Process of Incorporation of Foreign Subsidiary / Wholly Owned Subsidiary/ Foreign Company

Foreign Company Formation In India: Process to Set Up a Subsidiary / Wholly Owned Subsidiary (WOS)

Whenever anyone incorporates a company in India as a ‘Subsidiary” or “Wholly owned Subsidiary (WOS)” of a company incorporated outside India. Many questions came to notice, like:

(i) What information/ Documents are required from the foreign Company?

(ii) Whether the presence of an authorised representative of a foreign Company is mandatory in India at the time of signing of documents.

(iii) What are the provisions in respect of Notary / Apostil, etc?

(iv) Which ID Proofs / Identity proof of foreign subscribers are required by the Company, etc?

Many more questions came to mind while incorporating a foreign subsidiary. In this editorial author shall try to clarify all such doubts/queries in a practical approach.

PROCESS OF INCORPORATION

Part A – Apply for Name Approval

Before application for name approval, a foreign Company has to choose the name based on the following:

a) In the case of a Subsidiary or WOS, a foreign Company can use a coined word of its name as a coined word for the Incorporation of the Company in India to take the Benefit of its goodwill in a foreign country.
b) A Foreign Company can apply the same name (name in a foreign country) in India by using the word “India” in its name.
c) If a foreign Company has any registered Trade Mark, then it can use such a trademark for the Incorporation of the company in India.
d) Any other name as decided by the Foreign Company.

i. While selecting the name, a thought came to mind: what are the documents/ information required for the application of the Name by a foreign Company?

In case of a Foreign Company using its “Coin” word or “Trademark” following Documents/information are required:

NOC from the Foreign Company to use the ‘Coin’ word or ‘Trademark’ in the form of a Resolution.
Apostilled copy of the Charter of a Foreign Company (translated into the English language).
Such a resolution shall be apostilled in a foreign Country.
In case of use of Trademark, a copy of trade mark registration documents.

Part B- Incorporation of Company

Information/ Documents required from the Foreign Company Formation in India

a) Apostille / Notarized copy of the resolution of the foreign Company mentioning the name of the authorized representative, and of number of shares.

b) Apostille/ Notarized copy of ID Proof of authorized representative, if such person is a resident of India.

c) Apostille/ Notarized copy of the Charter of a Foreign Company.

d) Name of one Resident Director.

e) Name of Nominee (in case of incorporation of WOS)

Preparation of Documents for the Foreign Company Formation In India:

After approval of the name or for the Incorporation of the Company applicant has to prepare the documents mentioned below;

♦ Memorandum of Association of Company (Physical copy of MOA shall be prepared; e-MOA (INC-33) can’t be prepared). (Duly apostilled or notarized in the country of origin).

♦ Article of Association of Company (Physical copy of AOA shall be prepared; e-AOA (INC-34) can’t be prepared). (Duly apostilled or notarized in the country of origin).

♦ INC-9 declaration by first subscriber(s) and director(s) (Duly apostilled or notarized in the country of origin). If all the subscribers have PAN/DIN, then INC-9 shall be e-INC-9 downloaded from the dashboard.

♦ DIR-2 declaration from the first Directors along with a Copy of Proof of Identity and residential address. (Duly apostilled or notarized in the country of origin).

♦ Declaration from the foreign subscribers in respect of not having a PAN. (Duly apostilled or notarized in the country of origin).

♦ NOC from the owner of the property.

♦ Proof of Office address (Conveyance/ Lease deed/ Rent Agreement, etc., along with rent receipts);

♦ Copy of the utility bills (not older than two months)

♦ In case of subscribers/ Director does not have a DIN, it is mandatory to attach: Proof of identity and residential address of the subscribers (Duly apostilled or notarized in the country of origin)

♦ A Digital Signature with only one Subscriber is enough for the Incorporation of a Company.

♦ DIR-2 from the Resident Director, along with self self-attested copy of PAN and resident Proof.

INC-9 shall also be generated web-based and needs the affixation of Directors/ subscribers on the same. It shall not be generated web-based in one situation when at least one director/ subscriber does not have a DIN and a PAN.

POST INCORPORATION

Step I: Receipt of Subscription Money from Foreign Subscriber.

Step II: Filing of e-form 20A – Declaration of Commencement of Business.

Step III: Collect the FIRC Certificate from the Bank as per the FDI Guidelines.

Step IV: Issue Share Certificate to the subscribers.

Step V: File FCGPR with RBI as per FDI Guidelines.

Notes:

If a foreign company is incorporating its subsidiary company in India, then the original name of the holding company, as it is, may be allowed with the addition of the word India or the name of any Indian state or city.

Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore.

NIDHI COMPANY

Nidhi Company, under the Companies Act 2013, is governed under section 406 of the Companies Act 2013.

The first Rules for Nidhi Company Registration came into effect from 1^st Day of April 2014, vide notification dated 31^st March 2014, hence called as Nidhi Company Rules 2014.

The said rules apply to (RULE 2 OF NIDHI RULES 2014),

(a) Every company that has been declared as a Nidhi or Mutual Benefit Society under sub-section (1) of Section 620A of the Companies Act, 1956;

(b) every company functioning on the lines of a Nidhi company or Mutual Benefit Society, but has either not applied for or has applied for and is awaiting notification to be a Nidhi or Mutual Benefit Society under sub-Section (1) of Section 620A of the Companies Act, 1956; and

*(d) every company declared as Nidhi or Mutual Benefit Society under sub-section (1) of section 406 of the Act.

* (Clause “d” Inserted as per Amended Nidhi Rules 2019 w.e.f 15/08/2019).

Meaning of Nidhi Company:-

As per Chapter XXVI, Section 406 of the Companies Act 2013, A Nidhi Company is a which has been incorporated with an object of cultivating the habit of thrift and savings among the its members, receiving deposits from, and lending to, its members only for their mutual benefit and which complies with rules as prescribed by the Central Government for regulation of such class of companies.

Nidhi Companies are also known as Permanent Fund, Benefit Fund, Mutual Benefit Fund and Mutual Benefit Company.

Nidhi Companies are governed under the Companies Act 2013, and the Reserve Bank of India is also empowered to issue directions to them in matters relating to their deposit acceptance activities. However, as Nidhi companies only deal with shareholders’ money, the RBI has specifically exempted this category of companies in India to comply with its core provisions, such as registration with the RBI, etc.

Incorporation of Nidhi Company (Nidhi Company Registration) ( RULE 4 OF NIDHI RULES 2014 & AS AMENDED BY AMENDMENT OF NIDHI RULES 2019 W.E.F 15/08/2019):-

As per the Nidhi Rules, 2014, a Nidhi Company should be a Public Limited Company only.
The Paid-up Equity Share Capital should be a minimum of Five Lakh Rupees.
As per the Companies Act 2013, a Nidhi company cannot issue Preference Shares. If Preference Shares are issued by any Nidhi company before the commencement of this Act, the same shall be redeemed in accordance with the terms of issue of such shares.
The object of Nidhi Companies in its Memorandum should be limited to cultivating the habit of thrift and savings among its members, receiving deposits from, and lending to, its members only for their mutual benefit. No other objects will be allowed. However, there is an exception to this in Rule 6(e)- General Restrictions or Prohibitions.
Every Nidhi Company shall have its last words “Nidhi Limited” as part of its name.

Requirements of Members, Net Owned Funds, etc (RULE 5 OF NIDHI RULES 2014 & AS AMENDED BY AMENDMENT OF NIDHI RULES 2019 W.E.F 15/08/2019):-

Every Nidhi company shall, within a period of one year from its incorporation, ensure that it has,

Not less than 200 members
Net Owned Funds of Ten Lakh Rupees or more
Unencumbered term deposits of not less than 10% of the outstanding deposits as specified in rule 14, and
Ratio of Net Owned Funds to deposits of not more than 1:20, i.e. deposits should not exceed 20 times Net Owned Funds.
“Net Owned Funds” means the aggregate of paid-up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet:

Provided that the amount representing the proceeds of issue of preference shares shall not be included for calculating Net Owned Funds.

Within three months of the closure of the financial year, Nidhi Company should file a return of compliance in Form NDH-1 with the Registrar of Companies.
If the company is not complying with the sub-rule as mentioned above within 30 days of the closure of the first financial year, the company should apply to the Regional Director for extension of time in Form NDH-2.

The Regional Director may extend the period up to one year from the date of receipt of the application.

If the failure to comply with sub-rule (1) and to get itself declared under section 406(1) of the act extends beyond completion of the second financial year, the company should not accept any deposit till it complies with sub-rule one and shall also be liable for penal consequences.

Declaration of Nidhi (RULE 3A OF AMENDED NIDHI RULES 2019 W.E.F 15/08/2019):-

The Central Government, on receipt of an application (in Form NDH-4) of a public company for declaring it as Nidhi and on being satisfied that the company meets the requirements under these rules, shall notify the company as a Nidhi in the Official Gazette:

Provided that a Nidhi incorporated under the Act on or after the commencement of the Nidhi (Amendment) Rules, 2019 shall file Form NDH-4 within sixty days from the date of expiry of:-

(a) one year from the date of its incorporation; or

(b) The period up to which extension of time has been granted by the Regional Director under sub-rule (3) of rule 5:

Provided further that nothing in the first proviso shall prevent a Nidhi from filing Form NDH-4 before the period referred therein:

Provided also that in case a company does not comply with the requirements of this rule, it shall not be allowed to file Form No. SH-7 (Notice to Registrar of any alteration of share capital) and Form PAS-3 (Return of Allotment).

General Restrictions and Prohibitions (RULE 6 OF NIDHI RULES 2014):-

As per the rules, there are certain restrictions imposed on Nidhi companies, which are as under,

No Nidhi Company shall –

carry on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate;
issue preference shares, debentures or any other debt instrument by any name or in any form whatsoever;
open any current account with its members;
acquire another company by purchase of securities or control the composition of the Board of Directors of any other company in any manner whatsoever or enter into any arrangement for the change of its management, unless it has passed a special resolution in its general meeting and also obtained the previous approval of the Regional Director having jurisdiction over such Nidhi (“control” shall have the same meaning assigned to it in clause (27) of section 2 of the Act)

(e) carry on any business other than the business of borrowing or lending in its own name: Provided that Nidhis’ which have adhered to all the provisions of these rules may provide locker facilities on rent to its members subject to the rental income from such facilities not exceeding twenty per cent of the gross income of the Nidhi at any point of time during a financial year.

accept deposits from or lend to any person, other than its members;
pledge any of the assets lodged by its members as security;
take deposits from or lend money to any body corporate;
enter into any partnership arrangement in its borrowing or lending activities;
issue or cause to be issued any advertisement in any form for soliciting deposits:

Provided that private circulation of the details of fixed deposit Schemes among the members of the Nidhi carrying the words “for private circulation to members only” shall not be considered to be an advertisement for soliciting deposits.

(k) pay any brokerage or incentive for mobilising deposits from members or for deployment of funds, or for granting loans.

Share Capital and Allotment (RULE 7 OF NIDHI RULES 2014& AS AMENDED BY AMENDMENT OF NIDHI RULES 2019 W.E.F 15/08/2019):–

Nominal value of fully paid up equity shares should be a minimum of Rupees Ten each, except for
Every company that has been declared as a Nidhi or Mutual Benefit Society under sub-section (1) of Section 620A of the Companies Act, 1956;

(b) Every company functioning on the lines of a Nidhi company or Mutual Benefit Society, but has either not applied for or has applied for and is awaiting notification to be a Nidhi or Mutual Benefit Society under sub-Section (1) of Section 620A of the Companies Act, 1956;

No service charge shall be levied for the issue of shares.

3) Each deposit holder should be allotted at least a minimum of ten equity shares of Rupees Ten each or shares equivalent to one hundred rupees:

Provided that a savings account holder and a recurring deposit account holder shall hold at least one equity share of Rupees Ten.

Membership (RULE 8 OF NIDHI RULES 2014):-

1) A Body Corporate and Trust cannot be a member of a Nidhi company

2) Except as otherwise permitted under these rules, the number of members should not fall below 200 members at any time, i.e. Nidhi company should have a minimum of 200 members always.

3) A minor shall not be admitted as a member; however, deposits may be accepted in the name of a minor if they are made by the natural or legal guardian who is a member of the company.

Net Owned Funds (RULE 9 OF NIDHI RULES 2014):-

“Net Owned Funds” means the aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet:

Provided that the amount representing the proceeds of issue of preference shares shall not be included for calculating Net Owned Funds.

Every Nidhi shall maintain Net Owned Funds of not less than TEN LAKH RUPEES or such higher amount as the Central Government may specify from time to time.

Branches (RULE 10 OF NIDHI RULES 2014):-

1) A Nidhi may open branches only if it has earned net profits after tax continuously during the preceding three financial years.

2) Subject to the provisions contained in sub-rule (1), a Nidhi may open up to three branches within the district.

3) If a Nidhi proposes to open more than three branches within the district or any branch outside the district, it shall obtain the prior permission of the Regional Director, and an intimation is to be given to the Registrar aboutthe opening of every branch within thirty days of such opening.

4) Nidhi company cannot open branches or collection centres or offices or deposit centres, or by whatever name called, outside the State where its registered office is situated.

5) No Nidhi shall open branches or collection centres or offices or deposit centres, or by whatever name called, unless a financial statement and annual return (up to date) are filed with the Registrar in E-Form NDH-3.

6) To close any branch of the company, the company should,

(a) publish an advertisement in a newspaper in the vernacular language in the place where it carries on business at least thirty days before such closure, informing the public about such closure;

(b) fixes a copy of such advertisement or a notice informing of such closure of the branch on the notice board of the company for a period of thirty days from the date on which the advertisement was published under clause (a); and

Acceptance of deposits by Nidhis (RULE 11 OF NIDHI RULES 2014):-

A Nidhi shall not accept deposits exceeding twenty times its Net Owned Funds (NOF) as per its last audited financial statements.

Application Form for accepting Deposit (RULE 12 OF NIDHI RULES 2014 & AS AMENDED BY AMENDMENT OF NIDHI RULES 2019 W.E.F 15/08/2019):–

The following are the particulars of the application form for placing deposits by the members of the company,

(a) Name of Nidhi;

(b) Date of incorporation of Nidhi

(ba) The date of declaration or notification as Nidhi

(d) Brief particulars of the management of Nidhi (name, addresses and occupation of the directors, including DIN);

(e) Net profits of Nidhi before and after making provision for tax for the preceding three financial years;

(f) Dividend declared by Nidhi during the preceding three financial years;

(g) Mode of repayment of the deposit;

(h) Maturity period of the deposit;

(i) Interest payable on the deposit;

(j) The rate of interest payable to the depositor in case the depositor withdraws the deposit prematurely;

(k) The terms and conditions subject to which the deposit may be accepted or renewed;

1. A summary of the financials of the company as per the latest two audited financial statements, as given below:

(i) Net Owned Funds

(ii) Deposits accepted

(iii) Deposits repaid

(iv) Deposits claimed but remaining unpaid

(v) Loans disbursed against—

(a) immovable property;

(b) deposits; and

(vi) Profit before tax

(vii) Provision for tax

(viii) Profit after tax

(ix) Dividend per share

(m) any other special features or terms and conditions subject to which the deposit is accepted or renewed.

2. The application form shall also contain the following statements, namely:—

(a) In case of Non-payment of the deposit or part thereof as per the terms and conditions of such deposit, the depositor may approach the Bench of the National Company Law Tribunal having jurisdiction over Nidhi;

(b) In case of any deficiency of Nidhi in servicing its depositors, the depositor may approach the National Consumers Disputes Redressal Forum, the State Consumers Disputes Redressal Forum or the District Consumers Disputes Redressal Forum, as the case may be, for redressal of his relief;

(c) a declaration by the Board of Directors to the effect that the financial position of Nidhi as disclosed and the representations made in the application form are true and correct, and that Nidhi has complied with all the applicable rules;

(d) a statement to the effect that the Central Government does not undertake any responsibility for the financial soundness of Nidhi or for the correctness of any of the statements or the representations made or opinions expressed by Nidhi;

(e) The deposits accepted by Nidhi are not insured, and the repayment of deposits is not guaranteed by either the Central Government or the Reserve Bank of India; and

(f) a verification clause by the depositor stating that he had read and understood the financial and other particulars furnished and representations made by Nidhi in his application form, and after careful consideration, he is depositing with Nidhi at his own risk and volition.

(3) Every Nidhi shall obtain a proper introduction of new depositors before opening their accounts or accepting their deposits, and keep on its record the evidence on which it has relied for such introduction.

(4) For the introduction of depositors, a Nidhi shall obtain documentary evidence of the depositor in the form of proof of identity and address as under:

(a) Proof of Identity (any one of the following)

(i) Passport

(ii) Unique Identification Number

(iii) Income-tax PAN card

(iv) Elector Photo Identity Card

(v) Driving licence

(vi) Ration card

(b) Proof of address (any one of the following)

(i) Passport

(ii) Unique Identification Number

(iii) Elector Photo Identity Card

(iv) Driving licence

(v) Ration card

(vi) Telephone bill

(vii) Bank account statement

(viii) Electricity bill

(documents referred to serial numbers (vi), (vii) and (viii) above shall not be more than two months old)

Deposits (RULE 13 OF NIDHI RULES 2014):-

(1) The fixed deposits shall be accepted for a minimum period of six months and a maximum period of sixty months.

(2) Recurring deposits shall be accepted for a minimum period of twelve months and a maximum period of sixty months.

(3) In case of recurring deposits relating to mortgage loans, the maximum period of recurring deposits shall correspond to the repayment period of such loans granted by Nidhi.

(4) The maximum balance in a savings deposit account at any given time qualifying for interest shall not exceed one lakh rupees at any point in time, and the rate of interest shall not exceed two per cent above the rate of interest payable on a savings bank account by nationalised banks.

(5) A Nidhi may offer interest on fixed and recurring deposits at a rate not exceeding the maximum rate of interest prescribed by the Reserve Bank of India, which the Non-Banking Financial Companies can pay on their public deposits.

(6) A fixed deposit account or a recurring deposit account shall be foreclosed by the depositor subject to the following conditions, namely:—

(a) Nidhi shall not repay any deposit within a period of three months from the date of its acceptance ;

(b) where, at the request of the depositor, a Nidhi repays any deposit after a period of three months, the depositor shall not be entitled to any interest up to six months from the date of deposit;

(c) where at the request of the depositor, a Nidhi makes repayment of a deposit before the expiry of the period for which such deposit was accepted by Nidhi, the rate of interest payable by Nidhi on such deposit shall be reduced by two per cent from the rate which Nidhi would have ordinarily paid, had the deposit been accepted for the period for which such deposit had run:

Provided that in the event of the death of a depositor, the deposit may be repaid prematurely to the surviving depositor or depositors in the case of joint holding with survivor clause, or to the nominee or to the legal heir with interest up to the date of repayment at the actual rate without any reduction as mentioned above.

Unencumbered term deposits (RULE 14 OF NIDHI RULES 2014):-

Every Nidhi shall invest and continue to keep invested, in unencumbered term deposits with a Scheduled commercial bank (other than a co-operative bank or a regional rural bank), or post office deposits in its own name an amount which should be a minimum of ten per cent of the deposits outstanding at the close of business on the last working day of the second preceding month:

Provided that in cases of unforeseen commitments, temporary withdrawal may be permitted with the prior approval of the Regional Director for repayment to depositors, subject to such conditions and time limit which may be specified by the Regional Director to ensure restoration of the prescribed limit of ten per cent.

Unencumbered refers to that which is free and clear of any encumbrances, such as creditor claims or liens

Loans (RULE 15 OF NIDHI RULES 2014):-

1) A Nidhi shall provide loans only to its members.

2) The loans given by a Nidhi to a member shall be subject to the following limits, namely: —

(a) two lakh rupees, where the total amount of deposits of such Nidhi from its members is less than two crore rupees;

(b) seven lakh fifty thousand rupees, where the total amount of deposits of such Nidhi from its members is more than two crore rupees but less than twenty crore rupees;

(c) twelve lakh rupees, where the total amount of deposits of such Nidhi from its members is more than twenty crore rupees but less than fifty crore rupees; and

(d) fifteen lakh rupees, where the total amount of deposits of such Nidhi from its members is more than fifty crore rupees:

Provided that where a Nidhi has not made profits continuously in the three preceding financial years, it shall not make any fresh loans exceeding fifty per cent of the maximum amounts of loans specified in clauses (a), (b), (c) or (d).

Provided further that a member shall not be eligible for any further loan if he has borrowed any earlier loan from the Nidhi and has defaulted in repayment of such loan.

3) For sub-rule (2), the amount of deposits shall be calculated based on the last audited annual financial statements.

4) A Nidhi shall give loans to its members only against the following securities, namely:—

(a) gold, silver and jewellery: Provided that the repayment period of such loan shall not exceed one year.

(b) immovable property: Provided that the total loans against immovable property [excluding mortgage loans granted on the security of property by registered mortgage, being a registered mortgage under section 69 of the Transfer of Property Act, 1882 (IV of 1882)] shall not exceed fifty per cent of the overall loan outstanding on the date of approval by the board, the individual loan shall not exceed fifty per cent of the value of property offered as security and the period of repayment of such loan shall not exceed seven years.

(c) fixed deposit receipts, National Savings Certificates, other Government Securities and insurance policies: Provided that such securities duly discharged shall be pledged with Nidhi and the maturity date of such securities shall not fall beyond the loan period or one year, whichever is earlier:

Provided further that in the case of a loan against fixed deposits, the period of the loan shall not exceed the unexpired period of the fixed deposits.

-Rate of Interest (RULE 16 OF NIDHI RULES 2014):–

The rate of interest to be charged on any loan given by a Nidhi shall not exceed 7.5% above the highest rate of interest offered on deposits by Nidhi and shall be calculated on the reducing balance method:

Provided that Nidhi shall charge the same rate of interest on the borrowers in respect of the same class of loans, and the rates of interest of all classes of loans shall be prominently displayed on the notice board at the registered office and each branch office of Nidhi.

Rules relating to Directors (RULE 17 OF NIDHI RULES 2014):–

(1) The Director shall be a member of Nidhi.

(2) The Director of a Nidhi shall hold office for a term up to ten consecutive years on the Board of Nidhi.

(3) The Director shall be eligible for re-appointment only after the expiration of two years of ceasing to be a Director.

(4) Where the tenure of any Director in any case had already been extended by the Central Government, it shall terminate on expiry of such extended tenure.

(5) The person to be appointed as a Director shall comply with the requirements of sub-section

(4) of Section 152 of the Act and shall not have been disqualified from appointment as provided in Section 164 of the Act.

Dividend (RULE 18 OF NIDHI RULES 2014):–

A Nidhi shall not declare a dividend exceeding 25% or such higher amount as may be specifically approved by the Regional Director for reasons to be recorded in writing and further subject to the following conditions, namely:—

(a) An equal amount is transferred to the General Reserve.

(b) There has been no default in repayment of matured deposits and interest, and

Auditor (RULE 19 OF NIDHI RULES 2014):–

1) No Nidhi shall appoint or re-appoint an individual as auditor for more than one term of five consecutive years.

2) No Nidhi shall appoint or re-appoint an audit firm as auditor for more than two terms of five consecutive years:

Provided that an auditor (whether an individual or an audit firm) shall be eligible for subsequent appointment after the expiration of two years from the completion of his or its term:

Explanation: For this proviso:

(i) in case of an auditor (whether an individual or audit firm), the period for which he or it has been holding office as auditor before the commencement of these rules shall be taken into account in calculating the period of five consecutive years or ten consecutive years, as the case may be;

(ii) Appointment includes re-appointment.

Prudential norms (RULE 20 OF NIDHI RULES 2014):–

1) Every Nidhi shall adhere to the prudential norms for revenue recognition and classification of assets in respect of mortgage loans or jewel loans as contained hereunder.

2) Income, including interest or any other charges on non-performing assets, shall be recognised only when it is actually realised, and any such income recognised before the asset became non-performing and which remains unrealised in a year shall be reversed in the profit and loss account of the immediately succeeding year.

3) (a) In respect of mortgage loans, the classification of assets and the provisioning required shall be as under:

NATURE OF ASSET	PROVISION REQUIRED
Standard Asset	No provision
Sub-standard Asset	10% of the aggregate outstanding amount
Doubtful Asset	25% of the aggregate outstanding amount
Loss Asset	100% of the aggregate outstanding amount

Provided that a Nidhi may make provision for exceeding the percentage specified herein.

Standard Asset means the asset in respect of which no default in re-payment of principal or payment of interest has occurred or is perceived and which has neither shown signs of any problem relating to re-payment of principal sum or interest nor does it carry more than normal risk attached to the business.

Sub-Standard Asset means a borrowal account which is a Non-performing asset:

Provided that rescheduling or renegotiation, or rephasing of the loan instalment or interest payment shall not change the classification of an asset unless the borrowal account has satisfactorily performed for at least twelve months after such rescheduling or renegotiation or rephasing.

Doubtful Asset means a borrowal account which has remained a Non-performing asset for more than two years but less than three years

Loss Asset means a borrowal account which has remained a Non-performing asset for more than three years, or where, in the opinion of the Board, a shortfall in the recovery of the loan account is expected because the documents executed may become invalid if subjected to legal process or for any other reason

(b) The estimated realisable value of the collateral security to which a Nidhi has valid recourse may be reduced from the aggregate outstanding amount, if the proceedings for the sale of the mortgaged property have been initiated in a court of law within the previous two years of the interest, income or instalment remaining unrealised.

4) (a) The Notes on the financial statements of a year shall disclose-

(i) the total amount of provisions, if any, to be made on account of income reversal and non-performing assets remaining unrealised;

(ii) the cumulative amount provided till the previous year;

(iii) the amount provided in the current year; and

(iv) the balance amount to be provided.

(b) Such disclosure shall continue to be made until the entire amount to be provided has been provided for.

5) In respect of loans against gold or jewellery—

(a) The aggregate amount of loan outstanding against the security of gold or jewellery shall either be recovered or renewed within three months from the due date of repayment;

(b) If the loan is not recovered or renewed and the security is not sold within the aforesaid period of three months, the company shall make provision in the current year’s financial statements to the extent of unrealised amount or the aggregate outstanding amount of the loan, including interest as applicable;

(c) No income shall be recognised on such loans outstanding after the expiry of the three months specified in (a) above or the sale of gold or jewellery, whichever is earlier; and

(d) The loan-to-value ratio shall not exceed 80 per cent.

Explanation.- For this rule, the term ‘loan to value ratio’ means the ratio between the amount of loan given and the value of gold or jewellery against which such loan is given.

Filing of Half Yearly Return (RULE 21 OF NIDHI RULES 2014):–

Every company covered under Rule 2 shall file a yearly return with the Registrar in Form NDH-3 along with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014, within 30 days from the conclusion of each half year, duly certified by a company secretary in practice or chartered accountant in practice or a cost accountant in practice.

Auditor’s Certificate (RULE 22 OF NIDHI RULES 2014):-

The Auditor of the company shall furnish a certificate every year to the effect that the company has complied with all the provisions contained in the rules, and such certificate shall be annexed to the audit report, and in case of non-compliance, he shall specifically state the rules which have not been complied with.

Power to enforce compliance (RULE 23 OF NIDHI RULES 2014 & AS AMENDED BY AMENDMENT OF NIDHI RULES 2019 W.E.F 15/08/2019):-

(1) For the purposes of enforcing compliance with these rules, the Registrar of Companies may call for such information or returns from Nidhi as he deems necessary and may engage the services of Chartered Accountants, Company Secretaries in Practice, Cost Accountants, or any firm thereof from time to time for assisting him in the discharge of his duties.

(2) In respect of any Nidhi which has violated these rules or has failed to function in terms of the Memorandum and Articles of Association, the Central Government may appoint a Special Officer to take over the management of Nidhi, and such Special Officer shall function as per the guidelines given by the Central Government:

Provided that an opportunity of being heard shall be given to the concerned Nidhi by the Central Government before appointing any Special Officer.

Compliance with rule 3A by certain Nidhis (RULE 23 A OF AMENDED NIDHI RULES 2019 W.E.F 15/08/2019 & AMENDED NIDHI RULES (SECOND AMENDMENT) 2020 W.E.F 14/02/2020):-

Every company referred to in clause (b) of rule 2 and every Nidhi incorporated under the Act, before the commencement of Nidhi (Amendment) Rules, 2019, shall also get itself declared (Form NDH-4) as such in accordance with rule 3A within a period of one year from the date of its incorporation or within a period of nine months from the date of commencement of Nidhi (Amendment) Rules, 2019, whichever is later:

Provided that in case a company does not comply with the requirements of this rule, it shall not be allowed to file Form No. SH-7 (Notice to Registrar of any alteration of share capital) and Form PAS-3 (Return of Allotment).

Companies declared as Nidhis under the previous company law to file Form NDH-4 (RULE 23 B of the Amended NIDHI RULES 2019 W.E.F 15/08/2019):-

Every company referred in clause (a) of rule 2 shall file Form NDH-4 along with fees as per the Companies (Registration Offices and Fees) Rules, 2014, for updating its status:

Provided that no fees shall be charged under this rule for filing Form NDH-4, in case it is filed within six months of the commencement of the Nidhi (Amendment) Rules, 2019:

Provided further that, in case a company does not comply with the requirements of this rule, it shall not be allowed to file Form No. SH-7 (Notice to Registrar of any alteration of share capital) and Form PAS-3 (Return of Allotment).

Penalty for non-compliance (RULE 24 OF NIDHI RULES 2014):-

If a company contravenes any of the provisions of the rules prescribed herein, the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees, and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during which the contravention continues.