Some companies have charitable and non-profit objectives. Such non-profit organizations (NPO) are referred to as a Section 8 Company because they get recognition under Section 8 of Companies Act, 2013. The concept of Section 8 companies was introduced in Companies Act 1913 that permitted companies with charitable objects etc. to be registered without the words ‘Limited’ or ‘Private Limited’. Section 8 of the Companies Act, 2013 continues to provide for restriction on application of profits and permits the same only for the purpose for which the company is promoted, prohibits declaration of dividend. It continues to permit partnership firms to be a member of section 8 companies etc. 2013 Act elaborates on the objects for such companies and specifies objects like sports, education, research, social welfare and protection of environment for which the Companies can be formed under this section.
In India, there are mainly the following types of non-profit organizations i.e., Section 8 Companies (earlier Section 25 of 1956 Act):
- Societies registered under section 20 of the Societies Registration Act 1860.
- Trusts formed under Indian Trusts Act 1882
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Objects and Restrictions for Non-Profit Companies Under the Act:
Any person or an association of persons intending to register a limited liability company for objects specified below can opt to apply for registration of Section 8 Company. The following have to be proved to the satisfaction of the Central Government that:
(a) its objects include promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
(b) the company after incorporation intends to apply its profits, if any, or other income in promoting such objects only; and
(c) the company intends to prohibit the payment of any dividend to its members.
Characteristics of Non-Profit Companies:
- A non-profit companies can be formed for promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object.
- The Companies Act, 2013 allows the application of profits and permits the same only for the purpose for which the company is promoted.
- Such companies can function only if they have the Central Government’s license. The Government can revoke this license as well.
- The Companies Act, 2013 prohibits declaration of dividend.
- Section 8 companies, unlike all other companies, do not require a prescribed minimum paid-up share capital.
- Registrars of Companies of respective jurisdictions are delegated with the powers of Central government to issue license to Section 8 Companies.
- Section 8 Company may be incorporated as a company limited by shares or by Guarantee (with or without share capital).
- A company with unlimited liabilities cannot be registered as a Section 8 Company.
- As per rule 8(7) of the Companies (Incorporation) Rules, 2014, for the Companies under Section 8 of the Act, the name shall include the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust and the like etc.
- Review of Form INC 13 clarifies that a memorandum of association of a Section 8 Company may inter-alia provide for the doing of all such other lawful things as considered necessary for the furtherance of the objects for which the company has been incorporated.
- Articles of Association of a Section 8 Company can have entrenchment clause in terms of provisions of section 5(3).
- Rule 3 of the Companies (Incorporation) Rules, 2014 prohibits a one person company to be incorporated as section 8 company or to convert into a Section 8 Company.
- Under the Companies Act, 2013, a Partnership firm or an LLP can become the member of Section 8 Company.
- Section 8 company can promote another company and be a holding company of another company.
- A Section 8 Company can be converted into any other company including OPC as prescribed under Section 8(4)(ii) read with Rules 21 and 22 of Companies (Incorporation) Rules, 2014. This is further subject to restrictions and compliances as per other applicable laws including Income tax Act, 1961.
- Since these companies possess charitable objectives, the Companies Act has accorded several benefits and exemptions to them.
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Procedure for Incorporation of a Section 8 Company:
To incorporate a Section 8 Company, an application shall be made to the Registrar of Companies in Form no. INC.12, which shall be accompanied, inter alia, by the following documents:
- Draft Memorandum of Association (MOA) and Articles of association (AOA) of the Company in prescribed format (Form no. INC – 13) where the photographs of subscribers are affixed.
- A Declaration is to be attached in Form no. INC-14 (on the stamp paper, duly notarized) 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 there under and all the requirements under section 8 have been complied with.
- 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.
- A declaration (in Form no. INC-15) on stamp paper duly notarized by each of the persons making the application and
- Form no. INC-9 from each subscriber and first directors, on appropriate stamp paper of the State and duly notarized.
Consequences of Contravening Section 8 of Companies Act, 2013:
The Central Government may
- Revoke the licence issued and covert the status and change its name to add the words ‘Limited” or “Private Limited” as the case may be.
- Order for amalgamation of company with similar objects
- Order for winding up.
- Section 8 Company and the respective officer in default is liable for penalty prescribed.
Revocation of License of Non-Profit Companies:
According to Section 8(6) of the Companies Act, 2013, the Central Government may, by order, revoke the licence 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 licence 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, and 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 ―Limited or the words ―Private Limited, as the case may be, to its name and 29 thereupon the Registrar shall, without prejudice to any action that may be taken under sub-section (7), on application, in the prescribed form, register the company accordingly: Provided that no such order shall be made unless the company is given a reasonable opportunity of being heard: Provided further that a copy of every such order shall be given to the Registrar.
The Government can even order the company to be wound-up or amalgamated with another similar company under certain circumstances. The Government has to hear the company before passing such orders.
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Conclusion:
The concept of Section 8 companies was introduced in Companies Act 1913 that permitted companies with charitable objects. Section 8 of the Companies Act, 2013 continues to provide for restriction on application of profits and permits the same only for the purpose for which the company is promoted, prohibits declaration of dividend. The Companies Act, 2013 elaborates on the objects for such companies and specifies objects like sports, education, research, social welfare and protection of environment for which the Companies can be formed under this section. the Central Government may, by order, revoke the licence 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 licence 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.
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