NON-PROFIT COMPANIES
Chambers of Commerce, Trade Associations, Clubs, Charitable Organisations etc. can be registered as 'companies'. However, they are not formed for making profits. Such companies can obtain a licence from Central Government to register the Company under section 8(1) of the 2013 Act - parallel section 25(1) of the 1956 Act. Such companies are called as licensed companies or 'section 8 companies' (earlier section 25 companies under 1956 Act)
A person or an association of persons registered under the Act as a limited Company can obtain licence to omit the words 'Limited' or 'Private Limited' from its name if (a) it 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 (b) it shall apply its profits, if any, or other income in promoting its objects; and (c) it prohibits the payment of any dividend to its members [section 8(1) of the 2013 Act - earlier section 25(1) of the 1956 Act]
The Company registered under section 8 of the 2013 Act shall have all privileges and shall be subject to all the obligations of a limited Company [section 8(2) of the 2013 Act]
The name of such Company is not required to contain the words 'Limited' or 'Private Limited' in its words.
If such a Company has already been registered, licence can be obtained to remove the word 'Limited' or 'Private Limited' from its name. [section 8(5) of the 2013 Act]
Name of section 8 Company must contain specified words - The name of Companies under section 8 of the Act shall include the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust and the like etc. - Rule 8(7) of Companies (Incorporation) Rules, 2014.
Relevant Act: Companies Act, 2013 [Section 8]
Relevant Rules: Companies (Incorporation) Rules, 2014 [Rule 8(7), 19, 20, 21, 22 and 23]
STRUCTURE OF SECTION 8 COMPANY
Section 8 Company can be formed as a private Company or a public Company.
WHO CAN FORM A SECTION 8 COMPANY
1. Any person or association of persons (including a partnership firm)
2. Any existing Company
3. One Person Company cannot be a Sec 8 Company (Rule 3(5))
PRE-INCORPORATION REQUIREMENTS
• At Least 2 Promoters in case of Private Company and 7 Promoters in case of Public Company: Promoters who will promote/ incorporate the Company. Promoters may be individual or body corporate.
• At Least 2 Directors in case of Private Company or 3 Directors in case of Public Company: Directors should be individual only. No Body corporate/ HUF or Partnership Firm can be appointed as Directors.
• Generally, in most of the cases, Promoters and Directors may or may not be same (i.e. promoters of the Company and directors can be different individuals).
• Directors must have DIN (Directors Identification Number)
• One of such two/ three directors must have DIGITAL SIGNATURE who can apply with any of DSC Vender.
VARIOUS METHODS OF FORMING A SECTION 8 COMPANY
There are three methods in which a Section 8 Company could be formed
a. Company Limited by Shares [Section 2(22)]: A Company that has the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a Company limited by shares. For example, a shareholder who has paid Rs. 7 on a share of face value Rs. 10 can be called upon to pay the balance of Rs. 3 only. Companies limited by shares are by far the most common and may be either public or private.;
or
b. Company Limited by Guarantee [Section 2(21)]: A Company that has the liability of its members limited to such amount as the members may respectively undertake, by the memorandum, to contribute to the assets of the Company in the event of its being wound-up, is known as a Company limited by guarantee. The members of a guarantee Company are, in effect, placed in the position of guarantors of the Company's debts up to the agreed amount.;
STEP WISE FORMALITIES FOR FORMATION OF A NEW COMPANY
Persons desirous of forming a company must adhere to the step by step procedure as discussed below:—
I. Selection of type of the company.
II. Selection of name for the proposed company.
III. Apply for Directors Identification Number and Digital Signatures, if does not have
IV. Application for Section 8 License.
V. Drafting of Memorandum and Articles of Association.
VI. Stamping, digitally signing and e-filing of various documents with the Registrar.
VII. Payment of Fees.
VIII. Obtaining Certificate of Incorporation.
NAME OF SECTION 8 COMPANY
Rule 8(7)
The name shall include the words
- Foundation
- Forum
- Association
- Federation
- Chambers
- Confederation
- Council
- Electoral Trust and the like etc.
The name does not include the words “Private Limited” or “Limited”, if license has been obtained.
ELIGIBILTY CRITERIA
1. The main objects should ensure promotion of [Sec 8(1)(a)]
- Commerce
- Art
- Science
- Sports
- Education
- Research
- Social Welfare
- Religion
- Charity
- Protection of Environment
- or any such other object
(2) Intends to apply its profits, if any, or other income in promoting its objects [Sec 8(1)(b)]
(3) Intends to prohibit the payment of any dividend to its Members [Sec 8(1)(c)]
PROCEDURE FOR OBTAINING LICENSE FROM
CENTRAL GOVERNMENT
I For new companies (Rule 19)
- Application in Form RD 1 to be made with ROC. (Now under Spice form)
- Documents to be attached
- Draft copy of Memorandum of Association as per Form INC 13
- Draft copy of Articles of Association (E-AOA under Spice)
- A declaration in Form INC 14 by professional stating that draft of MOA and AOA have been drawn up in conformity with the provisions of Section 8 and rules thereof and that all the requirements of the Act and Rules thereof have been complied therewith.
- Details of promoters and Directors
- An estimate of the future annual income and expenditure of the Company for the next 3 years specifying the sources of income and the objects of the expenditure
- Declaration by the subscribers in Form INC 15.
- A statement specifying briefly the grounds on which the application is made.
- Form INC 12 (Manually filled up and signed)
IF APPROVED LICENSE ISSUED IN Form INC 16.
PROCEDURE FOR INCORPORATION
The procedure for the incorporation of section 8 Company is same as that of normal private or public Company. In addition to this Section 8 Company have to follow the procedure for obtaining license and the Certificate of the same need to be attached with the incorporation form i.e. INC 7 (now INC 32 under Spice).
OTHER PROVISIONS APPLICABLE
The other provisions are as follows :
1. Partnership firm can become member - A partnership firm can be a member of such Company, but on dissolution of the firm, its membership ceases [A partnership firm cannot be a member of any other Company [section 8(3) of the 2013 Act - parallel section 25(4) of the 1956 Act].
2. Company can have different kinds of memberships - In Apparel Export Promotion Council v. All India Garment Exporters Common Cause Guild (2012) 111 SCL 714 (Del HC), the Company had two kind of memberships - member Exporters and Registered Exporters. Member Exporters only have voting rights to elect and be selected as office bearers of the Company. It was held that this is permissible.
3. Revocation of license - Central Government can revoke the licence after giving notice and opportunity of hearing, if the Company violates any of the conditions of the license or the affairs of the Company are conducted fraudulently or prejudicial to public interest. After such revocation, the Company will have to add the words 'Limited' or 'Private Limited' to its name – section 8(6) of the 2013 Act.
Powers to revoke license of Section 8 Company have been delegated to Regional Director vide Notification F No. 1/6/2014-CL.V dated 21-5-2014.
After revocation of licence, the Central Government can order that the Company be amalgamated with another Company registered under section 8 of the 2013 Act or order that the Company be wound up [section 8 (7) of the 2013 Act].
4. Alteration of memorandum or Articles - Such Company cannot alter its Memorandum or Articles without approval of Central Government. The approval will be subject to conditions and regulations as may be specified [Section 8(4)(i) of the 2013 Act – parallel section 25(8)(4)(a) of the 1956 Act].
Powers to permit alteration of Memorandum or Articles of Section 8 Company (except alteration to change existing licensed Company into another Company) have been delegated to Registrar of Companies vide Notification F No. 1/6/2014-CL.V dated 21-5-2014
Powers to alter Memorandum or Articles of existing licensed Company to convert it into another type of Company have been delegated to Regional Director vide Notification F No. 1/6/2014-CL.V dated 21-5-2014.
5. Proxy - Only a member of Company can be appointed as proxy - Rule 19(1) of Companies (Management and Administration) Rules, 2014. [In case of other Companies, proxy need not be a member].
6. Filing of particulars of change of directors - The Company is required to file e-form in respect of change of directors.
7. Winding up - After winding up, if any assets are left, these may be transferred to another Company registered under Section 8 having similar objects, with conditions as may be imposed by NCLT – Section 8(9) of the 2013 Act. [Section 8(9) of the 2013 Act is not notified and hence not effective as NCLT has not been constituted].
8. Income tax provisions - Such Company can get exemption from income tax under Section 10(23C)(iv) of Income Tax Act. Application has to be made to Director General (Income Tax Exemptions) in form No. 56. Such Company can also apply for exemption under Section 80G of Income Tax Act, in respect of donations received by the Company. - - A non profit Company under Section 25 of the 1956 Act (corresponding Section 8 of the 2013 Act) is a mutual concern. Transaction with members is not a trading activity. Excess received from members over expenditure for facilities attached to membership is not 'income' for purpose of Income Tax Act. - CIT v. Bankipur Club Ltd. (1998) 109 STC 427 (SC).
9. Approval of Articles is deemed exemption from provisions of the Act ? - In C P Singhania v. Garware Club House (2003) 46 SCL 659 (Bom HC), the defendant Company was registered under Section 25. It was incorporated to take over as going concern unincorporated association and enroll all its members. The Articles of Association of the unincorporated body provided for election of directors every five years. The entire Articles of the unincorporated association were approved by Central Government while granting license and in fact, was referred and approved in the license itself. The Company could make change in Articles only with permission of Central Government. Clause 41(c) of Articles provided that election of directors will be held every five years. It was held that this amounts to grant of exemption from provisions of Section 255 of Companies Act, which the Central Government is empowered to do under Section 25(6), though there was no express exemption. Hence, the provision is valid, though contrary to Section 255 [Very interesting and peculiar case indeed]
EXEMPTION TO SECTION 8 COMPANY
S.No.
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Section
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Description
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Exceptions/ Modifications/ Adaptations
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1.
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Section 2(24)
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Section 2(24) defines ‘company secretary’ or ‘secretary’ who is appointed by the company to perform the functions of company secretary under the Act.
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The said provision is now not applicable to the Section 8 company.
The company Secretary or secretary in relation to Section 8 Company need not be a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980.
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2.
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Section 2(68)
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Section 2(68) defines ‘private company’ as a company having minimum paid up share capital as may be prescribed and which satisfies some other conditions by way of its articles
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The requirement of having minimum paid up share capital is now not applicable to Section 8 company.
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3.
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Section 2(71)
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Section 2(71) defines ‘public company’ as a company which is not a private company and having a minimum paid up share capital as may be prescribed.
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The requirement of having minimum paid up share capital is now not applicable to Section 8 company.
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4.
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Section 96(2)
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Section 96(2) deals with the time, day and place of conduct of annual general meeting.
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An additional proviso is inserted which states that the Board of Directors may decide time, day and place of annual general meeting before- hand if they are directed in general meeting.
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5.
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Section 101(1)
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Section 101(1) states that a company
may call general meeting by giving not less than 21 days notice.
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As per the notification, the condition of giving 21 days clear notice has been substituted by 14 days.
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6.
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Section 118
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Section 118 deals with minutes of proceeding of general meeting, meeting of Board of Directors and other meeting and resolutions passed by postal ballet.
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The provisions of this section are now not applicable to Section 8 companies except that minutes may be recorded within 30 days of conclusion of every meeting in case confirmation of minutes by circulation is provided for in the articles of association.
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7.
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Section 136(1)
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Section 136(1) deals with right of members to copies of audited financial statement not less than 21 days before the date of meeting.
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As per the notification, the condition of giving 21 days clear notice has been substituted by 14 days.
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8.
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Section 149(1)
and its first proviso
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Section 149(1) deals with the provisions related to minimum and maximum number of Directors.
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The said provisions dealing with minimum and maximum number of directors are now not applicable to the section 8 companies.
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9.
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Section
149(4),(5),(6),(
7),(8),(9),(10),
(11),(12)(i)
&(13)
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These provisions deal with requirement, appointment,
meaning, duties, conduct, restrictions, term of independent
directors.
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The said provisions are now not applicable to the section 8 company.
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10.
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Section 150
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Section 150 deals with manner of
selection of independent directors and maintenance of databank of independent directors.
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The said provisions are now not applicable to the section 8 company.
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11.
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Proviso to
section 152(5)
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The said proviso says that in case of
appointment of independent director, along with the notice to general meeting, an explanatory statement stating that he fulfils the conditions specified in the Act for such appointment.
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The said provisions are now not applicable to the section 8 company.
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12.
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Section 160
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Section 160 deals with right of persons other than retiring directors to sand for directorship.
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The said provisions are now not applicable to the section 8 company where articles provide for election of
directors by ballot.
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13.
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Section 165(1)
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Section 165(1) deals with the restriction on the number of directorships a director can hold in a company.
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The said provisions are now not applicable to the section 8 company which means that directorship in section 8 companies are not to be considered while counting maximum limit of 20 companies.
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14.
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Section 173(1)
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Section 173(1) states that every company shall hold its first Board meeting within 30 days of incorporation and thereafter a minimum number of 4 meetings every year in such a manner that not more than 120 days shall intervene between 2 meetings.
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The said provisions are now applicable with a modification that at least 1 meeting of Board of Directors shall be held in every 6 calendar months.
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15.
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Section 174(1)
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Section 174(1) states quorum for a
meeting of Board which is:
1/3 of its total strength
OR
2 directors
Whichever is higher.
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As per the notification , the quorum
for a meeting of Board - section 8
companies is:
8 members
OR
25 % of its total strength
Whichever is less.
Further a proviso is inserted to state
that the quorum should not be less
than 2 members.
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16.
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Section 177(2)
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Section 177(2) states that the audit committee shall consist of minimum 3 directors out of which independent directors shall form the majority.
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From the said provision, the condition with respect to independent directors forming the majority is omitted.
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17.
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Section 178
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Section 178 deals with Nomination and Remuneration Committee and Stakeholders Relationship Committee.
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The said provisions are now not applicable to the section 8 company.
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18.
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Section 179
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Section 179 deals with the powers of board to do acts and things.
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As per the notification, the acts of the Board relating to borrowing monies u/s 179(3)(d), investing funds of the company u/s 179(3)(e) and granting loans, giving guarantee or providing security in respect to loans u/s 179(3)(f) may be decided by the Board by circulation instead of at a meeting.
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19.
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Section 184(2)
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Section 184(2) states that a director, concerned or interested, directly or indirectly in a contract or arrangement shall disclose his interest at the meeting of the Board and shall not participate in such meeting.
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According to the notification, the provision of this section shall apply only when the transaction amounts to a Related party transaction as per section 188 and the amount of contract or arrangement exceeds Rs.1 lac.
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20.
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Section 189
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Section 189 deals with the register of contracts or arrangements in which directors are interested.
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According to the notification, the provision of this section shall apply only when the transaction amounts to a Related party transaction as per section 188 and the amount of contract or arrangement exceeds Rs.1 lac.
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