Before investing in a Nidhi company, check this govt warning on deposits and returns

The Ministry of Corporate Affairs has cautioned the public against investing in Nidhi companies that promise unusually high returns, and advised potential depositors to independently verify whether a company has been declared as a Nidhi by the central government.

The ministry said it has noticed several companies functioning as Nidhi companies without complying fully with the applicable provisions of the Companies Act and Nidhi Rules.

During scrutiny of applications, the ministry also found that many companies have not submitted the mandatory NDH-4 application within the stipulated time, it said in an advisory issued on Thursday.

Every company seeking to function as a Nidhi is required to file an application in Form NDH-4 to get itself declared or updated as a Nidhi, according to the ministry.

The ministry said it has come across instances where companies lure their members by promising unusually high returns.

"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," the ministry said.

It advised people to independently verify whether the company has been declared as a Nidhi by the central government and to carefully consider the terms before making any financial decision.

Not covered by DICGC

The ministry also cautioned that deposits accepted by Nidhi companies are not insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

"In case the company fails or faces fraud, recovery of deposited money can be very difficult or incomplete," it said.

Nidhi companies are mutual-benefit companies regulated by the MCA under the Companies Act, 2013 and Nidhi Rules, 2014. They can accept deposits and provide loans only to their members.

Under the erstwhile Companies Act, 1956, companies seeking to function as Nidhis were required to be declared as Nidhis by the central government under Section 620A.

When the Companies Act, 2013 initially came into force, a company could incorporate itself as a Nidhi and function as one, subject to compliance with the Nidhi Rules, 2014.

However, Section 406 of the Companies Act, 2013 and the Nidhi Rules were amended with effect from August 15, 2019, reintroducing the requirement for a company to be declared as a Nidhi by the Central Government.

The ministry said 395 companies have been declared as Nidhis by the government under the relevant provisions of the Companies Act, 1956/2013 as of date.

The list of these companies has been placed on the MCA website for information of the general public.