Companies Act Section 406

Companies Act, Section 406: Provisions Relating to Nidhis or Mutual Benefit Societies and Their Application

Section 406 of the Companies Act, 2013 deals specifically with the regulation and treatment of Nidhis, also known as Mutual Benefit Societies, within the corporate legal framework of India. A Nidhi is a unique type of financial institution formed with the primary objective of cultivating the habit of thrift, saving, and mutual benefit among its members. This section provides the Central Government with the authority to recognize such companies and govern the applicability of certain provisions of the Companies Act to them.

1. Definition of Nidhi / Mutual Benefit Society

A “Nidhi” or “Mutual Benefit Society” is a type of company that the Central Government, through a notification in the Official Gazette, formally declares as a Nidhi or Mutual Benefit Society.
This means a company cannot call itself a Nidhi merely by name   it must be officially recognized by the Government through a formal declaration.
Such companies typically operate to accept deposits and lend funds only to their members, functioning on the principle of mutual benefit.

2. Power of the Central Government to Modify the Applicability of the Act

The Central Government may issue a notification specifying that certain provisions of the Companies Act:

a) Shall not apply to Nidhis or Mutual Benefit Societies.
b) Shall apply with specific exceptions, modifications, or adaptations as stated in the notification.

This flexibility allows the Government to tailor governance rules for Nidhis, as these institutions operate differently from normal commercial companies. The modifications ensure that regulations suit their mutual-benefit and community-based functioning.

3. Parliamentary Oversight for Notifications

Every notification intended to be issued under sub-section (2) must first be placed in draft form before both Houses of Parliament. The draft remains before Parliament for a total of 30 days during session time.
If both Houses agree to reject the notification, it shall not be issued to modify it. The notification shall be issued only in the modified form
This ensures democratic scrutiny and prevents arbitrary changes in the law that regulates Nidhis.

4. Calculation of the 30-Day Period

In counting the 30 days, any period when either House is:
Prorogued (formally closed), or Adjourned for more than four consecutive days must be excluded.
This avoids delays in scrutiny due to parliamentary breaks and ensures the full period is available for proper examination.

5. Placement of Final Notification Before Parliament

After the notification is finalized and issued, it must be laid before each House of Parliament at the earliest possible opportunity.
This provides transparency and ensures legislators are informed of the regulatory changes affecting Nidhis.