ANALYSIS OF PROVISIONS RELATED TO SECTION 8 COMPANIES under Companies Act, 2013 (Not-for-Profit Organizations) by CS Yash Pareek (www.csyashpareek.in)

 

||Om Shri Ganeshay Namah||

 

ANALYSIS OF PROVISIONS  RELATED TO

SECTION 8 COMPANIES

(Not-for-Profit Organisations)

 

Prepared by

TEAM YPA

www.csyashpareek.in

CS Yash Pareek (ICSI Silver Medalist)

Valuable inputs by CS Neha Jain & CS Gajab Maheshwari (Practicing Company Secretaries)

 

 

YASH PAREEK & ASSOCIATES

Company Secretaries

BHOPAL | INDORE | NAGPUR | AHMEDABAD

 

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ANALYSIS OF PROVISIONS  RELATED TO

SECTION 8 COMPANIES

 

1.     Provisions of Companies Act, 2013:

 

Following Sections and rules of the Companies Act, 2013 (‘The Act’) are covered:

 

·       Section 8 of the Act (Notified Date of Section: 01/04/2014)

 

·        Section 366 of Companies Act, 2013

 

·       The Companies (Authorized to Registered), rules, 2014

 

·       Notifications dated 05th June, 2015 and 13th June, 2017

 

·       Rule 20, 21, 22, 23 of the Companies (Incorporation) Rules, 2014

 

·       Section 2 (85), 2(68), 2(71), 96(2), 101(2), 118, 136 (1), 165(1), 173(1), 174(1), 177(2), 178, 179(3), 184(2), 186(7), 189, 248(2), 248(3) and Schedule III of the Act

 

·       Sub-sections (1), (4), (5),(6), (7), (8), (9), (10) , (11), Clause (i) of sub-section (12) and Sub-section (13) of Section 149

 

2.     What are Section 8 Companies:

 

Companies registered under Section 8 of the Companies Act, 2013 (the Act) are specifically formed with an object to promote commerce, arts, science, sports, education, research, social welfare, protection of environment or for any such similar object.

The name shall include the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust and the like etc.

 

3.     Restrictions on Profits:

 

Section 8 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.

 

Companies Act, 2013 continues to permit partnership firms to be a member of section 8 companies.

 

4.     Section 8 as Unlimited Companies:

 

Rule 20(1) of the Companies (Incorporation) Rules, 2014 provides that only a Limited company registered under this Act or under any previous company law shall make an application to the Registrar for issue of license. Therefore, a company with unlimited liabilities cannot be registered as a Section 8 Company.

 

Section 8 Company may be incorporated as a company limited by shares or by Guarantee (with or without share capital).

 

5.     One Person Company as member of Section 8 Company?

 

Rule 3(6) of the Companies (Incorporation) Rules, 2014 prohibits one person company to invest in securities of any body corporate. Section 8 Being body corporate cannot have One person company as its member.

 

6.     Alteration in memorandum of Section 8 companies

 

A Section 8 Company can alter the provisions of its Memorandum or articles by passing a special resolution. However such alteration requires the approval of the Registrar of Companies [vide MCA notification dated 21st May, 2014].

Further, if alteration in Memorandum or Articles results in conversion of Section 8 Company to any other kind of company, prior approval of Central Government is required. Such power is delegated to Regional Director [vide MCA notification dated 21st May, 2014].

7.     Section 8 Companies as Not for profit organization:

 

There is a misconception that a Section 8 company is formed ‘not for profit’. However, the fact is that there is no restriction for a Section 8 company to earn profit in carrying on its objects, but it cannot distribute to its shareholders the profits earned and the profits have to be re-deployed in furthering its objects.

 

8.     Bonus shares or Preference shares:

 

Section 8 Company is prohibited from issue of bonus shares in view of the following:

 

•    As per section 8(1)(b) of the Act, Section 8 Company shall intend to apply its profits, if any, or other income in promoting its objects;

 

•    As per section 8(1)(c) of the Act, Section 8 Company should intend to prohibit the payment of any dividend to its members; and

 

·       Further, Rule 22 (4) of the Companies (Incorporation) Rules, 2014 requires a declaration from Board of directors 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.

 

Therefore, a Section 8 Company cannot issue bonus shares. Bonus cannot be paid to a member, even in his capacity as an employee.

Since there is restriction in section 8(1) for distribution of profits and payment of any dividend to its members, the company cannot issue redeemable preference shares.

 

 

9.     Remuneration by Section 8 Companies:

 

In case the employee is also a member, no remuneration or other benefit in money or money’s worth can be given to him except payment of out-of pocket expenses, reasonable and proper interest on money lent, or reasonable and proper rent on premises let to the company.

In terms of clause 5(v) of the draft memorandum of association of Section 8 Company in form INC 13, such company may in good faith pay prudent remuneration to any of its members in return for any services (not being services of a kind which are required to be rendered by a member), actually rendered to the company.

 

 

10. Exemptions and Restrictions Provisions applicable to Section 8 Companies:

 

Sr. No	Section and Rules of the Act	Particulars	Provisions
1.	Section 160	Election of directors by ballot	If election of directors by ballot is not prescribed in the Articles, then, section 160 applies and consequentially a deposit of Rs. 1 lac is mandatorily required to be taken from persons standing for director’s election.
2.	Section 108 read with Rule 20 of the Companies (Management and Administration) Rules, 2014.	E-voting facility	Section 8 Company, having number of members 1000 or more, required to provide e-voting facility to its members at general meeting
3.	Section 110 read with Rule 22 of the Companies (Management and Administration) Rules, 2014	Postal Ballot	Companies having more than 200 members are required to transact business through postal ballot
4.	Rule 19 of the Companies (Management and Administration) Rules, 2014,	Proxy	In terms of a member of a company registered under section 8 shall not be entitled to appoint any other person as his proxy unless such other person is also a member of such company.
5.	Section 149(1) of Companies Act 2013	Minimum of three directors for public limited company and two directors for private limited company and maximum of fifteen directors	There is no prescription with respect to minimum or maximum directors in a section 8 Company.
6.	Section 174(1)	Quorum for board meetings	Eight directors or 25% of its total strength, whichever is lower. However, the quorum shall not be less than two members
7.	Section  173	First Board meeting	Upon incorporation a Section 8 company is required to hold its first board meeting within 6 months of incorporation instead of one month applicable to other kinds of companies.
8.	Section 2(24)	Company Secretary	Any person can be appointed as Company Secretary of a Section 8 company and such person need not be a member of ICSI
9.	Section 101	Notice of meeting	General Meetings can be convened 14 clear days’ notice instead of 21 days’ notice
10.	Section 136	Copies of financial statements	Section 8 company can send a copy of the financial statements, including consolidated financial statements, if any, auditor’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 to its members not less than 14 before the date of the meeting.
11.	Section 118	Minutes	Unless the Articles of Association of the companies otherwise provide, recording of minutes of General Meetings, Board Meeting and other resolutions is not mandatory.
12.	Section 149 (1)	Independent Director	Section 8 company, if it’s a public company, is exempt from appointment of independent directors.
13.	Section 178	Nomination and remuneration committee	Section 8 company is exempt from constituting committees of the Board like nomination and remuneration committee etc.
14.	Section 165	Directorship	Directorship in Section 8 companies is not counted for limitation on number of directorship (not more than 20 companies)
15.	Section 173	Board meetings	Board meeting in a Section 8 company can be conducted once every 6 months.
16.	Section 179 (3)	Resolution by circulation	Resolutions under Section 179 of the Act relating to borrowing of monies, investing the funds of the company and providing loans or security or guarantee can be passed by circulation.
17.	Section 188	Related Party Transactions	A Director of a Section 8 company, if interested in a transaction placed before the board for discussion and approval, is required to disclose his interest in a transaction, arrangement or contract and abstain from participating in the meeting only if the value of such transaction exceeds Rs.1 Lakh.
18.	Section 184 (2)	Participation of interested Directors	Section 184(2) prohibits participation of interested directors. In case of Section 8 Company, it shall apply only if the transaction with reference  to section 188 on the basis of terms and conditions of the contract and arrangement exceeds one lakh rupees. [vide notification dated 5th June, 2015]
19.	2(iii) of the Companies (Auditors Report) Order, 2016.	CARO 2016	Companies (Auditors Report) Order, 2016 are not applicable on a Section 8 Companies.
20.	2 (68) & 2 (71)	Paid up capital	The requirement of Minimum paidup share capital shall not apply.
21.	Section 96(2) of the Act	Annual General Meeting	A Section 8 company can hold its annual general meeting on a National Holiday, beyond business hours and at a place other than a place which is in the same city, town or village where the registered office of the company is situated subject to any directions in this regard given by the company in a general meeting.
22.	Section 2 (85)	Small companies	Provided that nothing in this clause shall apply to—   (A) a holding company or a subsidiary company;   (B) a company registered under section 8; or   (C) a company or body corporate governed by any special Act;
23.	Rule 19 of the Companies (Incorporation) Rules, 2014	Memorandum of Association	The memorandum of association of the proposed company shall be in Form No.INC.13.

 

 

11. Conversion

 

 

A.    Conversion of Section 8 company into any other Company: Rule 21 of the Companies (Incorporation) Rules, 2014

 

A company registered under this section may convert itself into company of any other kind only after complying with such conditions as may be prescribed.

 

·       Pass a special resolution at a general meeting for approving such 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.

 

·       The company shall file an application in Form No.INC.18 with the Regional Director with the fee 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 the company shall also attach the proof of serving of the notice served to all the authorities mentioned in sub-rule (2) of rule 22.

 

·       A copy of the application with annexures as filed with the Regional Director shall also be filed with the Registrar.

 

·       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, namely:

 

(a)        The date of incorporation of the company;

(b)       The principal objects of the company as set out in the memorandum of association;

(c)        The 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;

(d)       If the principal or main objects of the company are proposed to be altered, what would be the altered objects and the reasons for the alteration;

(e)        What are the privileges or concessions currently enjoyed by the company, such as tax exemptions, approvals for receiving donations or contributions including foreign contributions, land and other immovable properties, if any, that were acquired by the company at concessional rates or 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.

(f)        Details of 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.

 

B.    Conversion into Section 8 company: Rule 20 of the Companies (Incorporation) Rules, 2014

 

Any existing limited company registered under this Act or under any previous company law can apply for conversion subject to the following

 

The Memorandum and Articles of Association either have (or are amended such that they have) the objects specified in clause (a) of sub-section (1) of Section 8 and the restrictions and prohibitions as mentioned respectively in clauses (b) and (c) of that sub-section are incorporated in the Memorandum/ Articles, and the Company is desirous of being registered under Section 8, without the addition to its name of the word "Limited" or as the case may be, the words "Private Limited"

 

A.     Application in Form No. INC. 12 shall be accompanied by the following documents, namely:-

·       the memorandum and articles of association of the company;

·       the declaration as given in Form No.INC.14

·       For each of the two financial years immediately preceding the date of the application, or when the company has functioned only for one financial year, for such year (i) the financial statements, (ii) the Board’s reports, and (iii) the audit reports, relating to existing companies

·       a statement showing in detail the assets (with the values thereof), and the liabilities of the company, as on the date of the application or within thirty days preceding that date;

·       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

·       the certified copy of the resolutions passed in general/ board meetings approving registration of the company under section 8; and

·       a declaration by each of the persons making the application in Form No.INC.15.

·       The company shall, within a week from the date of making the application to the Registrar, publish a notice at his own expense, and a copy of the notice, as published, shall be sent forthwith to the Registrar and the said notice shall be in Form No. INC.26 and shall be published- (a) at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the proposed company is to be situated or is situated, and circulating in that district, and at least once in English language in an English newspaper circulating in that district; and (b) on the websites as may be notified by the Central Government.

 

 

 

12. Can a Co-operative Society registered under the Cooperative Societies Act or Multi State Co-operative Societies Act OR Trust registered under the trust Act, a Limited liability partnership, Partnership Firm, Society registered under the Societies Registration Act, 1860 be registered/converted into Section 8 Company

 

Yes. Section 8(1) of the Companies Act, 2013 allows person or association of persons to be registered as a Section 8 Company on fulfillment of certain conditions and procedure as prescribed therein. The term “person” has not been defined in the Companies Act, 2013. Section 2(41) of the General Clauses Act, 1897 provides that “person” shall include any Company, or association or body of individuals, whether incorporated or not. Accordingly, Co-operative Society registered under the Cooperative Societies Act or Multi State Co-operative Societies Act OR Trust registered under the trust Act, a Limited liability partnership, Partnership Firm, Society registered under the Societies Registration Act, 1860 is a person. Therefore, can be registered/converted as a Section 8 Company.

 

 

13. Whether a One person Company can be converted in to a Section 8 Company?

 

One person company may convert itself into a private/ public company and then conversion of such private/public company into Section 8 is possible.

 

 

14. Whether the object of Section 8 Company can extend beyond the India?

 

Clause 4 of the Form INC 13 (Memorandum of Association) filed in pursuant to Rule 19(2) of the Companies (Incorporation) Rules, 2014 requires to state that “objects of the company extend to the ......... .” Further states that “here enter the name of the State or States, and Country or Countries.” Accordingly, the objects of Section 8 Company may be extended beyond India.

 

15. Section 8 company and Corporate Social Responsibility (CSR)

 

A Section 8 company can be a preferred vehicle for achieving CSR objectives. The Companies (Corporate Social Responsibility Policy) Rules, 2014 (the Rules) provide that inter alia Section 8 companies with an established track record of three years of handing CSR projects are recognised as eligible implementing agencies through which CSR applicable companies can achieve their CSR spend objectives.

 

However, if a Section 8 company were to be incorporated by a company to which CSR provisions are applicable, and if such Section 8 company were to be used as implementing agency, then no such track record is required. Further, a Section 8 company is required to have registration under Section 12A and Section 80G of the Income Tax Act to be eligible for CSR implementation agency.

 

Further such Section 8 company is required to file Form CSR-1 with MCA and obtain CSR Registration Number before it handles CSR projects on or after 01st April, 2021.

 

The Rules also enable Section 8 company to hold assets created out of CSR contributions provided by companies for use to further CSR objects

 

 

16.   Contravention of Section 8 of Companies Act, 2013:

 

The Central Government may

 

(i)         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. Where the licence granted to a company registered under section 8 has been revoked, the company shall apply to the Registrar in Form No.INC.20 along with the fee to convert its status and change of name accordingly.

 

(ii)        Order for amalgamation of company with similar objects

 

(iii)       Order for winding up.

 

(iv)       Section 8 Company and the respective officer in default is liable for penalty prescribed

 

For Company:  Fine not less than Rs 10 lakh, which may extend to Rs 1 crore

 

For Directors and every officer of the company :fine not less than Rs 25000 which may extent to Rs 25 lakhs

 

 

Every officer in default shall be liable for action under Section 447 of Companies Act for punishment of fraud. The punishment is imprisonment for a term not less than 6 months which may extend to 10 years and shall be liable for a fine which shall not be less than the amount involved in the fraud which may extend to three times the amount involved in the fraud. It is a non-compoundable offence.

 

(Proviso to Section 8(11).

 

 

17. Delegation of Powers:

 

           

Sr. No	Section	Particulars	Powers delegated to
1.	Section 8(1)	Registration of Section 8 companies	Registrar of Companies
2.	Section 8 (4) (1)	Alteration of memorandum of Association and Articles of association except for alteration of memorandum in case of conversion into another kind of company;	Registrar of Companies
3.	Section 8 (5)	Registration of as limited company registered under this Act or under any previous company law as Section 8 company	Registrar of Companies
4.	Section 8 (4) (1) and Rule 21	Conversion of a Company Registered Under Section 8 into a Company of Any Other Kind	Regional Director

 

 

Conclusion:

Section 8 companies are companies having very distinguished model of business intending to do welfare due to which Companies Act, 2013 provides various relaxations to such companies for encouraging stakeholders to choose Section 8 companies rather than trust and societies and help in booting CSR initiatives of the Government of India.

Professionals should take care of the provisions while advising corporate regarding conversion of their existing societies/trusts into Section8 companies, Application for Section 12A/80G registration under Income Tax Act, 1961 and various other aspects.

 

Happy reading.

 

Regards,

CS Yash Pareek   [ICSI Silver Medalist]

Company Secretary  I     Yash Pareek & Associates {www.csyashpareek.in/Professional}

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The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I, CS Yash Pareek assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.