EXEMPTION TO NIDHI COMPANIES

On 5^th June 201, Ministry of Corporate Affairs  draft notification to be published in Official Gazette announcing some exemption to Nidhi Companies.

As there is no effective date is announced in the Notification, this notification shall come into effect on the date of its publication in the Official Gazette.

The Notification is issued in exercise of power conferred by Clauses (a) and (b) of Sub – section 462 read with Section 406 of the Companies Act, 2013. A copy of this notification has been laid in draft before both Houses of Parliament as required by sub-section (2) of section 462 of the Companies Act, 2013.

Paragraph 2 of the Notification cast a condition on the Nidhi Companies:

“The Nidhis, while complying with such exceptions, modifications adaptations, as specified in column (3) of the aforesaid Table [Given in Paragraph 1 of the Notification], shall ensure that the interests of their shareholders are protected.”

This is a subjective condition and may complicate litigations. This may also open for Secretarial Standards and Circulars.

Now, we discuss exemption granted under Paragraph 1 of the Notification.

Service of Documents to Members [Section 20(2)]:

A document may be served on Registrar or any member by sending it to him by post or by registered post or by speed post or by courier or by delivering at his office or address, or by such electronic or other mode as may be prescribed. A member may request for delivery of any document through a particular mode, for which he shall pay such fees as may be determined by the company in its annual general meeting.

After this Notification, in the case of a Nidhi, the document may be served only on members who hold shares of more than one thousand rupees in face value or more than one percent of the total paid-up share capital of the Nidhis whichever is less. For other shareholders, document may be served by a public notice in newspaper circulated in the district where the Registered Office of the Nidhi is situated; and publication of the same on the notice board of the Nidhi.

Private Placement by Nidhi Companies [Section 42]:

This is one of the most important provisions for Nidhi Companies and subject of most queries directed to me.

Sub – section (1), Explanation II to Sub-section (2), Sub – sections  (4), (6), (8), (9) and (10) of Section 42 shall apply to the Nidhi Companies. Other part of this Section shall apply.

This permits Nidhi Company to invite private placement from any number of persons. [Non applicable subsection (2)]

Nidhi Companies may accept subscription money in cash. [Non applicable subsection (5)]

Nidhi Company may issue private placement to any person without recording name. [Non applicable subsection (7)]

Voting Rights [Section 47(1)]:

Every member of a company limited by shares and holding equity share capital there in, shall have a right to vote on every resolution placed before the company. His voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

No member of a Nidhi Company shall exercise his Voting right on poll in excess of five percent of total voting rights of equity shareholders.

Further Issue of Share Capital [Section 62]:

This Section shall not apply to Nidhi Companies. This enables Nidhi Companies to make new members without complying with issuing rights to present members and without seeking authorisation from members.

Restrictions on purchase by company or giving of loans by it for purchase of its shares [Section 67(1)]:

According to Section 67(1), No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act.

When shares are purchased by a Nidhi company from a member on his ceasing to be a depositor or borrower and it shall not be considered as reduction of capital under section 66 of the Companies Act, 2013.

Accordingly, Nidhi Company may purchase share of a member, at the time of his ceasing to be a depositor or borrower, not otherwise.

In my views, all shares of such members are not required to be purchases, such person may still be a member with lesser holdings.

Declaration of dividend [Section 123(5)]:

According to Section 123(5), no dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash.

In case of Nidhi Company, any dividend payable in cash may be paid by crediting the same to the account of the member, if the dividend is not claimed within 30 days from the date of declaration of the dividend.

Punishment for failure to distribute dividends [Section 127]:

According to this Modification, where the dividend payable to a member is one hundred rupees or less, the declaration of dividend shall be announced in the local language in one local newspaper of wide circulation and announcement of the said declaration is also displayed on the notice board of the Nidhis for at least three months.

This exemption or modification is related to more with exemption granted in Section 123(5) and suitable place to adjust it is indeed Section 127.

When Dividend is paid in account as per modification of Section 123(5), it became default of Section 127. Now, if announcement is made, there is no default of Section 127 shall be deemed.

Close reading of modification to Sections 123 and 127 suggests, any amount more than Rs. 100 shall be not be deposit in account of member with the Nidhi company but by cheque, warrant or in any electronic mode to the shareholders as per second proviso to Section 123(5).

Readers’ views are Welcome.

Right of member to copies of audited financial statement [Section 136(1)]:

Nidhi Companies are not required to send copy of its financial statements to all members.

In the case of members who do not individually or jointly hold shares of more than one thousand rupees in face value or more than one percent of the total paid-up share capital whichever is less, it shall be sufficient compliance with the provisions of the section if an intimation is sent by public notice in newspaper circulated in the district in which the Registered Office of the Nidhi is situated stating the date, time and venue of Annual General Meeting and the financial statement with its enclosures can be inspected at the registered office of the company, and the financial statement with enclosures are affixed in the Notice Board of the company and a member is entitled to vote either in person or through proxy.

Right of persons other than retiring directors to stand for directorship [Section 160(1)]:

The deposit along with the Proposal of candidature shall be Rupees ten thousand in case of Nidhi companies, not rupees ten lakh as in case of other companies.

Loan to Directors [Section 185]:

According to Section 185, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

This Section 185 shall not apply to a Nidhi company provided the loan is given to a director or his relative in their capacity as members and such transaction is disclosed in the annual accounts by a note.

If Director is not a member, Section 185 shall apply.

Managerial Remuneration [Second Proviso to Section 197(1)]:

The remuneration of any one Managing Director or Whole Time Director or Manager shall not exceed 5% of net profit. Where, there is more than one Managing Director or Whole Time Director, the overall limit is 10% of net profit. The remuneration may exceed this limit only after approval by company in general meeting and after satisfying the conditions given in this Section and Schedule V. [Second Proviso to Section 197(1)]

In Case of Nidhi Companies, the remuneration of a director who is neither managing director nor whole – time director or manager for performing special services to the Nidhis specified in the articles of association may be paid by way of monthly payment subject to the approval of the company in general meeting and also to the provisions of section 197:

Provided that no approval of the company in general meeting shall be required where,-

(a) a Nidhi does not have a managing director or a whole-time director or a manager;

(b) the remuneration payable during a financial year to all the directors of the Nidhi does not exceed ten percent of the net profits of such Nidhi or fifteen lakh rupees, whichever is less; and

(c) a remuneration payable under clause (b) is approved by a special resolution passed in this behalf by the Nidhi.

Fees for Filing etc [Section 403]:

Section 403 shall apply with the modification that the filing fees in respect of every return of allotment under sub-section (9) of section 42 shall be calculated at the rate of one rupee for every one hundred rupees or parts thereof on the face value of the shares included in the return but shall not exceed the amount of normal filing fee payable.