Financial Daily
from THE HINDU group of publications

Saturday, January 15, 2000



Opinion | Prev

Nidhi companies -- Too many regulations, but little action

R. Ravi

THE SPATE of nidhi companies failing to repay their depositors on time compounded the woes of the investor community. These depositors, unlike those in unincorporated bodies and collective investment companies, cannot be accused of ignorance or greed in choosing the avenue to invest in as the nidhi companies are recognised under Section 620A of the Companies Act, regulated under its provisions and further registered with the Reserve Bank of India as per the provisions of Section 45IA of the RBI Act 1997 .

It is surprising that the nidhi companies, despite being allowed to borrow from and lend only to members against security such as jewels or immovable property, face a liquidity crunch.

Some acts of commission and omission by the companies which have become sick are:

AAcceptance of deposits without any limit or determination of the deployment of the funds (deposits were accepted even for 280 months in some cases);

AInvestment in immovable property to house branch offices that were started arbitrarily;

AChange in management;

AAdvertisements inviting deposits that violated the provisions contained in the July 6, 1996 government notification.

The Government, vide November 1, 1999 notification, directed that nidhi companies, recognised as such under Section 620 A of the Companies Act, shall not carry on any business other than borrowing and lending in its own name. It also listed the other thi ngs nidhi companies are prohibited from doing: Open new branches; open current accounts with members; admission of any body corporate or trust; issue new shares to any group; acquire control of any other company; enter into any financial dealing with any person other than the members; take further deposits from or lend money to any body corporate; give loans or advances without security; or reduce membership below the specified number.

As per the notification, ``no company declared as nidhi company before the date of the notification shall, after the publication of the notification, engage itself in these activities.''

A further set of restrictions was also notified:

Nidhi companies are prohibited from pledging with others any type of security lodged with them by their members and exceeding the cap on the loans or advances to any one borrower.They must ensure that the minimum net owned fund and the preference share c apital do not fall below the prescribed levels.

According to the third set of regulations, nidhi companies should ensure that no director's term exceeds a continuous ten years; no deposits are accepted in excess of Rs. 20 crores or the actual deposits as on September 30, 1999, prescribed as the maximu m. Nidhi companies having deposits in excess of these limits on the date of the notification (November 1, 1999) shall cease to be nidhi companies but deemed to be a non-banking financial company under the RBI Act. They shall not have branches outside the State in which its registered office is located. They shall not enter into any arrangement for change of management without a special resolution passed in its general meeting and approved by the government. And, they shall not accept deposits for a peri od exceeding 60 months.

These directions were issued in exercise of the powers delegated to the Government under Section 637A of the Act. Despite sounding like they were given for the first time there were restrictions vide notifications issued on December 4, 1995, and October 20, 1997, which were applicable to those declared nidhi companies before the respective dates. While the first set was contained in the 1995 notification, a consolidated one (first and second sets) was issued in 1997. The latest notification (including the third set) came in November 1999, with minor modifications to the earlier restrictions.

AWhy are the notifications being issued repeatedly, specifying that the restrictions contained in them apply from the notification date?

AWhat action was taken against the nidhi companies that violated the provisions of the earlier notifications?

What is the legal validity of the notifications under Section 637, while the recognition as a nidhi company for a company is granted under Section 620A? While the Government is empowered, under Section 620A, to notify that certain provisions of the Act s hall not apply to nidhi companies or shall do so with modifications, Section 637 authorises the Government to delegate its powers or functions under the Act to an officer.

How far is the interpretation by the nidhi companies that the special powers under Section 620A by which such companies are exempt from certain provisions cannot be curtailed (by prescribing additional conditions) by a general power under Section 637 cor rect? They argue that only Section 620 A declares a company a nidhi company subject to the conditions specified while so declaring, and that the existing companies (on the date of the notification under Section 637), are not affected by the provisions of notifications under Section 637: That is, a company declared a nidhi company from or after the date of notification under Section 637 only is subject to these restrictions, as the declaration under Section 620A will incorporate such restrictions contain ed in the notifications under Section 637 too. Is this why some nidhi companies in existence on the dates of the 1995 and 1997 notifications not bother to comply with the requirements?

When each fresh notification, referring to the nidhi companies in existence as on that date, restrains them from certain activities, does it mean that those that violated the earlier sets were exonerated?

If the Government itself gives the restrictions a `guideline' status, why is the Act not amended so that the Rules under Section 620 A are inserted incorporating all extant restrictions and conditions contained in the various notifications made so far an d grant the Government powers to modify them?

The Government should ensure that nidhi companies are put under effective, constant and continuous supervision, so that they do not fail. It is the Government's responsibility to effectively control nidhi companies through stringent regulations that are enforced.

The Government could consider some of the following measures:

AAmend suitably provisions of Section 620A to incorporate the rules required to replace the notifications under Section 637 and empower the Government to amend the Rules.

AModify the conditions for change of management should be modified such that the consent of at least 75 per cent of the members _ both in the value of shares held and the number of members present and voting _ is mandatory, in addition to the Government' s approval. Notice of such meetings and their conduct should be supervised by a government functionary.

AEnsure that convicted nidhi managers/officers/directors do not start a new venture. Section 203 of the Act permits any member or creditor of a company to move the court for an order to the effect that a person convicted, inter alia, of any offence in co nnection with the management of a company shall not, without leave of the court, be a director or in any way, directly or indirectly, be concerned or take part in the promotion, formation or management of a company for such period as the court may specif y. While the affected members and the association of such members of a defaulting company may be prepared to move the court under this provision, it is only when the Government takes action against such an individual can be convicted.

ACome out with effective prohibitory orders that not only restrain nidhi companies from issuing advertisements but will also make handling the advertisements (by the media and intermediary agencies) an offence.

AAppoint a government representative to the board of each nidhi company formed in the last 20 years.

APut on hold the starting of any more nidhi companies.

Protect the interest of the other class of members _ borrowers, who have pledged their properties:

AEnsure that the jewels pledged as security for loans is kept under safe custody, and that they physically match the specifications mentioned in the company's records.

AVerify that the ownership of the immovable property mortgaged by borrowers remains in their name and secured in favour of the nidhi companies.

(The author is secretary, Rane group of companies.)

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