Section 8 Companies

This article has written by Prithiv Raj Sahu, a student of KIIT School of Law, Bhubaneswar (4th year)

Introduction

In India, a non-profit organisation can be registered as Trust by executing a Trust deed or as a Society under the Registrar of Societies, or as a private limited non-profit company under Section 8 Company under the Companies Act, 2013. A Section 8 Company is the same as the popular Section 25 company under the old Companies Act, 1956, which was one of the most popular forms of Non- Profit Organisations in India. But, as per the new Companies Act 2013, Section 25 (as per the old act) has now become Section 8. As per Section 8(1a, 1b, 1c) of the new Companies Act, 2013, a person can establish Section 8 company for “promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object”, provided it 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.

To register a section 8 company in India, the process is similar to the incorporation of other companies (except requires an additional license). The applicant looking to start a section 8 company has to file Form INC-1 for name availability. On approval of the name, there is a further requirement of obtaining a license for a Section 8 Company, for which file the Form RD-1 in order to obtain a license for such company. After obtaining the license number, the applicant can proceed further to incorporate a company by filing e forms INC-7, INC-22 and DIR-12 or e-forms INC-7 and DIR-12.

Eligibility for forming a Section 8 Company

A person or an association of persons intending to be registered under Section 8 of the Companies Act, 2013 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.

Exception for Section 8 Companies

Company Secretaries are not mandatory
There is no requirement for minimum share capital
Prior and short notice period of 14 days for Annual General Meetings
The recording of the MOM is not required unless needed
Number of Directors (2) is required
A director can take up more than 20 Section 8 company positions in various other companies.
There is no requirement for any committees
Meeting are called only for some specific decisions

Characteristics of Section 8 Companies

1. Incorporate for social welfare

2. No minimum capital

3. Licensed by government

4. Limited liability

5. No dividend distribution

Advantages

Members have limited liability.
No minimum capital requirements.
They get several tax exemptions.
Stamp duties and high fees are not payable for registration.
They have perpetual existence and separate legal status.
Exemptions from carrying out several procedural compliances.
More credibility than compared to NGOs, societies, and trusts because they are recognized by the Central Government’s license.

Disadvantages

Members of the company cannot get any dividend.
Officers and directors do not get benefits and allowances.
Can only use the profits for furthering charitable aims and objectives.
Amendment of memorandum and articles requires Central Government’s permission.
The license is revocable on several grounds.

Winding Up

Section 8 companies can wind-up or dissolve themselves either voluntarily or under orders given by the Central Government. If any assets remain after satisfaction of debts and liabilities upon such winding-up, the National Company Law Tribunal can order the transfer of these assets to a similar company. It can also order that they must be sold and the proceeds of this sale should be credited to the Insolvency and Bankruptcy Fund.

Punishment for Contravention

Any company that contravenes provisions of Section 8 is punishable with a fine ranging from Rs. 10 lakhs to Rs. 1 crore. Further, directors and officers of the company are liable to punishment with imprisonment up to 3 years and a fine between Rs. 25,000 to Rs. 25 lakhs. Such officers can also face prosecution under stringent provisions of Section 447 (dealing with fraud) if they conduct any affairs with fraudulent motives.

Procedure for Incorporation of Section 8 Companies

To register a company under Section 8 you need to just follow these steps:

Obtain a DSC of the proposed Directors of the Section 8 Company.
Once a DSC is received file Form DIR-3 with the ROC for getting a DIN.
Once the DIR-3 is approved
Draft MOA and AOA
File Form RUN for reservation/availability of company name.
After approval, file Form INC-12 with the ROC
Once the Form is approved by Central Government, a license under section 8 will be issued in Form INC-16.
After obtaining the license, file SPICE Form 32 with the ROC for incorporation

Relevant Case Laws

In N.C. Bakshi v. Union of India

An association had been given a licence under section 25 (now section 8) by the Central Government and as per licence condition, no alteration could be made in Articles of Association unless alteration had been approved by Central Government. Alteration made to Articles of Association of respondent had been approved but according to petitioner members their representation was not considered. Petitioner sought for quashing of approval and mandamus to grant fair hearing to petitioner.

Delhi high court held that since petitioner’s representation was not considered while granting impugned approval, competent authority was to be directed to provide a post decisional hearing to petitioners on representation and to pass a speaking order while returning a positive finding as to whether alterations in articles of association impugned were in contravention of provisions of act.

Conclusion

Section 8 companies primarily operate for charitable and non-profit objectives which are for the well-being of our society. Also it has got several exemptions in terms of tax and others. These companies are registered under ministry of corporate affairs, government of India.

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