The government warned people against putting their money into non-compliant Nidhi companies offering unusually high returns, saying investors should independently verify an entity’s regulatory status before making deposits. The Corporate Affairs Ministry also cautioned that deposits with Nidhi companies are not insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), making recovery difficult or incomplete if a company fails or is involved in fraud.
The warning followed the ministry’s examination of applications from entities seeking recognition as Nidhi companies, during which it found that several were not complying fully with provisions of the Companies Act and the Nidhi Rules. The ministry said many companies functioning as Nidhis had also failed to submit their mandatory NDH-4 applications within the prescribed timeframe.
Don’t chase high returns
Nidhi companies are mutual-benefit companies established primarily to encourage savings among their members and can accept deposits and provide loans only to those members. They are regulated by the Corporate Affairs Ministry under the Companies Act, 2013, and the Nidhi Rules, 2014.
The ministry said it had come to its notice that several companies were attracting members by promising unusually high returns on their money. It advised the public not to make financial decisions solely on claims made by agents or on the basis of informal assurances.
“Hence, members of the public are advised not to rely solely on promises of unusually high returns by agents or informal assurances while making financial decisions and to independently verify whether the company has been declared as a Nidhi by the central government,” the ministry said. Investors have also been advised to carefully examine the terms and conditions associated with a deposit before committing their money.
Only 395 recognised entities
According to the ministry, only 395 entities have been declared as Nidhi companies by the Central government. Companies seeking to operate as recognised Nidhis are mandatorily required to file Form NDH-4 with the ministry to obtain or update their declaration as Nidhi companies.
The government said scrutiny of NDH-4 applications had revealed compliance deficiencies among several applicants. “It has also been observed that many of the companies functioning as Nidhi companies have not submitted their NDH-4 application within the stipulated time frame prescribed under Nidhi Rules,” the ministry said.
The warning means investors should not assume that an entity is compliant merely because it uses “Nidhi” in its name or presents itself as a mutual-benefit company. The ministry has advised depositors to independently establish whether the company has received the required declaration from the Central government before handing over their money.
Deposits not covered by DICGC
The government particularly highlighted the absence of deposit insurance for money placed with Nidhi companies. Unlike eligible deposits held with insured banks, deposits accepted by Nidhi companies do not receive protection from the DICGC.
This means depositors could face substantial difficulties recovering their money if a Nidhi company becomes financially distressed, shuts down or is affected by fraud. The ministry said recovery in such circumstances could be difficult or incomplete, underscoring the need for investors to examine the entity and the risks involved rather than treating such deposits like conventional bank deposits.
Rules tightened in 2019
The regulatory framework for Nidhi companies has evolved over the years. Under Section 620A of the erstwhile Companies Act, 1956, companies intending to function as Nidhis were required to be declared as such by the Corporate Affairs Ministry.
Under Section 406 of the Companies Act, 2013, the initial framework allowed a company to incorporate itself as a Nidhi and required it to comply with the Nidhi Rules, 2014. The framework was subsequently tightened, with Section 406 and the Nidhi Rules amended with effect from August 15, 2019, restoring the requirement that a company must be declared a Nidhi by the Central government.
The ministry said the change brought the system broadly back in line with the earlier framework under the Companies Act, 1956. Its latest advisory puts the onus on prospective depositors to check that declaration and assess the risks before investing, particularly when unusually high returns are being offered as an inducement.