Section 8 Companies- A Corporate Form of Non-Profit Organisation

India’s rich experience in philanthropy which received more publicity over last few years and many wealthy individuals are coming forward to donate for country’s poor. Non Governmental organizations (NGO) are also playing great role in this process. Tata Trusts, a CSR wing of Tata Group, is directly involving in charitable activities in pursuance to its policy outlined by Mr. Ratan Tata years back. Tata Trusts, is holding two third of tata sons shares, will constitute various charitable programme in various new geographies jointly with government and corporates as part of its philanthropy.

There are mainly 3 types of NGOs in India involved in charitable activities, the details of which are given below:

1. Societies registered under Societies Registration Act 1860 (being Central Act for incorporation of NGO and almost all states of country have adopted the statute for creating its state level authorities).
2. Trusts formed under Indian Trusts Act 1880 (either Private trust or Public trust).
3. Section 8 Company as per Companies Act, 2013 (Section 25 as per Companies Act, 1956).

Companies incorporated not for profit under Sec 8 of the Companies Act, 2013 either as public company or private company, are considered as best form of organizational framework. The statutory reports and audited financials are available online on public inspection. One Person Company (OPC) cannot be incorporated as a Section 8 Company as per the provisions of the Act. The main purpose of section 8 company is mainly for the social welfare of the society. Infosys Foundation, Reliance Foundation, TATA Foundation, Reliance Research Institute are some of the examples of Sec 8 companies registered under the Act. In this article, an attempt has been made to enumerate on various exemption and major provisions applicable to such Companies.

ABOUT SEC 8 COMPANY

As per Sec 8 (1) of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government* that a person or an association of persons proposed to be registered under this Act as a limited company:

• has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

• intends to apply its profits, if any, or other income in promoting its objects; and

• intends to prohibit the payment of any dividend to its members,

the Central Government* may, by license issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”, and thereupon the Registrar of Companies (RoC) shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

* The powers have been delegated to Registrar of Companies vide notification dated May 21, 2014

FEATURES OF SECTION 8 COMPANIES

• Members of such company don’t give any dividend.
• Such company can’t be treated as small company.
• Any profit or income of such company shall be used only for the promotion of its objects.
• A special license is required for its incorporation.
• Such company cannot be converted into one person company
• No minimum share capital required for such company.
• Such company need not use suffix ‘Private Limited’ or ‘Limited’ with its name.
• Articles of Association (AoA) of such company shall be amended only with the prior approval of Central Government ie., RoC.
• Such company shall amalgamate only with another company registered under section 8 of the Act and having similar objects.

Section 8 Company enjoys all the privileges and subject to all the obligations of limited companies. However such companies have following exemptions as detailed below:

IMPORTANT EXEMPTIONS:

1. Any person can be appointed as Company Secretary even if he/she is not a member of Institute of Company Secretaries of India (ICSI).

2. A general meeting may be called by giving 14 clear days notice instead of 21 clear days.

3. It shall be enough for a Section 8 Company to hold at least one meeting within every six calendar months instead of holding four meetings a year.

4. The provision related to recording of minutes of general meetings, board meeting other meetings and resolutions passed by Postal Ballot under Sec 118 of the Act has been withdrawn except where company’s articles provide for confirmation by way of circulation of minutes.

5. The maximum limit of 15 directors and appointment of more than 15 directors by passing special resolution has been withdrawn.

6. Conditions requiring and governing appointment of Independent Directors under Sec 149 (4) to (13) & 150 have also been waived off.

7. Provisions of Sec 160 w.r.t. right of persons other than retiring director to stand for directorship, shall not applicable to these companies whose AoA provide for election of directors by ballot.

8. The maximum limit of directorship a person can hold in more than 20 companies has been relaxed.

9. The provisions related to the meeting of Board od Directors under Sec 173 (1) shall apply to the extent that Board shall meet atleast once in every 6 calendar months.

10. The Quorum for the Board Meeting of such company shall be either 8 members of 25% of total strength whichever is less instead of 2 directors or 1/3^rd of total strength whichever is higher (which is applicable to other companies).

11. Appointment of Independent Directors forming majority in case of Audit Committee of the Company shall not apply pursuant to Sec 177 of the Act.

12. Provisions of Sec 178 of the Act w.r.t constitution of Nomination and Remuneration Committee and Stakeholders Relationship Committee shall not apply to such companies.

13. A partnership firm can become member of a such Company.

14. There is an specific exemption to Section 8 from complying with the Secretarial Standards. However, such companies may comply with secretarial standards in order to have better governance in the company.

INCORPORATION OF SECTION 8 COMPANY: 

REVOCATION OF THE LICENSE

As per the Sec 8(6) of the Act, the Central Government ie RoC may by order revoke the license of the company if the company contravenes

1. any of the requirements of this section or
2. any of the conditions subject to which a license is issued or
3. any activity of the company which are conducted fraudulently or
4. are  in contrast to public interest.

On occurring of such event as given above, the Central Government ie., RoC can direct the company to convert its status to private or public company and change its name by adding the suffix ‘Limited’ or ‘Private Limited’ and there upon the RoC shall register the company accordingly.

The Central Government ie., RoC may, if it is satisfied that it is essential in the public interest, direct such company to be wound up or amalgamated with another company that is registered under this section. But such orders can only be given after the company has been given a reasonable chance to be heard and then a copy of the order shall be filed with RoC.

As per Sec 8 (8) where a licence is revoked under sub-section (6) and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order. 

PENALTY 

In case a company makes any default in complying with any of the requirements laid down in this Section 8 of the Act, the company shall be punishable –

• with fine not less than 10 Lakh rupees and which can be extended up to 1 Crore rupees,
• Every directors and officer of the company in default shall be punishable with imprisonment for a term which can be of three years with fine which shall not be less than 25,000 rupees but which can extend to 25 Lakh rupees,
• Or with both.

SEC 8 COMPANY VS CORPORATE SOCIAL RESPONSIBILITY

Sec 135 of the Act mandates that every class of companies shall constitute Corporate Social Responsibility (CSR) Committee and spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy read  with Sch VII.

It is pertinent to note that Board of Directors of the Company may decide to undertake its CSR acitivies through company established under Section 8 of the Act or registered trust  or a registered society established by the Company either singly or jointly with other companies provided that such company/ trust/ society shall have established track record of 3 years in undertaking similar programmes.

CONCLUSION:

Big corporates are moving towards adherence of the social responsibility and the Corporate form of non profit organization is considered as best for philanthropy including CSR.