Nidhi Company Annual Compliance: NDH Filings, Deposit Ratios, and the Dividend Cap

A Nidhi is a company that takes deposits from, and lends to, its own members only (rule 6(f)). It files the same company-law returns as any other company, and then it answers to a second calendar written in the Nidhi Rules, 2014. Which version of that second calendar applies to you depends on when the company was incorporated. This note maps both: what a Nidhi must file, which ratios it must hold, and where the rules freeze deposits, loans or dividends.

Legal basis: s.406, Companies Act 2013; Nidhi Rules, 2014 (G.S.R. 258(E)), as amended by the Nidhi (Amendment) Rules, 2019 (G.S.R. 467(E), in force 15 August 2019), the Nidhi (Amendment) Rules, 2020 (G.S.R. 81(E), in force 10 February 2020), the Nidhi (Second Amendment) Rules, 2020 (G.S.R. 114(E), 14 February 2020) and the Nidhi (Amendment) Rules, 2022 (G.S.R. 301(E), 19 April 2022, in force on publication in the Official Gazette). Later amendments are not covered here; check the current text before you act.

What to do now

• Identify your cohort. A Nidhi incorporated on or after 19 April 2022 is outside rule 5 (rule 5(5), inserted by G.S.R. 301(E)) and applies for declaration under rule 3B. An earlier Nidhi stays under rules 3A, 5 and 23A.
• Next filing. Pre-2022 Nidhi: file Form NDH-3 within thirty days of each half-year's close (rule 21, Nidhi Rules 2014). File Form NDH-1 within ninety days of the close of the first financial year after incorporation, and of the second where applicable (rule 5(2)). The auditor's certificate is annexed to the audit report every year (rule 22).
• Consequence of missing the declaration. Without NDH-4 compliance the company cannot file Form SH-7 or PAS-3 (rule 3A, as inserted by G.S.R. 467(E); rule 3B(6), as inserted by G.S.R. 301(E)). From the date of non-compliance it may not raise deposits from, or give loans to, members. Deposits raised after that date are treated as deposits under Chapter V of the Act (fourth and fifth provisos to rule 3A, as inserted by G.S.R. 301(E)).

Have a CA review your facts before you act or file.

The four documents: NDH-4, NDH-1, NDH-3 and the auditor's certificate

NDH-4, the declaration. Since 15 August 2019 a company is treated as a Nidhi only when the Central Government notifies it as one on an application in Form NDH-4 by a public company (rule 3A, inserted by G.S.R. 467(E)).

• Nidhis incorporated on or after 15 August 2019 and before 19 April 2022. File within sixty days from the expiry of one year from incorporation, or of the extension the Regional Director grants under rule 5(3); filing earlier is allowed (first and second provisos to rule 3A).
• Nidhis incorporated before 15 August 2019. Rule 23A requires the declaration within one year from incorporation or within six months of commencement of the 2019 Rules, whichever is later. G.S.R. 114(E) (14 February 2020) substituted "nine months" for "six months" in rule 23A.
• Companies declared Nidhis under the previous company law. File NDH-4 to update status (rule 23B).
• Public companies applying after 19 April 2022. Rule 3B requires the application in Form NDH-4 within one hundred twenty days of incorporation, if the company has at least two hundred members and Net Owned Funds of twenty lakh rupees or more (rule 3B(1)). It must attach the fit-and-proper-person declaration for all promoters and directors (rule 3B(2)-(3)). The Central Government conveys its decision within forty-five days, failing which the application is deemed approved (rule 3B(4)), and the company may commence business only after the approval (rule 3B(5)).

NDH-1, the first-cycle return. Within ninety days of the close of the first financial year after incorporation, and the second where applicable, the Nidhi files Form NDH-1 with the Registrar, certified by a company secretary, chartered accountant or cost accountant in practice (rule 5(2), Nidhi Rules 2014). Rule 5 as a whole does not apply to a company incorporated as a Nidhi on or after 19 April 2022 (rule 5(5)).

NDH-3, the half-yearly return. File within thirty days from the conclusion of each half year, certified by a professional of the same three kinds (rule 21, Nidhi Rules 2014). The 2022 amendment added a Net Owned Fund line to Form NDH-3 (G.S.R. 301(E), paragraph 16(2)).

The auditor's certificate. "The Auditor of the company shall furnish a certificate every year" that the company has complied with all provisions of the rules, annexed to the audit report (rule 22, Nidhi Rules 2014). Nothing in the 2019, 2020 or 2022 amendments changes rule 22.

Forms. G.S.R. 81(E) substituted new Forms NDH-1, NDH-2 and NDH-3 "in place of Form NDH-1, NDH-2 & NDH-3". File on the current versions. G.S.R. 301(E) later retitled Form NDH-2 as an application to the Regional Director and intimation to the Registrar, covering branch permissions, branch closures and withdrawal of unencumbered deposits as well as extensions.

The ratios: members, funds, liquidity, leverage

For a Nidhi that falls under rule 5, four tests must be met within one year from the date of its incorporation. The 2019 Rules substituted "from the date of its incorporation" for "from the commencement of these rules" (rule 5(1), as amended by G.S.R. 467(E)). They are:

• at least two hundred members;
• Net Owned Funds of ten lakh rupees or more, as the rule read before 2022;
• unencumbered term deposits of at least ten per cent of outstanding deposits (rule 14);
• a ratio of Net Owned Funds to deposits of not more than 1:20 (rule 5(1)(a)-(d), Nidhi Rules 2014).

Members. A Nidhi must keep membership from falling below two hundred at any time. It cannot admit a body corporate or trust, and a minor cannot be a member, though a member who is the minor's natural or legal guardian may deposit in the minor's name (rule 8(1)-(3), Nidhi Rules 2014). The 2022 Rules added that a member may not transfer more than fifty per cent of his shareholding, measured at the date of availing a loan or making a deposit, while it subsists (rule 8(4), inserted by G.S.R. 301(E)).

Net Owned Funds. Every Nidhi must maintain Net Owned Funds, excluding preference share capital proceeds, of twenty lakh rupees (rule 9, as amended by G.S.R. 301(E), which substituted "twenty lakh" for "ten lakh"). A Nidhi existing on 19 April 2022 had eighteen months from that date to comply, a period that has now run out (proviso to rule 9). Net Owned Funds are defined in rule 3(1)(d).

Liquidity. A Nidhi must keep invested in unencumbered term deposits in its own name not less than ten per cent of deposits outstanding at close of business on the last working day of the second preceding month (rule 14, Nidhi Rules 2014). Temporary withdrawal for repaying depositors in unforeseen commitments needs the Regional Director's prior approval, now sought by application in Form NDH-2 with the prescribed fee (proviso to rule 14, as amended by G.S.R. 301(E)). The test uses a rolling base, so compute it every month-end.

Leverage. A Nidhi shall not accept deposits exceeding twenty times its Net Owned Funds as per its last audited financial statements (rule 11(1), Nidhi Rules 2014).

The extension route and its limit

For a Nidhi under rule 5, failure on the member-count test or the 1:20 ratio can be addressed by applying to the Regional Director in Form NDH-2 within thirty days from the close of the first financial year, for extension of time; the Regional Director may pass orders within thirty days of receipt (rule 5(3), Nidhi Rules 2014). The 2019 Rules added a proviso that the Regional Director may extend the period "upto one year from the date of receipt of application". If the failure extends beyond the second financial year, the Nidhi may not accept any further deposits from the commencement of the second financial year until it complies, besides penal consequences under the Act (rule 5(4)). The 2019 Rules added that the Nidhi must also get itself declared under s.406(1) (rule 5(4), as amended by G.S.R. 467(E)).

Members only: the dealing circle

Rule 6 lists what no Nidhi may do. The auditor's yearly certificate under rule 22 covers compliance with all of it:

• carry on chit fund, hire purchase finance, leasing finance, insurance, or acquisition of securities issued by any body corporate (rule 6(a));
• issue preference shares, debentures or any other debt instrument in any form (rule 6(b));
• open a current account with its members (rule 6(c));
• acquire or purchase securities of any other company, control the composition of another company's Board, or enter into an arrangement for change of its management. The 2022 amendment made this a flat prohibition, where the 2014 text allowed it with a special resolution and Regional Director approval (rule 6(d), substituted by G.S.R. 301(E));
• accept deposits from, or lend to, any person other than its members (rule 6(f));
• pledge assets lodged by members as security (rule 6(g));
• take deposits from, or lend money to, any body corporate (rule 6(h));
• enter into any partnership arrangement in borrowing or lending (rule 6(i));
• issue advertisements soliciting deposits, though private circulation of fixed deposit scheme details to members, marked "for private circulation to members only", is not an advertisement (rule 6(j) and proviso);
• pay brokerage or incentive for mobilising deposits from members (rule 6(k));
• raise loans from banks, financial institutions or any other source to advance loans to members (rule 6(l), inserted by G.S.R. 301(E)).

Deposits and loans

Fixed deposits run for six to sixty months, recurring deposits for twelve to sixty months (rule 13(1)-(2), Nidhi Rules 2014). Savings balances qualifying for interest are capped at one lakh rupees, with interest at no more than two per cent above the rate payable on savings accounts by nationalised banks (rule 13(4)). Fixed and recurring deposit rates may not exceed the maximum the Reserve Bank of India prescribes for non-banking financial companies' public deposits (rule 13(5)).

Loans go only to members (rule 15(1)). The per-member limit is two lakh rupees where member deposits are under two crore; seven lakh fifty thousand where between two and twenty crore; twelve lakh where between twenty and fifty crore; fifteen lakh where above fifty crore, measured on the last audited annual statements (rule 15(2)-(3)). Where the Nidhi has not made profits continuously in the three preceding financial years, fresh loans may not exceed fifty per cent of those limits, and a member who has defaulted on an earlier loan is ineligible for a further loan (provisos to rule 15(2)). For joint shareholders, the loan goes to the member whose name appears first in the register of members (proviso to rule 15(1), inserted by G.S.R. 301(E)).

Branches and dividends

A Nidhi may open branches only if it has earned net profits after tax continuously in the three preceding financial years, and up to three within the district (rule 10(1)-(2), Nidhi Rules 2014). More than three in the district, or any outside it, needs the Regional Director's prior permission, now by application in Form NDH-2, with intimation to the Registrar within thirty days of each opening (rule 10(3), as amended by G.S.R. 301(E)). No branch may open outside the State of the registered office (rule 10(4)). Closure of a branch now needs Board approval and the Regional Director's prior approval at least sixty days before closure, followed by a vernacular newspaper advertisement in format NDH-5 and Registrar intimation within thirty days of closure (rule 10(6), substituted by G.S.R. 301(E)).

On dividends, rule 18 was substituted in 2022: "A Nidhi shall not declare dividend exceeding twenty five per cent in a financial year." The earlier route to a higher dividend with Regional Director approval and a general reserve transfer is no longer in the rule (rule 18, as substituted by G.S.R. 301(E)).

A working calendar

• Monthly: the ten per cent unencumbered-deposit cover (rule 14); the twenty-times deposit ceiling (rule 11(1)); the two-hundred-member floor (rule 8(2)); the twenty lakh Net Owned Funds floor (rule 9).
• Declaration: Form NDH-4 by the window that applies to your cohort (rules 3A, 3B, 23A above).
• Ninety days from the first financial year's close (pre-2022 Nidhis): Form NDH-1 (rule 5(2)).
• Every half year, within thirty days: Form NDH-3 (rule 21).
• Every year: the auditor's certificate annexed to the audit report (rule 22).
• On a member-count or ratio breach in year one (pre-2022 Nidhis): the NDH-2 extension request within thirty days of year-end (rule 5(3)).

FAQ

Our membership fell to one hundred ninety this quarter. What now?
Restore it at once; membership must not be reduced below two hundred at any time (rule 8(2)). For a Nidhi under rule 5, the NDH-2 extension route is tied to the first financial year (rule 5(3)); a failure continuing beyond the second financial year stops fresh deposits (rule 5(4)).

Where does Form NDH-4 sit in the annual calendar?
It is not annual. It is the declaration that makes the company a Nidhi, filed once, by the window in rule 3A, 3B or 23A depending on when the company was incorporated.

Can we accept a large deposit from a company to boost liquidity?
No. A Nidhi may not take deposits from a body corporate (rule 6(h)) or from anyone who is not a member (rule 6(f)).

Can the board declare a thirty per cent dividend after a bumper year?
No. Rule 18, as substituted in 2022, caps dividend at twenty-five per cent in a financial year.

Can we open a branch in the neighbouring state?
No (rule 10(4)). Within the home State, a fourth branch in the district or any branch outside it needs prior Regional Director permission (rule 10(3)), and branches open only after three continuous years of profit after tax (rule 10(1)).

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See Also

• When a director leaves: vacation, resignation and removal under ss.167-169
• When a Company Outgrows Private-Limited Compliance: The Public-Company Extras
• Cost records and cost audit under section 148: the second audit companies overlook