Section 8 Company: Incorporation, Privileges and Exemptions

Introduction: A Section 8 Company, as per the Companies Act, 2013, is a unique legal entity formed by individuals or associations of persons with the primary objective of promoting activities related to commerce, art, science, sports, education, research, social welfare, religion, charity, or environmental protection. Unlike other companies, a Section 8 Company is distinctive in its commitment to apply any profits or income towards the promotion of its defined objectives, and it explicitly prohibits the distribution of dividends to its members.

A person and association of person can register a company as a Section 8 Company if

• has object with 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 declaration and payment of dividend to its member.

The section 8 company can be incorporated without suffix the word “Private Limited” and “Limited.”

Section 8 company can enjoy all the privileges and be subject to all the obligations of limited companies.

A Firm can also be a member of section 8 company.

INCORPORATION OF SECTION 8 COMPANY

A person or association of persons can file an application in form Spice + (INC 32) to registrar of Companies.

Following are the attachments to the application:

• MOA of the proposed company shall be in form INC-13
• AOA of the proposed company
• Declaration by CA, CS, Cost Accountant, Advocate in practice that MOA and AOA of the proposed company have been drawn up in conformity of section 8 Companies and rules made thereunder. All the requirements of the acts and rules made thereunder have been complied with to register the section 8 company.
• an estimate of the future annual income and expenditure of the company for next three years, specifying the sources of the income and the objects of the expenditure.
• the declaration by each of the persons making the application.

PRIVILEGES/EXEMPTION FOR SECTION 8 COMPANY UNDER COMPANIES ACT, 2013

• The provisions of clause (24) of section 2 shall not apply.
• Requirement of minimum paid up share capital clause (68) and (71) of section 2 the requirement of having minimum paid-up share capital shall not apply.
• Notice for general meeting (Section 101(1) of the Companies Act, 2013)– Section 8 company will send notice of general meeting at least 14 days prior to the date of the meeting instead of 21 days.
• Minutes of the meeting (section 118 of the Companies Act, 2013) -This section shall not apply to section 8 company as a whole except that minutes may be recorded within thirty days of the conclusion of every meeting in case of companies where the articles of association provide for confirmation of minutes by circulation.
• Right of member to copy of audited financial statement (Section 136(1) of the Companies Act, 2013) – A copy of the financial statements shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, within 14 days before the date of the meeting.
• Independent director – Section 149 (4), (5), (6), (7), (8), (9), (10), (11), clause i of sub section 12 and (13) will not apply to section 8 company.
• Manner of appointment of independent director – Section 150 of CA, 2013 is not apply to section 8 company.
• Right of Persons Other than retiring Directors to Stand for Directorship (section 160 of CA, 2013)– This section is not applicable to those section 8 companies whose articles provide for electing directors by ballot.
• Number of Directorships (Section165 (1) of CA, 2013) – This section is not applicable to section 8 company.
• Meetings of the Board (section 173 (1) of CA, 2013) – The Board of Directors of the section 8 company shall hold at least 1 meeting in each half of the calendar year.
• Quorum for Board Meeting (Section 174 (1) of CA, 2013) – Quorum of board meeting for section 8 company would be 8 members or 25% of its total strength whichever is less. Also, another proviso shall be inserted that quorum shall not be less than 2 members.
• Audit Committee (Section 177(2) of the CA, 2013) – As per section 177 (2) requires Audit committee shall have majority of independent director. It is not required for section 8 company.
• Nomination and Remuneration Committee and Stakeholders Relationship Committee (section 178 of the CA, 2013) – This section is not applicable to Section 8 company.
• Power of the Board (section 179 of the CA, 2013) – This section contains certain matters that can be exercised in board meeting by passing resolution. However, the matters as specified in section 173 (d) borrow monies; (e) to invest the funds of the company (f) to grant loans or give guarantee or provide security in respect of loans, may be decided by the board by circulation instead of meeting for section 8 company.
• Disclosure of interest by directors (section 184 (2) of CA, 2013) – This section provides that every director of the company shall disclose his interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting. However, the director of the section 8 company can participate in that meeting after disclosure of his interest.
• Loan and Investment by a Company (section 186 (7) of the CA, 2013) – This section contains that no loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan. For section 8 company the following clause shall be inserted-

“Provided that nothing contained in this sub-section shall apply to a company in which twenty-six per cent. or more of the paid-up share capital is held by the Central Government or one or more State Governments or both, in respect of loans provided by such company for funding Industrial Research and Development projects in furtherance objects as stated in its memorandum of association.”

• Register of contracts or arrangements in which directors are interested (section 189 of CA, 2013) – Section 189 shall apply to section 8 company only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.

Conclusion: A Section 8 Company offers a unique legal structure for organizations with charitable or socially impactful objectives. The privileges and exemptions granted under the Companies Act, 2013, make it an attractive option for entities committed to promoting various social, cultural, educational, or environmental causes. However, individuals considering the formation of a Section 8 Company should adhere to the specific guidelines and requirements outlined by the Act.

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Disclaimer: This article is an opinion of the author. The Author will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person using or relying on information in this publication.