## CARO 2020 — Clause (xii): Nidhi Company

### What Is a Nidhi Company?

A Nidhi company is a type of Non-Banking Financial Company (NBFC) recognised under the Companies Act, 2013, whose primary purpose is to cultivate the habit of thrift and savings among its members. It accepts deposits from and lends to its members only.

### Three Reporting Points — Clause (xii)

(a) Net Owned Funds (NOF) to Deposits Ratio:

Whether the Nidhi Company has complied with the Net Owned Funds to Deposits ratio of 1:20 to meet out the liability.

This means: for every ₹1 of Net Owned Funds, the company can accept up to ₹20 in deposits.
Non-compliance signals that the company's deposit base is too large relative to its own funds — a solvency/liquidity risk.

(b) Unencumbered Term Deposits:

Whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability.

These deposits act as a liquidity buffer — they must be free (unencumbered) and readily available.

(c) Default in Payment to Depositors:

Whether there has been any default in payment of interest on deposits or repayment thereof for any period — if so, details must be provided.

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### Memory Aid: Nidhi Clause — "1:20, 10%, Default"

Ratio: 1 : 20 (NOF : Deposits)
Buffer: 10% unencumbered term deposits
Default: interest payment or repayment failures

Worked example

### Example 1

Q (MTP 7 / PYP May 24): You are statutory auditor of a Nidhi company. What are the reporting requirements under CARO 2020?

The auditor must report under Clause (xii) of Paragraph 3 of CARO 2020 on:

(a) NOF to Deposits Ratio: Whether Net Owned Funds to Deposits ratio of 1:20 has been maintained.

Example: If the Nidhi's Net Owned Funds are ₹50 lakhs, it should not have accepted more than ₹1,000 lakhs (₹10 crores) in deposits. If deposits are ₹1,200 lakhs, this is a violation — report it.

(b) Unencumbered Term Deposits: Whether the company holds unencumbered term deposits equal to at least 10% of its total deposits, as required by Nidhi Rules, 2014.

Example: If total deposits are ₹500 lakhs, at least ₹50 lakhs must be held in unencumbered term deposits.

(c) Payment Defaults: Whether there is any default in paying interest to depositors or repaying deposit amounts on maturity. If yes, provide details of amounts and duration of default.

⚠️ Common exam mistakes

Inverting the ratio — it is NOF : Deposits = 1 : 20 (not deposits : NOF).
Confusing 'unencumbered' with any term deposit — the 10% buffer must be free from any charge or lien.
Reporting only on the ratio without addressing the 10% deposit buffer and payment defaults — all three sub-clauses are mandatory.
Assuming Nidhi companies are exempt from CARO 2020 — they are NOT in the exemption list and are subject to CARO 2020, including this specific clause.

Bare-Act text Paragraph 3, Clause (xii) · Companies Auditor's Report Order, 2020 · click to expand

Clause (xii): (a) whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1:20 to meet out the liability; (b) whether the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability; (c) whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof.

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CARO 2020 — Nidhi Company Reporting [Clause xii]

Worked example

⚠️ Common exam mistakes