Nidhi Companies Have to Disclose More About their Control
🔹 What are Nidhi Companies?
Definition:
A Nidhi Company is a non-banking financial company (NBFC) recognized under Section 406 of the Companies Act, 2013, whose core business is borrowing and lending money only among its members.
Objective:
Encourage thrift and savings among members.
Operate on the principle of mutual benefit.
Not allowed to deal with the general public or do business like other NBFCs.
🔹 Legal & Regulatory Framework
1. Companies Act, 2013
Section 406: Recognizes Nidhi Companies and empowers the Central Government to make rules.
Rule 3 of the Nidhi Rules, 2014: Defines the nature and scope of activities allowed.
2. Nidhi Rules, 2014 (as amended in 2022)
The Nidhi (Amendment) Rules, 2022 introduced stricter disclosure and compliance norms to bring transparency in the ownership and control of such companies.
🔹 Disclosure of Control – Why Is It Required?
The Central Government and regulatory authorities observed that:
Many Nidhi companies were operating without proper oversight.
Some were collecting deposits from the public illegally or engaging in Ponzi schemes.
There was lack of transparency about who controls these companies.
Hence, the amended rules now require Nidhi Companies to make disclosures regarding:
Promoters and directors.
Beneficial ownership.
Change in control or management.
Fit and proper criteria for promoters and directors.
🔹 Key Provisions Mandating Disclosure of Control
1. Rule 3A – Declaration by Promoters
Promoters must file a declaration with the Central Government stating that they are fit and proper persons, and disclose:
Past criminal record.
Financial integrity.
Control or influence over the company.
2. Rule 5A – Approval before Commencing Business
No Nidhi company can commence business or accept deposits unless it receives prior approval from the Central Government, which requires disclosure of control and ownership.
3. Rule 23A – Disclosure in Annual Returns
Nidhi companies must include specific information regarding their board composition, shareholding, and control structure in their annual returns and financial statements.
🔹 Judicial Viewpoint
Though Nidhi companies operate under a specialized set of rules, courts have clarified that their operation must conform to principles of transparency, public interest, and regulatory compliance.
Case Law 1: Sree Gokulam Chit & Finance Co. Pvt. Ltd. v. Union of India, (Madras HC, 2011)
Though this case dealt with chit funds, the court stressed that entities dealing with public funds, even if among members, must maintain high levels of transparency, especially in management and control.
Case Law 2: Registrar of Companies v. Golden Forest India Ltd. (NCLT Case)
This case highlighted misuse of corporate structures by companies (including Nidhi-type entities) to avoid disclosing beneficial ownership.
The tribunal ordered investigation and stricter disclosure of control and promoters.
Case Law 3: Gurukrupa Nidhi Ltd. v. Union of India (Bombay HC)
The Bombay High Court upheld stricter government oversight over Nidhi companies, stating that compliance with disclosure norms is in the interest of members and public trust.
🔹 Purpose and Importance of Disclosure of Control
| Purpose | Explanation |
|---|---|
| ✅ Transparency | Ensures that regulators and members know who controls the company. |
| ✅ Accountability | Prevents misuse of the Nidhi structure for illegal fund-raising. |
| ✅ Investor Protection | Helps safeguard the interests of depositors (even if they are members). |
| ✅ Prevent Shell Operations | Identifies shell or dummy owners behind the scenes. |
🔹 Consequences of Non-Disclosure or Misreporting
Under the amended rules and the Companies Act, non-compliance may lead to:
Rejection of approval to operate as a Nidhi company.
Penal consequences under Section 406 of the Companies Act.
Deregistration or freezing of activities.
Disqualification of directors and prosecution of promoters.
🔚 Conclusion:
The recent regulatory and judicial trend emphasizes that Nidhi Companies must disclose more about their control to:
Prevent misuse of the corporate veil.
Promote accountability.
Protect members and financial integrity.
The Bombay High Court and other Indian courts have backed the government's approach to transparency in corporate governance, especially for companies dealing with public or member funds. The amended Nidhi Rules, 2022 now make it mandatory for such entities to clearly disclose their ownership and control structures, aligning with global principles of corporate transparency and financial regulation.
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