The IBC’s Dirty Secret: How Nidhi Borrowers Vote Themselves Rich at Savers’ Expense

[Devansh and Yuti are students at Dr Ram Manohar Lohiya National Law University.]

When a Nidhi fails, one depositor wants her deposit back while another wants to set off his own deposit against his loan. While both are depositors, the two have conflicting objectives. A member-based institution becomes divided on which class of depositor should be entitled to the assets of the Nidhi.

The Insolvency and Bankruptcy Code 2016 (IBC) places Nidhis in a difficult position. Two frameworks could apply to Nidhis – ordinary corporate insolvency and the special regime for financial service providers (FSPs). The distribution of assets becomes problematic. Treating the depositors of Nidhis as a single class exacerbates the situation. A Nidhi-specific protocol should address the issue of the netting of deposits and loans before the insolvency process commences.

A Mutual Body Engaged in a Corporate Process

Nidhis attract deposits from, and make loans to, their members only. They do so under Section 406 of the Companies Act 2013; Rule 6(1)(f) of the Nidhi Rules 2014 bars them from dealing with anyone else. Under Rule 15(4)(c), members may draw loans against fixed deposit receipts pledged with the Nidhi. One person can therefore be a member, creditor and debtor at once. The Nidhi’s assets include loans owed by its own creditors – a situation that an ordinary corporate insolvency resolution process (CIRP) does not handle well.

The changes that took effect on 15 August 2019 – Section 406(1) as substituted by the Companies (Amendment) Act 2017, and the new Rule 3A of the Nidhi Rules – restored the requirement of a Central Government declaration. The Nidhi (Amendment) Rules 2022 require newly incorporated Nidhis to obtain this declaration before accepting deposits, and require their promoters and directors to meet ‘fit and proper’ criteria. Economic viability alone does not show whether the rescued company may keep accepting deposits, and CIRP has no Nidhi-specific mechanism tying the rescue to these criteria. A resolution plan may keep the business economically viable without answering whether it can still function as the mutual institution its members signed up to.

Why is the FSP Route Not Applicable?

Deposit-taking is by itself a financial service under Section 3(16)(a) of the IBC. However, under Section 3(17), an FSP must operate under an authorisation or registration granted by a financial sector regulator. Section 3(18) names four such regulators – the RBI, SEBI, IRDAI and PFRDA – and allows the Central Government to notify others. Nidhis, by contrast, get their declaration from the Central Government, acting through the MCA, and no regulator has been notified for them under Section 3(18).

On the better view, therefore, Nidhis are not FSPs. The special route under Section 227 would open only if an authority were notified as their regulator under Section 3(18) and Nidhis were then notified as a category under Section 227 itself; until then, the matter is left to ordinary CIRP. The Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules 2019 (FSP Rules) have been applied to non-banking financial companies with assets of INR 500 crore or more. They offer useful guidance but do not extend to Nidhis. Nidhis therefore need a customised protocol within CIRP.

A Class of Depositors with Contrary Interests

Nidhi depositors are a class of financial creditors covered by Section 21(6A)(b). Under the first proviso to Section 7(1), such creditors can initiate CIRP only through a joint application by at least 100 creditors in the same class, or ten per cent of that class, whichever is less. After admission, an insolvency professional is appointed as the authorised representative (AR) of the class. Under Section 25A(3A), the AR must cast the entire class’s vote in line with the decision of more than fifty per cent of the voting share of the class members who vote.

A sharper split than among homebuyers

Homebuyers are the best-known class voting through an AR: in Pioneer Urban Land and Infrastructure Limited v. Union of India, the Supreme Court upheld the 2018 amendment treating them as financial creditors. Class voting has been criticised for letting the majority override individual creditors’ preferences. Homebuyers may disagree over refunds or completion of the project, but all of them remain creditors of the developer. The conflict is sharper in Nidhis because some creditors also owe money to the estate: one member’s loan is an asset of the very estate from which the other members’ deposits must be repaid.

The conflict arises when a member has borrowed against his own deposit. If that deposit is set off against the loan, the loan is discharged out of the deposit – in effect, the borrower recovers his deposit in full, up to the amount of the loan, while pure depositors share pro rata in whatever remains. Whether such set-off survives in CIRP is unclear: in Bharti Airtel Limited v. Vijaykumar V Iyer, the Supreme Court held that CIRP does not recognise insolvency set-off, while leaving room for contractual and equitable set-off. This uncertainty falls on a class that is structurally divided over the answer. Borrower-members will vote for a plan that grants set-off; pure depositors will vote against it. The vote cannot create a legal right of set-off, but it does fix the class’s position on how the plan deals with the question.

No exit through dissent

Further, in Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Limited, the Supreme Court held that homebuyers outvoted within their class cannot be treated as dissenting financial creditors for the purposes of Section 30(2)(b). Applied to Nidhis, pure depositors who are outvoted lose the protection given to dissenting financial creditors. That protection now sits in Section 30(2)(ba), inserted by the IBC (Amendment) Act 2026. It guarantees dissenting financial creditors only the lower of what they would receive in liquidation and what they would receive if the plan value were distributed under the Section 53 waterfall – a floor that outvoted Nidhi depositors cannot claim at all.

Individualised voting would reflect each member’s choice in each instance; however, the underlying entitlements would remain unresolved. Each member of the class would still judge the plan by how it treats their deposits and loans. The underlying issue involves both the structure of the class and when the right of set-off should apply.

Lessons from the United States: A Comparative Analysis

The lesson of the US case is that the determination of entitlements must take place in advance of an insolvency proceeding and not during one.

Credit unions: Legal solutions to set-off problems

The same issues arise with regard to credit unions in the United States, where the members of the credit union hold their savings as shares in the credit union, as well as possibly borrowing funds from the credit union. Under 11 USC § 109(b)(2) and (d), credit unions are not able to be debtors in the Chapter 7 and Chapter 11 bankruptcy processes. Instead, they are subject to the National Credit Union Administration (NCUA), which has powers of conservatorship and liquidation pursuant to 12 USC §§ 1786–1787. In this regard, 12 USC § 1757(11) enables the federally chartered credit union to be deemed to have the right to ‘impress and enforce a lien’ on the shares and dividends of a member, up to the amount of any value obtained by the member through a loan. This entitlement is fixed by statutory law so that it does not lead to a conflicted decision-making process.

Where the analogy ends

However, the analogy is limited in other ways, including the fact that the shares of credit union members in the United States are insured through the National Credit Union Share Insurance Fund, unlike Nidhi deposits, which are not entitled to this protection. Additionally, the NCUA is a specific regulator, while the MCA is largely regulatory with regard to company registrations in general. Thus, India should borrow the idea of fixing entitlements in advance, but should create unique rules to apply the principle to Nidhis.

Creation of a Unique Protocol for Nidhis

Step 1: Screening at the time of admission

The first step in the protocol is to require screening at the time of admission. When the debtor comes to the NCLT, the NCLT must ensure that the corporate debtor actually has a Nidhi declaration, and must not merely rely on the debtor’s own claim to that effect.

Step 2: Splitting the class

In situations where there are true conflicts of interest, it is important that the members be represented in separate classes. The insolvency professional must sort each member’s loan and deposit, creating two classes for the purposes of assigning the AR – pure depositors and borrower-members. Section 21(7) gives the IBBI the ability to determine how to vote and determine voting share; however, it cannot legally split classes. It is important to see this change as a legislative change to be implemented.

Step 3: Predetermination of netting rules

It is essential that the netting rule be established in advance through a provision in the Nidhi Rules whereby all loans made to a member that are secured against his or her own deposit are applied against the member’s deposit on the date of commencement of insolvency.

Step 4: Rescue within the Nidhi rules

Finally, on the model of Rule 5(d) of the FSP Rules, the MCA should clear the resolution plan against the Nidhi Rules – declaration, membership and ‘fit and proper’ norms – before it goes to the NCLT.

Conclusion

The IBC can accommodate Nidhis only if it recognises the community inside their corporate form. In insolvency, members’ interests are partly shared and partly opposed. A sound protocol should settle the entitlements of both groups before insolvency begins, so that one group need not vote against the other.