Regulatory action against Nidhis, undisclosed beneficial ownership jump

RoCs across the country issued as many as 131 adjudication orders to Nidhi companies in 2024, most of which imposed penalties for alleged violations, an increase of about 72% from 76 notices last year. The concentrated regulatory action against Nidhi companies is so evident that only three notices were recorded against Nidhi in 2022, compared to five in 2021, according to the Ministry of Corporate Affairs (MCA), which regulates these entities.

Regulatory action surges

RoC action against beneficial ownership disclosure defaulters also surged in 2024, with 79 adjudication notices issued to companies under sections 89 and 90 of the Companies Act in 2024, MCA data shows, compared with 79 adjudication notices issued the previous year. Compared with 3 notifications, the number has increased significantly.

Most adjudication notices are penalty orders, imposing fines on both the company and the company operator. Penalties imposed on Nidhi include: $10,000 to approx. $The company and the individuals named over the years stand to lose Rs 30 lakh, or Rs 30 lakh if ​​no significant beneficial ownership was reported. $50,000 to approx. $1.25 million.

Regulators have cracked down on Nidhis this year after Bihar eradicated illegal loans last year. As Mint reported on February 27 last year, in February 2023, Bihar issued notices to around 550 Nidhis under its territorial jurisdiction following complaints that they were allegedly cheating investors.

Nidhis are a type of non-banking financial companies (NBFCs) that are only allowed to take deposits and grant loans to their members without obtaining an NBFC license from the Reserve Bank of India (RBI). These companies are specially created under Section 406 of the Companies Act 2013 and must adhere to strict disclosure regulations. They must also include the words “Nidhi Limited” in their company name and must be registered as a public limited company.

Failure to comply with these disclosure requirements is unlawful and may result in regulatory action. A Nidhi company should have at least 200 members within one year of registration and at least $Net capital of Rs 20 lakh, minimum paid-up share capital is $1 million.

“The intense scrutiny stems from multiple risk factors – Nidhi companies, despite handling public deposits, operate without RBI regulation, have low barriers to entry, and recent instances have shown widespread non-compliance with basic financial reporting requirements. This The portfolio creates huge vulnerabilities for small retail investors, who are the key players,” said Amit A. Tungare, managing partner at Asahi Legal.

Nidhis have a vast network in eastern India, especially Bihar, Jharkhand and West Bengal, generally catering to the needs of the middle and lower middle classes and help inculcate the habit of thrift and savings among members besides promoting financial intermediation . .

Subodh Dandawate, deputy director of regulation, explained: “Nidhi Company is a mutual benefit company that only accepts deposits and loans from its members, but there are instances of misuse of Nidhi Company structure for non-bank financial and questionable activities.” Nexdigm is a business and Professional services firm. “Therefore, in order to curb malpractices, the MCA is scrutinizing Nidhi Corporation,” Dandawat said.

MCA focuses on beneficial ownership

MCA regulatory actions targeting undisclosed beneficial ownership have also surged this year. Experts told Mint that the rapid increase in scrutiny of beneficial ownership of companies is driven by governments’ desire to increase transparency in company ownership. They say the penalties stipulated in the law demonstrate the seriousness of the problem.

Amit Maheshwari, tax partner at tax and advisory firm AKM Global, explained that the penalty imposed by the Ministry of Corporate Affairs underscores the importance of complying with statutory requirements through careful disclosure of beneficial interests in companies.

“Judging from the surge in adjudication orders issued by the ROC against Articles 89 and 90 of the Company Law in the past few months, it can be assumed that the department is going beyond the letter of the law and considering intent when analyzing corporate structures, keen on identifying potentially important beneficial owners. people or SBOs,” Maheshwari said.

Maheshwari said the increase in adjudicated cases highlights the importance of transparency and strict compliance with such regulatory requirements to prevent companies from suffering legal and financial consequences.

The Companies Act requires reporting of significant beneficial owners of Indian companies and reporting Indian companies are also obliged to report the natural persons who are significant beneficial owners of shares.

“Recently, Indian regulators have tightened regulations related to beneficial ownership to increase transparency and lift the corporate veil to identify the real owners behind a company,” Nexdigm’s Dandawat said.

Global Standards and FATF Impact

Lifting the corporate veil involves looking beyond the legal identity of a company to identify the real individuals who own, control or benefit from it, often by uncovering complex corporate structures.

Even the rules under the Prevention of Money Laundering Act (PMLA) have been significantly changed to lower the threshold limit for beneficial ownership, Maheshwari said, drawing on the recommendations of the Financial Action Task Force (FATF) in this regard and highlighted these Importance of Disclosure.

The Paris-based Financial Action Task Force (FATF), an intergovernmental body that formulates policies to combat money laundering and terror financing, has included India in the “regular follow-up category” following an assessment during 2023-24, the EU Finance Ministry said in a statement. The ministry called it an “outstanding achievement.” According to Mint’s report on June 28, only four G20 countries hold this distinction.

Legal experts have argued the risks of not taking regulatory action against beneficial ownership disclosure defaulters. Harshita Agarwal Sharma, Founder, Lexlevel Services said: “Failure to disclose beneficial ownership has far-reaching legal and operational implications as it obscures the real individuals who exercise control over the company, thereby providing access to illegal activities such as money laundering, terrorism financing and tax evasion. ”, adding that such opacity undermines corporate governance by limiting stakeholder oversight and exposing minority shareholders to potential exploitation or fraud.