In March 2000, the Department of Company Affairs, Ministry of Law, Justice and Company Affairs convened a committee chaired by P. Sabanayagam, Chief Secretary, Govt of Tamil Nadu, to study various aspects of Nidhi companies’ operations and propose measures for their overall improvement, against the background of many of them failing in recent years. Nidhi companies are small mutual benefit organizations, primarily operating in southern India, that accept deposits from and lend to their members exclusively. The committee’s primary objectives were to suggest an appropriate policy framework, restore public confidence, especially among small depositors, and examine mechanisms for better regulation and facilitation of Nidhi companies. Additionally, the committee aimed to evaluate current monitoring mechanisms, suggest prudential norms for fund deployment, and develop a long-term growth plan for Nidhi companies. Members included S. Radhakrishnan (Professor of Economics); N. R. Sridharan (C.A., Chennai); T. S. V. Panduranga Sarma (Ex-Director General, MRTPC); V. S. N. Murthy (Chief General Manager, RBI, Mumbai, from 23.3.2000 to 30.6.2000); R. Sadanandam (Chief General Manager (Incharge), RBI, Mumbai, with effect from 1.7.2000); H. Raja (C.A., Karaikudi); Mathuradas H. Mehta (Mumbai); R. Vadudevan (Director, Department of Company Affairs); and V. Sreenivasa Rao (Regional Director).
The report noted that Nidhis are regulated under the Companies Act and fall under the class of nonbanking financial companies, supervised by the Reserve Bank of India. However, a lack of clear definition for “Nidhi,” inadequate capital requirements, insufficient regulation of deposit mobilization, and the absence of proper auditing and reporting mechanisms were identified as significant shortcomings. The dual control by the Department of Company Affairs (DCA) and the Reserve Bank of India also led to regulatory confusion. The committee noted that while many Nidhis had functioned commendably, some had failed because of imprudent lending and mismanagement, highlighting the need for better regulation without stifling their growth.
In response to these findings, the committee made several key recommendations. It proposed a clear definition for “Nidhi” and suggested that all Nidhi companies include “Nidhi” in their name to standardize identification and ensure regulatory compliance. The committee recommended a new incorporation procedure requiring a minimum capital of Rs. 10 lakhs and 500 members. Financial norms included a suggested ratio of 1:20 for net owned funds to deposits, ceilings on interest rates for deposits and loans, and a maximum dividend of 25 percent, contingent on certain conditions. Operational guidelines detailed loan limits based on deposit size and recommended restrictions on opening branches outside the original district or state. Governance recommendations included instituting boards of directors with representation for depositors and women, imposing limits on director remuneration and tenure, and prohibiting loans to directors. To streamline regulation, it proposed designating regional directors of the DCA as regulatory authorities and forming a Standing Review Committee with representatives from the Reserve Bank of India and DCA. Other significant recommendations included providing deposit insurance for Nidhis, providing credit ratings for people with deposits over Rs. 50 crores, and computerizing Nidhis with deposits exceeding Rs. 20 crores. These comprehensive measures aimed to enhance the viability, resilience, and performance of Nidhi companies, ensuring they continue to serve their members effectively.
Based on the recommendations of the committee, the Department of Company Affairs on July 26, 2001, issued a notification with rules for Nidhi companies. These included rules regulating minimum paid-up capital and setting the minimum ratio of net owned funds to deposits at 1:20. The central government later convened an expert committee in 2002 to address the concerns of Nidhi companies regarding the rules issued in 2001.
The report focused on addressing the issues of unclear definitions, insufficient capital requirements, and regulatory confusion in Nidhi companies. It proposed standardizing identification, introducing stricter financial and governance norms, and centralizing regulation under the Department of Company Affairs to ensure clear and stable regulation.
