Nidhi Companies have a model of gathering deposits from individuals through recurring, savings, and fixed deposits of individuals and distribute different sorts of loans.

They are one of the finance sectors in the country. Facilitating borrowing and lending of money between the members is the primary idea behind Nidhi. Recognized under section 620A of the Companies Act 1956, Nidhi companies are known under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds, and Mutual Benefit Companies.

Their dealings are restricted only to the members, and membership is limited to individuals, so the structure is like a mutual benefit society. The principal source of funds is the contribution from the members. In fact, they are quite popularized as highly localized single office institutions in South India.
A Nidhi company is supposed to carry out all its schemes and plans as per the guidelines of RBI. It cannot carry out any plan either loan or deposit of more than five years. Secure loans are facilitated to individuals at very reasonable rates for various needs such as construction of houses, mortgages, other financial requirements. The deposits mobilized by Nidhis are not much when compared to the organized banking sector.

They are created mainly for promoting the habit of thrift and savings amongst its members. A Nidhi company is supposed to make 200 members in the first financial year. In case if it is not able to do so, it has to seek permission from the registrar of companies for granting an extension to make 200 members.

• A Nidhi company is supposed to keep 10 percent of total deposits collected in every month as fixed deposit in any nationalized bank.
• It can only close its branch if it has published an advertisement in the newspaper in vernacular language in the place where it carries on business at least 30 days prior to such closure, informing the public about such closure.
• The fixed deposit plans carried out by the mutual benefit company or a Nidhi company shall be for a minimum period of six months and a maximum period of sixty months. In the case of recurring deposits, it shall be for a minimum period of 12 months and a maximum period of sixty months.
• A Nidhi company registration can take almost 2 months time from the date of filing of the application. This company cannot declare dividend exceeding twenty-five percent or such higher amount as may be approved by the Regional Director.
• No Nidhi shall appoint or re-appoint an individual as auditor for more than one term of five consecutive years. The rate of interest to be charged on any loan given by a mutual benefit company shall not exceed seven and a half percent above the highest rate of interest offered on deposits by Nidhi and shall be calculated on reducing balance method.
• This company shall maintain net owned funds of not less than ten lakh rupees or such higher amount as may be specified by the Central Government.

There are certain conditions for Nidhi to comply within the first year. First, it is necessary for Nidhi Company to make two hundred members in the first year. Further, it should have net owned funds of at least ten lakhs or more than that amount, unencumbered term deposits of not less than ten percent of the outstanding deposits and the ratio of net owned funds to deposits should not be more than 1:20. If there is a failure in these four conditions beyond the second financial year, the mutual benefit company cannot collect deposits from the second financial year till it complies with the rules and regulations and also subject to penalty as per the Act. Due to these unsuccessful four conditions, after the end of the first financial year, the mutual benefit company is required to file form NDH-2 along with fees to regional director for extension of time and the director may consider the application and issue order letter as per his own will within thirty days from the receipt of the application. After the completion of the first financial year, there should be filing of form NDH-1 along with a fee to a registrar of companies duly certified by a practicing chartered accountant or company secretary but it should be done within ninety days.