Financial Activity Can't Glissade Into Situation Where Its Operations Become Impossible: Kerala HC Issues Directions On Status Of Nidhi Companies

The Kerala High Court recently held that any financial activity ought to be regulated reasonably within the ambit of law, and it cannot glissade into a situation where its operations become impossible, or are defeated by oppressive or impossible restrictions and regulations. The High Court held so while finding force in the apprehensions of the “Nidhi Companies” that amendment to Section 406 of the Companies Act, 2013 will authorise the Government to bring in changes to the Nidhi Rules, 2014, to en-draft Rules 3A and 23A thereby rendering their existence & operations impossible. A Single Bench of Justice Devan Ramachandran observed that “in the case of any right vested to any individual or class of persons/entities, necessary regulatory mechanism and reasonable restrictions are desideratum, if not imperative, especially when public money is involved. Such cannot be challenged, if they are reasonable in nature and are within the constitutional perimeter”. (Para 10) As per the brief facts of the case, the petitioners stated to be 'Nidhi Companies' operating under the Companies Act, 1956, called into question the amendments brought to Section 406 of the Companies Act, 2016, through Act 1 of 2018, whereby, the obtention of declaration as a 'Nidhi Company' has been made mandatory. The petitioner asserted that this marks a deviation of the statutory regime applicable until now, taking it back to the era of the Companies Act, 1956, under which Section 620A thereof, required such declaration as a mandatory requisite. They pleaded that under the guise of regulation, particularly Rules 3A and 23A of Nidhi Rules 2014, conditions are being imposed, which is not possible for any of them to comply with; and hence most of them stand denuded of their status as a 'Nidhi Company'. Thus, they challenged the amendments brought into Section 406 of the Companies Act, 2013, as well as the corresponding amendments made into the Nidhi Rules, 2014, as being illegal, unlawful, and unconstitutional. This was opposed by the counsel for Respondent i.e., Solicitor General of India, that the primary reason, which persuaded the Government of India to consider an effective regulatory mechanism for 'Nidhi Companies', was that complaints were being received on a regular basis from various sources, including stake holders, State Level Co-ordination Committees and such other, regarding deleterious malpractices indulged by various “Nidhi” companies. The counsel stated that these companies used to refuse repayment of matured amount with interest and lure members with exorbitant promises and expensive gifts through advertisement and then blatantly violates them. It was also alleged that they refused permission to members to withdraw from their own amounts; and, in some cases, Directors and Promoters absconded, so as to avoid repayment of deposit by small investors. Thus, it was pleaded that unless their operations are well regulated and brought under an effective monitoring scanner, it would benefit no one, but would operate as a great detriment to bonafide investors, who are generally from small towns and who make small investments from their hard-earned money. When the petitions were earlier listed on Nov 22, 2023, the Court had ordered thar all coercive action against the petitioner shall stand deferred till Nov 24, 2023. At the same time, the Court had also stated that the petitioner companies shall not enrol any new members beyond 10% of the existing membership. The Court directed the Petitioners to ensure that all deposits and loans to new members will be in compliance with the guidelines provided under the Companies Act, 1956, as also the Nidhi Rules, 2014; and granted liberty to the respondents to take necessary action in case of any violation in this regard. The Court also directed the petitioner not to create any charge over the deposit of the members and they will be obligated to file returns as required in law, which will be subject to further orders. The Bench observed that during such earlier listing, Deputy Solicitor General (DSG) had assured that new regime could be streamlined to give an opportunity to the desirous petitioner companies to make fresh applications under “NDH-4” format as is mandated under the “Nidhi Rules, 2014”, however, on condition that they apply for compounding of all offences committed qua the pre-amendment era. The DSG re-affirmed that, if the “Nidhi Companies” are to apply for compounding the offences committed earlier, it would be considered in the afore perspective and with the empathy it deserves; but, of course, after verifying and confirming absence of criminality, on a case-to-case basis, added the Bench. Opposing the same, the counsel for Petitioner reiterated that the petitioner companies were faced with the prospect of being burdened with large sums as compounding fees which is as...

Financial Activity Can't Glissade Into Situation Where Its Operations Become Impossible: Kerala HC Issues Directions On Status Of Nidhi Companies

Pankaj Bajpai

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