• Nov
  • 10
  • 2009

Government planning to allow section 25 companies to set up higher educational institutions

Posted In Company Law | No Comments » Print Friendly and PDF

The government is planning to permit corporate houses to set up higher educational institutions — like multi-disciplinary universities and colleges — by floating a separate not-for-profit entity under Section 25 of the Companies Act 1956.

A not-for-profit entity is one that does not distribute its surplus funds to owners or shareholders. It, instead, reinvests these in the institute. Many private universities in India have been set up under Section 25 of the Companies Act.

However, deemed universities are not covered by the Act.

“We have received requests demanding this route. The government is exploring the possibility, as it could be allowed under Section 25 of the Companies Act,” confirmed Sunil Kumar, joint secretary, ministry of human resource development, on the sidelines of the Ficci summit on higher education.

MHRD officials, too, acknowledged that the human resource development minister Kapil Sibal was keen on the entry of companies through this route.

At present, educational institutions in India can be set up only by trusts, societies or companies, and it is not possible for non-profit companies, like industry associations, under Section 25 of the Companies Act, to set up institutions and get recognition from the University Grants Commission.

In the primary and secondary education space, however, the Central Board of Secondary Education allowed companies registered under the Act to start private unaided schools last year.

Some higher education institutions have taken this route in the technical education space to escape policing by the All India Council for Technical Education — the body that regulates technical education in the country. For instance, many management schools have gone the Indian School of Business way, opting for a one-year management programme (against the conventional two-year courses), and have registered themselves under Section 25 of the Act.

The Mumbai  Business School, which began operations in suburban Mumbai a few months ago, is a case in point.

The school is registered under the Act as a private entity. Its promoters include A Mahendran, managing director, Godrej  Sara Lee, and Santosh Desai, CEO, Future Brands.

This measure, industry observers reason, could provide more power to non-government organisations to enter into mainstream education rather than merely being supplementary-aiding centres.

NGOs have been viewed as ‘aids’ to the formal education sector. Very few of them have received recognition as schools or colleges.

Educational institutions in India, which are set up by trusts or societies come under the purview of the Charity Commissioner, who is appointed by a state government.

Section 25 of the Act, on the other hand, comes under the Central Board of Direct Taxes, thus reinforcing the control of the Centre and not the state over the manner in which the institutions are run and financed.

However, in both the structures – non-profit or society and trust — profits cannot be taken out of the institution and have to be reinvested. Institutions registered under the Act have to use their profits, if any, in promoting the institutions. The Act also prohibits the payment of any dividend to its members.

The association may enjoy all the privileges of charitable trusts, but are scrutinised by the Income-Tax department and not charity commissioner, unlike limited companies.

MHRD says it is still studying the way out for students if an institution set up under the Act winds up and its assets are to be transferred to another similar institution.

“As of today, if an institution set up by a society winds up, its operation and properties are transferred to another institution. But in this case, we are still studying what route a non-profit entity could acquire if it faces a similar issue,” added an HRD official.

Experts add, this arrangement will allow standards for centrally-administered institutes to be cleared by one central authority rather than different standards for different states.


Leave a Reply

GET FREE EMAIL UPDATES