Effects of Mandatory Dematerialization of Shares on Nidhi Companies.
Updated: Apr 14, 2020
A Nidhi Company is one that belongs to the non-banking Indian finance sector and is recognized under section “406” of the Companies Act, 2013. Their core business is borrowing and lending money between their members. Nidhi Companies are created for cultivating the habit of saving amongst the members.
Nidhi Companies can accept/lend funds only from/to its members. They are regulated by Ministry of Corporate Affairs, Section “406” of Companies Act 2013 and Companies (Nidhi Companies) Rules, 2014 govern Nidhi companies. Reserve Bank of India is empowered to issue directions to them in matters relating to their deposit acceptance activities, However as Nidhi Companies only accept/lend funds only from/to its members, RBI has exempted Nidhi Companies from the core provisions or regulations applicable on NBFC.
The basic concept of the Nidhi business is that it can transact only with its members, so if a Nidhi company wants to open any saving account, recurring deposit account, fixed deposit account or any loan account of any person, that person need to be a member of that Nidhi. Therefore interested people become a member of Nidhi by subscribing shares during allotments or transfer of shares from existing members, most of the members hold only one share in Nidhi.
Now as MCA has notified Companies (Prospectus and Allotment of securities ) Third Amendment Rules, 2018. With these rules now it is mandatory to issue securities in dematerialized form for all unlisted public limited companies, they also need to facilitate dematerialization of its existing securities. Members of unlisted public companies are now required to get their securities dematerialized before transfer. As we know Nidhi Companies have large numbers of shareholders withholding of one share each. It’s now difficult and impractical for members of Nidhi to maintain a demat accounts for holding of single share, at the same time it’s also a tough job for Nidhi to dematerialize the shares of members who hold only one share in company.
Nidhi Companies are cultivating the habit of saving amongst the members and providing small secured loans to them. Nidhi Companies are now very recognized in the Indian market and adding significant value in the non-banking Indian finance sector, but said notified rules are impractical for Nidhi Companies and will affect Nidhi business. MCA should exempt the Nidhi Companies from the rules of mandatory dematerialization of shares.