Law Relating To Section 8 Companies (Non-Profit Organisation)
Section 8 of the Companies Act, 2013 provides for a mechanism through which an Association can be registered as a Company, if such association is formed for promoting commerce, art, science, religion or any other useful object and intends to apply its profits/income in promoting its objects. The objective of this provision is to provide corporate personality to such Associations but at the same time exempting them from some of the cumbersome legal requirements. Section 8 companies also plays very important role in compliance of the provisions of corporate social responsibility. Under the provisions of Section 8 of the Companies Act, 2013, a company can also be formed for non-profit objectives. These may not be charitable. These companies are also allowed to drop the words â€˜limitedâ€™ or â€˜private limitedâ€™ from their names. The promoters while deciding whether to register themselves as a society or as section 8 company may keep the following distinctive feature in mind:
WHO CAN FORM A SECTION 8 COMPANY
- Any two or more persons or association of persons (including a partnership firm)
- Any existing company
Here it is important to mention that One Person Company cannot be a Section 8 Company. (Rule 3(5)) of Company Incorporation Rules.
PROCEDURE FOR INCORPORATION OF SECTION 8 COMPANY
Obtain Digital Signatures
Nowadays various document prescribed under the Companies Act, 2013, are required to be filed with the digital signature (DSC) of the Managing Director or Director or Manager or Secretary of the Company, therefore, it is compulsorily required to Obtain a Class II Digital Signature Certificate from authorized DSC issuing Company for at least one director to sign the E-forms related to incorporate like form INC.1 and other documents.
Obtain Director Identification Number
As per 153 of the Companies Act, 2013, every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number in form DIR.3 to the Central Government in such form and manner and along with such fees as may be prescribed.Therefore, before submission of e-Form INC.1 for availability of name, all the directors of the proposed company must ensure that they are having DIN and if they are not having DIN, it should be first obtained.
Name availability for proposed company
As per section 4(4) read with Rule-9 of Companies (Incorporation) Rules, 2014, application for the reservation/availability of name shall be in Form no. INC.1 along with prescribed fee of Rs. 1,000/-. In selection of Company name should be in accordance with name guidelines given in Rule-8 of Companies (Incorporation) Rules, 2014. The name will be valid for a period of 60 Days from the date on which the application for Reservation was made. After approval of name ROC will issue a Name availability letter w.r.t. approval for availability of name for a proposed company.
Preparation of the Memorandum of Association (MOA) and Articles of Association (AOA)
Drafting of the MOA and AOA is generally a step subsequent to the availability of name made by the Registrar. It should be noted that the main objects should match with the objects shown in e-Form INC.1. These two documents are basically the charter and internal rules and regulations of the company. Therefore, it must be drafted with utmost care and with the advice of the experts and the other object clause should be drafted in a very broader sense. The memorandum of association of the proposed company shall be in Form No.INC.13.
License under section 8 for new companies with charitable objects
Obtaining License under Section 8 of the Companies Act is compulsory for incorporating a Company under this Section. The Central Government has entrusted the power to grant License under Section 8 to the respective Registrar of Companies. A person or an association of persons desirous of incorporating a company with limited liability under sub-section (1) of section 8 without the addition to its name of the word â€œLimitedâ€, or as the case may be, the words â€œPrivate Limitedâ€, shall make an application in Form No.INC.12, along with the prescribed fee, to the Registrar for a license under sub-section (1) of section 8.
- Main attachments of Form INC.12 would be as follows:
- The memorandum of association of the proposed company shall be in Form No. INC-13.
- The draft Articles of Association of the proposed company.
- The declaration in Form No.INC.14 by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in practice, that the draft memorandum and articles of association have been drawn up in conformity with the provisions of section 8 and rules made thereunder and that all the requirements of the Act and the rules made thereunder relating to registration of the company under section 8 and matters incidental or supplemental thereto have been complied with;
- The declaration by each of the persons making the application in Form No. INC-15.
- 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;
On being satisfied that the required conditions has been fulfilled, the Central Government may issue the license. The license shall be in Form No. INC-16 (for newly incorporated) or Form No. INC-17 (for conversion), as the case may be, and the Registrar shall have power to include in the license such other conditions as may be deemed necessary by him. The Registrar may direct the company to insert in its memorandum, or in its articles, or partly in one and partly in the other, such conditions of the license as may be specified by the Registrar in this behalf and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section.
- A company registered under this section shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government.
- The company registered under this section shall enjoy all the privileges and be subject to all the obligations of limited companies.
REVOCATION OF LICENSE
License issued under section 8 can be revoked on account of non compliance of any of the provisions relating to grant of the License and conditions of the said license. Central Government has power to revoke the license granted to a company under section 8 of the Act. Sub-section (6) of the section 8 of the act states that the Central Government may, by order, revoke the license granted to a company registered under this section if the company contravenes any of the requirements of this section or any of the conditions subject to which a license is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest.
The central Government, without prejudice to any other action against the company under this Act, direct the company to convert its status and change its name to add the word â€œLimitedâ€ or the words â€œPrivate Limitedâ€, as the case may be, to its name and thereupon the Registrar shall, without prejudice to any action that may be taken, on application, in Form No. INC.20 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 to convert its status and change of name accordingly.
CONVERSION OF SECTION 8 COMPANY INTO ANY OTHER COMPANY
A company registered under section 8 of the act can convert itself into a company of any other class or kind. To convert, the company needs to comply the below mentioned procedure.
A company registered under section 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion.
The explanatory statement annexed to the notice convening the general meeting shall set out in detail the reasons for opting for such conversion including the following:
- Date of incorporation of the company;
- The principal objects of the company as set out in the memorandum of association;
- Reasons as to why the activities for achieving the objects of the company cannot be carried on in the current structure i.e. as a section 8 company;
- If the principal/main objects of the company are proposed to be altered, what would be the altered objects and the reasons for the alteration;
- What are the privileges/concessions currently enjoyed by the company, such as tax exemptions, approvals for receiving donations/contributions including foreign contributions, land and other immovable properties, if any, that were acquired by the company at concessional rates/prices or gratuitously and, if so, the market prices prevalent at the time of acquisition and the price that was paid by the company, details of any donations or bequests received by the company with conditions attached to their utilization etc.
- What would be the impact of the proposed conversion on the members of the company including details of any benefits that may accrue to the members as a result of the conversion.
A certified true copy of the special resolution along with a copy of the Notice convening the meeting including the explanatory statement shall be filed with the Registrar in Form No. MGT.14 along with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 and then the company shall file an application in Form No. INC.18 with the Regional Director with the fee as provided in Companies (Registration, Offices and Fees) Rules, 2014 along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for converting itself into a company of any other kind and a copy of the same application shall also be filed with the Registrar.
The company shall, within a week from the date of submitting the application to the Regional Director, publish a notice at its own expense, and a copy of the notice, as published, shall be sent forthwith to the Regional Director. The said notice shall be in Form No. INC.19 and shall be published.
- At least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district;
- on the website of the company, if any, and as may further be notified/directed by the Central Government.
The company shall send a copy of the notice, simultaneously with its publication, together with a copy of the application and all attachments by registered post or hand delivery, to the Chief Commissioner of Income Tax having jurisdiction over the company, Income Tax Officer who has jurisdiction over the company, the Charity Commissioner, the Chief Secretary of the State in which the registered office of the company is situated, any organization or Department of the Central Government or State Government or other authority under whose jurisdiction the company has been operating. If any of these authorities wish to make any representation to Regional Director, it shall do so within sixty days of the receipt of the notice.
The Board of directors shall give a declaration to the effect that no portion of the income or property of the company has been or shall be paid or transferred directly or indirectly by way of dividend or bonus or otherwise to persons who are or have been members of the company or to any one or more of them or to any persons claiming through any one or more of them.
Where the company has obtained any special status, privilege, exemption, benefit or grant(s) from any authority such as Income Tax Department, Charity Commissioner or any organization or Department of Central Government, State Government, Municipal Body or any recognized authority, a â€œNo Objection Certificateâ€ must be obtained, if required under the terms of the said special status, privilege, exemption, benefit or grant(s) from the concerned authority and filed with the Regional Director, along with the application.
The company should have filed all its financial statements and Annual Returns upto the financial year preceding the submission of the application to the Regional Director and all other returns required to be filed under the Act up to the date of submitting the application to the Regional Director.
The company shall attach with the application a certificate from practicing Chartered Accountant/ Company Secretary in practice/ Cost Accountant certifying that the conditions laid down in the Act and these rules relating to conversion of a company registered under section 8 into any other kind of company, have been complied with.
The Regional Director may require the applicant to furnish the approval or concurrence of any particular authority for grant of his approval for the conversion.
On receipt of the application, and on being satisfied, the Regional Director shall issue an order approving the conversion of the company into a company of any other kind subject to such terms and conditions as may be imposed in the facts and circumstances of each case including the following conditions:
- The company shall give up and shall not claim, with effect from the date its conversion takes effect, any special status, exemptions or privileges that it enjoyed by virtue of having been registered under the provisions of section 8;
- If the company had acquired any immovable property free of cost or at a concessional cost from any government or authority, it may be required to pay the difference between the cost at which it acquired such property and the market price of such property at the time of conversion either to the government or to the authority that provided the immovable property;
- Any accumulated profit or unutilized income of the company brought forward from previous years shall be first utilized to settle all outstanding statutory dues, amounts due to lenders claims of creditors, suppliers, service providers and others including employees and lastly any loans advanced by the promoters or members or any other amounts due to them and the balance, if any, shall be transferred to the Investor Education and Protection Fund within thirty days of receiving the approval for conversion; Before imposing the conditions or rejecting the application, the company shall be given a reasonable opportunity of being heard by the Regional Director.
On receipt of the approval of the Regional Director
The company shall convene a general meeting of its members to pass a special resolution for amending its memorandum of association and articles of association as required under the Act consequent to the conversion of the section 8 Company into a company of any other kind and thereafter shall file with the registrar a certified copy of the approval of the Regional Director within thirty days from the date of receipt of the order in Form No. Inc.20 along with the following documents:-
- Amended memorandum of association and articles of association of the company.
- A declaration by the directors that the conditions, if any imposed by the Regional Director have been fully complied with.
On receipt of the required documents, the Registrar shall register the documents and issue the fresh Certificate of Incorporation.
CONVERSION OF ANY OTHER CLASS OF COMPANY INTO SECTION 8 COMPANY
Any other class of Company can be converted into Section 8 Company after following the prescribed procedure as given below:
- Adoption of the new Memorandum of Association (MOA) and Articles of Association (AOA) :Â New set of Memorandum of Association (in e-form INC-13) and Articles of Association should be adopted by passing Special Resolution in the Extraordinary General Meeting (EGM) after proposing it in the Board Meeting by passing Board Resolution.
- Follow the procedure mentioned in Point No. 5 and Point No.7 under the head PROCEDURE FOR INCORPORATION OF SECTION 8 COMPANY
- On being satisfied that the required conditions have been fulfilled, the Central Government may issue the license in Form No. INC-17
- File Application for approval of Central Government for change of name in form INC-24.
- On satisfaction of all the conditions ROC shall issue the new certificate of incorporation in form INC-25.
EXEMPTIONS TO SECTION 8 COMPANIES UNDER COMPANIES ACT 2013
(vide Notification dated 05.06.2015)
- Provision of Section 2(24) relating to Company Secretary shall not apply to Section 8 Company
- The provision given under Section 2(68) and 2(71) relating to requirement of minimum paid up share capital of Private Company and Public Company respectively shall not apply to Section 8 Company.
- A general Meeting of Section 8 Company may be called by giving not less than clear fourteen days notice.
- In sub section 2 of section 96, the following clause has been added before the explanation and after the proviso:
â€œProvided further that the time, date and place of each annual general meeting are decided upon before-hand by the board of directors having regard to the directions, if any, given in this regard by the company in its general meeting.
- Provision contained under Section 118 relating to Minutes of proceedings of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballot shall not be applicable to Section 8 Company.
Except that minutes, may be recorded within thirty days the conclusion of every meeting in case of Companies where the articles of association provide for confirmation of minute by circulation.
- A copy of the financial statements, including consolidated financial statements, if any, auditorâ€™s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, 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, not less than fourteen days before the date of the meeting
- Provision Contained under Section 149(1) and first proviso to Subsection (1) which is relating to minimum and maximum number of Directors in a Company shall not applicable to Section 8 Company.
- Provision Contained under following:
- Section 149(4) relating to number of Independent Directors
- Section 149(5) relating to time period provided for compliance of Section 149(4)
- Section 149(6) relating to definition of Independent director
- Section 149(7) relating to declaration by Independent director
- Section 149(8) relating to Compliance of provision specified under Schedule IV
- Section 149(9) relating to remuneration of Independent director
- Sction 149(10) and 149(11) relating to term of Independent director
- Section 149(12)(i) relating to liability of Independent director
- Section 149(13) relating to non applicability of section 152(6) and 152(7) to appointment of Independent directorÂ Shall not be applicable to Section 8 Company
- Provision contained under Section 150 relating to Manner of Selection Of Independent director shall not be applicable to Section 8 Company.
- Provision contained under Section 152(5) relating to Consent of director to hold the office as director shall not be applicable to Section 8 Company.
- Provision contained under Section 160 relating to right of persons other than retiring director to stand for directorship shall not be applicable to Section 8 Company whose articles provide for election of directors by ballot.
- Provision contained under Section 165(1) relating to number of directorships.
- Provision contained under Section 173(1) relating to Meetings of Board shall apply to the extent that the Board of Directors of Section 8 Company shall hold at least one meeting within every six calendar months.
- The quorum for meeting of Board shall be either eight members or twenty five percent of its total strength whichever is less.
- Provided that the quorum shall not be less than two members
The provision contained under Section 177(2) relating toâ€ independent directors forming a majority in Audit Committeeâ€ shall not be applicable to Section 8 Company.
- The provisions contained under Section 178 relating to Nomination and Remuneration Committee and Stakeholders Relationship Committee shall not be applicable to Section 8 Company.
- The Board may decide the following matters by circulation instead of at meeting:
(i) to borrow monies
(ii) to invest the funds of the Company
(iii) to grant loans or give guarantee or provide security in respect of loans
- The provision contained under Section 184(2) relating to disclosure of interest by director shall apply only if the transaction with reference to section 188 on basis of terms and conditions of the contract or arrangement exceeds one lakh rupees
- The provision contained under Section 189 relating to register of contracts or arrangements in which directors are interested shall apply only if the transactions with reference to Section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.
Applicable Provisions: Section 8 and 447 of the act
Sub-section (11) of the section 8 of the act states that if a company makes any default in complying with any of the requirements laid down in this section, the company shall, without prejudice to any other action under the provisions of this section, be punishable with fine which shall not be less than ten lakh rupees but which may extend to one crore rupees and the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than twenty-five thousand rupees but which may extend to twenty-five lakh rupees, or with both:
Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447 of the Act.