Formation of companies with charitable object under Section 8 of Companies Act 2013
Updated: Mar 2
Philanthropic social activities with the main object of promoting welfare and social responsibility towards the under developed and less thought-out sections and arenas of the society have grown in necessity as well as in practice due to the rise in economic and social trends such as the spread of capitalism, consequent rise of the welfare state and the decline of the traditional family support structure. In India a non-profit organization can either be registered as a trust, a society or a private limited non-profit company under section 8 of the Companies Act of 2008.
Section 8 of the companies act, 2013 which identical to the former Section 25 of the old companies act of 1956 helps to facilitate this very approach. In accordance with section 8(1) clauses (a)(b)(c) a limited company is a person or an association of persons who have promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment as their objective and who intend to apply its profits for the promotion of the same prohibiting the payment of any of its dividend to its members.
The central government on fulfillment of these conditions would allow the person or association of persons to be registered as a “limited company’ under section 8 of the companies act 2013 without adding the word “Limited” or “Private Limited” as the case maybe. The main objective of a section 8 company is the welfare of the society, Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII)is one such company focusing on growth of trade in India, other famous examples include Reliance, Infosys, Tata foundation and Reliance Research Institute.
Advantages of section 8 companies-
1. Limited Liability
This means that the members of the company and the company in itself are considered separate entities according to the law. The liability of the members for the company’s debts only extends up to a limited sum depending on the sum of the face value of the shares they take over.
2. Distinct Legal Identity
A section 8 company unlike a society or a trust a distinct legal entity separable from its members and shareholders, it can thus own properties, transfer and incur debts under its independent name. This advantage helps in not only promoting its objective but also transferring ownership and initiating corporate restructuring schemes such as merger, acquisition etc whatever the case maybe.
3. Tax Benefits
In order to obtain the said benefits the company needs to registered under Section 80G and 12AA of the 1961 Income Tax act. These enable it to receive donations for the furtherance of its objects, it further receives concessions in certain states for formation and registration of property in the form of stamp duty. Not only is minimum stamp duty available thus but the less stamp duty is charged on incorporation of the company under the given section.
Formation of company under section 8
For this, a person or association of persons can apply to the registrar of companies through the the required forms, the application would be accepted by the central government on its discretion subject to any terms and conditions that it may impose under the license granted by it. Prior to this the company will be registered upon payment of the requisite fee to the registrar. Due to the fact that the company has been formed on the basis of the license granted by the central government, changes to the memorandum of the association can be made only with the consent of the central government.
Incorporation of Section 8 Companies-
1. Application for the Company’s name-
An application for reserving the company’s name has to be made through part-A of SPICe Plus (SPICe+) form, wherein one has to select the type of business activity followed by filing of two proposed names, in the case that the CRC rejects the proposed name, filing of two more proposed names have to be completed before the expiration of a given time limit as specified.
2. Application for a Digital Signature Certificate
Due to the online mode of company incorporation, a DSC or a Digital Signature Certificate is required which would be used to electronically sign any forms proposed by members or directors of the company. Further a digital signature certificate needs to be necessarily applied for each member and director of the company.
3. Application for Incorporation through SPICe+ form
The name gets reserved for the time limit of 20 days from the date of approval during which one has to fill up application for the incorporation along with all the required documents and upload it online.
Through this application the company at once applies for name reservation, DIN TAN application, PAN application, EPFO, ESIC and GSTIN registration. This is then followed by filing of part B of SPICEe+ containing details such as no. of directors, no. of share-holders, company address details etc.
This is followed by the drafting of the Memorandum of association as well as the Article of association after which you have to complete the EPFO, ESIC and AGILE registration form. Additional documentation must be sent with the SPICe+ form in part –B for section 8 company applicants. Members and witnesses have signed a physical copy of the current MOA. Members' and witnesses' signatures are required on a hard copy of the AOA followed by signature of any practicing professional on the INC-14 declaration form.
4. Certificate for the Commencement of Business
On the approval of the application of the company through the steps followed above, a certificate of incorporation will be issued by the ROC, after which an application would be made by the company seeking approval for the conduct of business 180 days from the incorporation of the company.
Documents required for incorporation are as follows-
i. PAN card, Aadhar card and Photograph of the proposed director.
ii. ID proof of proposed directors and members.
iii. Address proof of proposed members and directors.
iv. Address proof for the principal place of business of the proposed company.
Cancellation of License
Sub clause (6) of Section 8 of the companies act deals with the cancellation of license of a limited company. In the circumstance that the company-
i. violates any of the conditions of section 8
ii. Conducts its affairs fraudulently
iii. Conducts its affairs in such a manner as violative of the objectives of the company or harmful to the public interest
The central government upon its discretion may direct the said company to convert its status from that of company under section 8 and add the word “Limited” or the words “Private Limited” as the case maybe to its name, following which the Registrar shall without prejudice to any action that may be taken under sub section (7) on application register the company accordingly.
Winding up or Amalgamation
The Central government if satisfied that it is essential for the interest of the public may further under sub-section 7 order that the company will be either dissolved or amalgamated with another company possessing a similar objective and registered under the section 8. Through this such amalgamation would form a single company with its constitution, properties, rights, interest, authorities, privileges, liabilities, duties and obligations as stated in the order. Here, it should be noted that no such order shall be made without giving the company a reasonable opportunity of hearing.
Further, if after the settlement of debts of the winded up company there remains any asset, the same shall either be transferred to company with a similar object under conditions imposed by the Tribunal or sold with proceedings of the sale transferred to the Insolvency and Bankruptcy Fund formed under Section 224 of the Insolvency and Bankruptcy Code, 2016.
Punishment for violation under sub-section 11
In the case, that the company fails to comply with or violates any of the requirements laid down in section 8 of the Company Act, 2013, it will attract a fine not less that ten lakh rupees and extendable to one crore rupees. The directors and officers of the company if in default of the same shall also be punishable with a fine not less than twenty-five thousand rupees and extendable to twenty-five lakh rupees. If on investigation it is proved that the affairs of the company were being conducted fraudulently, every officer in default of the same shall be liable for action under section 447.
Corporate Social responsibility and Section 8 Companies
CSR or corporate social responsibility can be defined as a company’s sense of social and ecological responsibility. To fulfill this responsibility corporations, undertake activities such as waste and pollution reduction, educational and other philanthropic social programs of similar nature. Unlike charity, through CSR companies conduct business in a way that visibly contributes to social good by using resources that are not focused singularly on increasing their profits. Thus, CSR is a way which integrates economic, environmental and social benefit keeping in mind the company’s growth and operations. A Non-profit company formed under Section 8 needs to be in compliance with Section 135 of the same Companies Act of 2013 and Companies (Corporate Social Responsibility Policy) Rules, 2014 (the Rules) to fulfil activities under corporate social responsibility. Corporations can further be good partners for social enterprises if their impact goals are aligned, for example- Grameen Microfinance bank by Muhammad Yunus entered into a partnership with Groupe Danone, a French food company to produce healthier yogurt in Bangladesh. The partnership was structure in a way that once the initial investment by the bank was repaid all the profits generated would be reinvested into the yogurt producing operations.
A section 8 company with an established track record of 3 years fulfilling condition laid down under section 135 of the act namely-
i. Net worth of rupees 500 crore or more, or
ii. Turnover of rupees 1000 crore or more, or
iii. Net profit of rupees 5 crore or more
In absence of any specific exemption having spent 2% of its average net profits of previous 3 financial years can undertake CSR activities. A section 8 company can be a preferred vehicle for achieving CSR objectives, if a section 8 company were to incorporated by a company to which CSR provisions are applicable no track record would be required. To be qualified for CSR implementation agency, a Section 8 company must also be registered under Section 12A and Section 80G of the Income Tax Act. Furthermore, before handling CSR projects on or after April 1, 2021, such a Section 8 company must file Form CSR-1 with the MCA and get a CSR Registration Number. The Rules also allow a Section 8 firm to hold assets derived from corporate social responsibility contributions for the purpose of furthering CSR objectives.
Although it is advisable for the section 8 companies to amend their objectives to reflect the CSR objectives as under Schedule VII it is not mandatory, for this very reason Companies Act has made the provisions of section 135 applicable to section 8 companies which just meet the mentioned conditions.