deposits and lend to their members, keeping a net owned funds to deposits ratio not exceeding 1: 20.
What is the maximum interest rate on Nidhi Company?
Nidhi Companies offer a maximum interest rate of 12.5% on FDs & RDs along with a maximum of 6% on savings accounts to their members ensuring competitive but regulated returns.
What is the maximum period of directorship in Nidhi Company?
A director in a Nidhi Company could serve for ten consecutive years. After this time they must resign but can be re-elected after a two – year cooling-off period.
