IS THE CRACKDOWN ON NIDHI COMPANIES UNCALLED FOR?

Interestingly, the retrospective operation was introduced through the Rules, which in my view, is also against the spirit and intent of section 406 of the CA Act, 2013. Apparently, the term “meets” too has an inherent subjectivity, which one would argue bestows unbridled discretion on the approving authority.

- Sherry Samuel Oommen

Nidhi companies, especially those in Kerala, are currently embroiled in litigation which could virtually endanger their very existence and bring this business undertaking yeoman services to a grinding halt. It is well known that such companies are largely predominant in Kerala and that they primarily service members who hail from the ‘unbanked’ sections.

At the outset, what is a ‘Nidhi’ company?

A ‘Nidhi’ is primarily regulated under section 406 of the Companies Act, 2013 (‘CA, 2013’) read in conjunction with the Nidhi Rules, 2014 (‘the Nidhi Rules’). A ‘Nidhi’ has been defined under Rule 3(da) to mean “a company which has been incorporated as a Nidhi with the object of cultivating the habit of thrift and savings amongst its members receiving deposits from, and lending to, its members only, for their mutual benefit, and which complies with the rules made by the Central Government for regulation of such class of companies.”

As is apparent, these are entities that are incorporated with the intent of inculcating the habit of thrift among the members. Pertinently, such companies primarily deal only with its members, as they are run “by the members” for the benefit of “the members”. It would also be relevant to state that section 406 as it stood introduced in CA Act, 2013 automatically regarded a company as a ‘Nidhi’ it was incorporated as a ‘Nidhi’ with the object of cultivating the habit of thrift and savings among its members, receiving deposits from, and lending to, its members only, for their mutual benefit. Thus, once incorporated as a ‘Nidhi’, the said status could not be altered.