Can a Nidhi Company convert into an NBFC?

by Swarit Advisors Financial Service Consultant

If any person is running a successful Nidhi Company in his or her local region and has plans to increase business reach, further, that person is also looking forward to upgrading or convert his Nidhi company into a full-fledge NBFC (Non-Banking Finance Company) registration, then this article is for his relevance.

What is Nidhi Company:

A Nidhi company belongs to a class of NBFC (Non-Banking Financial Company). Further, Nidhi Company has been granted an exemption by the Reserve Bank of India (RBI) regarding registration and legal compliances. The reason behind granting the exemption is that Nidhi Company is not supposed to deal with anyone then its members. This company functions to promote the savings of its members. Nidhi Companies are regulated under the Nidhi Rules, 2014. Registering a Nidhi Company requires a period of ten to twenty days.

Nidhi Company collects funds by way of Fixed Deposits (FD), Recurring Deposits (RD) from its members. Further, this company also lends money against collateral to its members. Collateral includes shares, Recurring Deposits (RD), Fixed Deposits (FD), gold, properties, and bonds etc. Nidhi Company is required to get itself registered with the MCA (Ministry of Corporate Affairs).

Any person who wants to get its Nidhi Company registered can apply online and can secure the license for Nidhi Company within a maximum twenty days.

Non-Banking Financial Corporation :

Unlike, Nidhi Company, other types of Non-Banking Financial Company’s (NBFC) does not enjoy any exemption from the RBI (Reserve Bank of India) and are stringently monitored directly by the Reserve Bank of India (RBI). Further, the Non-Banking Financial Company (NBFC) has to abide by the different rules and regulations issued by the Reserve Bank of India (RBI) from time to time.

An NBFC or Non-Banking Financial Company is a Reserve Bank of India (RBI) approved financial institution registered under the Companies Act, 2013. Free from banking license, these corporations provide a collection of financial services, starting from contractual savings to currency exchange; Non-Banking Financial Company’s (NBFC) has got you covered. Perhaps, that is the main reason behind the mounting recognition of the Non-Banking Financial Companies. Such companies are a major contributor to the growth of (BFSI) Banking, Financial Services, and Insurance sector in India.

Hence, registration of a Non-Banking Financial Corporation is done under strict rules and regulations prescribed in the RBI Act.

Why can’t a Nidhi Company be upgraded into a Non-Banking Financial Company?

Under the Nidhi Rules, 2014, a Nidhi Company is not permitted to engage in any business activity other than the prescribed one. Thus, the rules prescribed restrict a Nidhi Company to engage in the business of other Non-Banking Financial Company’s (NBFC). Lastly, the basic difference between the Nidhi Company and other types of Non-Banking Financial Company are as follows –
1. Registration Required – RBI registration is not required for the incorporation of a Nidhi Company. While the other Non-Banking Financial Corporation (NBFC) cannot run without the prior approval from the Reserve Bank of India (RBI).
2. Capital Required – A minimum net worth of rupees ten lakh is required to start a Nidhi Company. Whereas in the case of Non-Banking Financial Corporation, a minimum net worth of rupees two crores is required.

Can a Nidhi Company Apply for RBI Registration, if in case all the Requirements for NBFC are fulfilled?

As mentioned earlier, the Nidhi Rules, 2014 does not permit a Nidhi Company to engage in any other business than the prescribed one. Therefore, if in case a Nidhi Company wants to apply for the RBI registration, it would consider being an illegal act. The only possible way out would be to permanently wrap up the Nidhi Company business and commence a new business of any type of Non-Banking Financial Company (NBFC) after changing the name, legal obligations and objectives of the Memorandum of Association. But, it is significant to mention that the above-said way out is neither advised nor realistic.

So, incorporating a new company is always considered as better over the option of changing the structure of a Nidhi Company. Further, if any person is already operating a successful Nidhi Company, then he or she is advised to build a growth plan and raise the business heights, instead of causing abruption in the operations of the ongoing Nidhi Company. Following is the procedure to expand the existing business.

Choose the type of Non-Banking Financial Corporation – The foremost thing one should do is to find the type of Non-Banking Financial Company he or she wants to enter. Before choosing the type of NBFC, one thing which is need to be kept in mind is that everything is not possible with the single Non-Banking Financial Company. There are various types of Non-Banking Financial Corporation like Loan Company, Investment Company, Asset Management Company, and Micro Finance Company.

Create a New Company – The next step is to open a new type of company. It can be either a public or a private company. Further, the type of company is decided considering factors like the scale of business, number of members etc.

Technical Parameters and Minimum Investment – Once a company is being registered, the next step is to invest a minimum amount of capital as per the prescribed requirement of the chosen NBFC. In case the person wants to commence a Loan Company, then, in that case, he needs to invest at least a minimum net worth of rupees two crores. Besides meeting the capital requirement, the person needs to create a robust director’s profile to impress the Reserve Bank of India. One of the things to keep in mind that honesty and experience of the proposed directors is the only way out to impress the RBI. Hence, the RBI takes into concern every caution before issuing the NBFC license, as the Non-Banking Financial Company deals with the general public.

Apply for NBFC license - After the completion of all the requirements, an application for the RBI approval is filed at the RBI regional office. A lot of the time is spent in the preparation and filing of the application. Further, the RBI takes around three to six months to reply.

Approval or Rejection of the Application – After the completion of the due time, the Reserve Bank of India may accept or reject the concerned application. In the case of rejection, the reasons behind rejecting the application must be recorded and worked upon appropriately. After, rectifying all the shortcomings the said application can be refilled with the Reserve Bank of India again.

Appropriate expense – This whole procedure will cost around nine to ten lakh rupees, including government fees.