All About Section 8 Company under Companies Act, 2013

Section 8: Formation of companies with charitable objects, etc.

Chapter II

INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Provisions of the Companies Act, 2013:

Section 8: Formation of companies with charitable objects, etc.; Section 2(85).

Rules 3(5), 19, 20, 21, 22 and 23 of the Companies (Incorporation) Rules, 2013 [Section 8 (except sub-section (9)) is brought to force with effect from 01 April 2014]

Corresponding provisions of the Companies Act, 1956:

Section 25

Corresponding provisions of the English Companies Act, 2006:

Sections 42, 181 and 226

Applicability:
This provision is applicable to companies incorporated for promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object.

A Section 8 company cannot be treated as a small company, as per definition of ‘small company’.

Application for registration [Section 8(1)]:

Any person or an association of persons intending to be registered as a limited company for charitable purpose can apply for registration of section 8 company. However, it shall prove to the satisfaction of the Central Government that:

(a) its objects includes promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

(b) the company on incorporation intends to apply its profits, if any, or other income in promoting such object; and

(c) the company intends to prohibit the payment of any dividend to its members. After perusal, the Central Government may issue license with such conditions as it deems fit and allow the registration of such person or association of persons as a limited company without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”.

The power of the Central government is delegated to the Registrar of Companies (‘ROC’) having Jurisdiction over the area where the Registered office of the company is proposed to be situated. Hence, the application for registering such company is to be made to the ROC.

Steps to incorporate Section 8 Company:

1. Make an application.

To incorporate a new company under section, an application  shall be made in Form no. INC.12. And application shall be accompanied with following documents:

(i) draft Memorandum and Articles of association of the Company, in Form no. INC.13;

(ii) Declaration (in Form no. INC.14) 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;
(iii) 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; and
(iv) A declaration (in Form no. INC.15) by each of the persons making the application.

2. Give notice in newspapers.

Within a week from the date of making the application to the Registrar of Companies, the applicant shall publish a notice, in Form no. 2.18, at his own expense:
1. 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, and circulating in that district, and

2. at least once in English language in an English newspaper circulating in that district; and
3. On the websites as may be notified by the Central Government. Copy of such notice in newspapers shall be submitted to the Registrar of Companies immediately after their publication.

3. Approval of other authorities.

The Registrar of Companies may require the applicant to furnish the approval or concurrence of any appropriate authority, regulatory body, department or Ministry of the Central or State Government(s).

4. To decide on granting of license under section 8.

The Registrar will wait for 30 days for objections, if any, of any person pursuant to notice published in newspapers. The Registrar may also consult necessary authorities and regulatory bodies. Thereafter, the Registrar of Companies at its discretion, may grant the licence. And such licence may contain conditions as deemed necessary by the Registrar. The Registrar may direct the company to insert in its memorandum, or in its articles, or partly in one and partly in the other, such conditions of the license as may be specified by the Registrar in this behalf.

Effect of Registration:

The Section 8 Company shall enjoy all the privileges and be subject to all the obligations of limited companies. [Section 8(2)].

A firm can be a member of a section 8 company.

To alter the provisions of its memorandum or articles of association, section 8 company will have to obtain the previous approval from the Central Government.

Revocation of licence:

The Central Government may, by order, revoke such licence granted under section 8, if:
a) the company contravenes section 8; or

b) the company contravenes the conditions subject to which licence is issued; or
c) affairs of the company are conducted in a fraudulent manner or in violation of object of the company or prejudicial to the interest of the public. Further, the Central Government may direct the company to change its status from section 8 company to either private or public limited company. And also direct it to change its name to include the word “Limited” or words “Private Limited”. However, before making order, the Central Government shall give reasonable opportunity of hearing to the company.
Upon receiving such an order, Where the licence granted to a company registered under section 8 has been revoked, the company shall intimate to the Registrar and apply in Form no. 2.23 to convert its status and change of name accordingly.
The revocation of licence does not absolve the company from the punishment that may follow under the Act.

On revocation of licence the Central Government may, in public interest, order such company to be wound up or amalgamate with another company registered under this section having similar objects. However, before making order, the Central Government shall give reasonable opportunity of hearing to the company.

Where the licence is revoked and the Central Government is satisfied that in public interest, such company shall amalgamate with another company registered under section 8 and having similar objects, then the Central Government may order details of amalgamation like forming a single company, transfer of assets and liabilities etc. This right of the Central Government prevails even if they are contrary to other provisions of the Companies Act, 2013.

Winding up of section 8 company: Upon winding up or dissolution of section 8 company and after satisfaction of its debts and liabilities, if there remains any asset then the same shall be transferred, as per direction of the National Company Law Tribunal either to another section 8 company with similar object or to the credit of the Rehabilitation and Insolvency Fund formed under section 269.

Amalgamation of section 8 company:

Section 8 company can amalgamate only with other section 8 company and having similar objects.

Conversion of existing limited company into Section 8 Company:

A limited company registered under any previous company law or under the Companies Act, 2013, with any of the objects specified in (a) above and the restrictions and prohibitions as mentioned respectively in (b) and (c) above and which 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”, shall make an application in Form No. 2.14 (Part B) to the Registrar of Companies.

Conversion of Section 8 Company into other form of company:

Section 8 company may convert itself into company of any other kind after complying with conditions as may be prescribed. Rule 2.18 contains detailed procedure to this effect. Briefly the same is as under:

Step 1: Consent of members

1. Section 8 company shall get approval of its members by way of a special resolution at a general meeting for approving such conversion.

2. The explanatory statement annexed to the notice convening the general meeting shall set out details as mentioned in the rule 2.18(1), including the reasons for such conversion.
3. A certified true copy of the special resolution along with a copy of the Notice and the explanatory statement shall be filed with the Registrar.

Step 2: All filings shall be up-to-date

The company should have filed all its financial statements and Annual Returns upto the financial year preceding the submission of the application to the Regional Director and all other returns required to be filed under the Act up to the date of submitting the application to the Regional Director.

Step 3: Obtain NOC, if so required

Where the company has obtained any special status, privilege, exemption, benefit or grant(s) from any authority such as Income Tax Department, Charity Commissioner or any organisation or Department of Central Government, State Government, Municipal Body or any recognized authority, a “No Objection Certificate” must be obtained, if required under the terms of the said special status, privilege, exemption, benefit or grant(s) from the concerned authority and filed with the Regional Director, along with the application.

It may be noted that the Regional Director may require the applicant to give the approval or concurrence of any particular authority for grant of his approval for the conversion.

Step 4: Certificate from professionals

The company shall attach with the application, a certificate from practicing Chartered Accountant/ Company Secretary in practice/ Cost Accountant certifying that the conditions laid down in the Act and these rules about conversion of a company registered under section 8 into any other kind of company, have been complied with.

Step 5: Make an application

File an application in Form no. 2.21 for approval for converting itself into a company of any other kind with the Regional Director and the Registrar of Companies in Form no. 7.14. Copy of application in form no. 2.21 shall also be filed with the Registrar of Companies.

The Board of directors shall give a declaration stating that no part 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.

Step 6: Give notice in newspapers

Within a week from the date of making the application to the ROC, the company shall publish a notice, in Form no. INC.26, at his own expense:

1. 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, and circulating in that district, and

2. at least once in English language in an English newspaper circulating in that district; and

3. On the websites as may be notified by the Central Government.

Copy of such notice in newspapers shall be submitted to the Regional Director immediately after their publication.

Step 7: Inform other authorities

The company shall send the copy of the notice, simultaneously on its publication and copy of the application and all attachments by registered post or hand delivery to:
(i) The Chief Commissioner of Income Tax having jurisdiction over the company,
(ii) Income Tax Officer who has jurisdiction over the company,
(iii) the Charity Commissioner,

(iv) the Chief Secretary of the State in which the registered office of the company is situated,
(v) any organisation or Department of the Central Government or State Government or other authority under whose jurisdiction the company has been operating.
Such authorities shall make representations, if any, to the Regional Director within sixty days of the receipt of the notice.

There is no provision in the Rules of keeping the company informed of the representation by other authorities before the Regional Director.

Step 8: Regional Director may approve or reject the conversion

On being satisfied , the Regional Director shall issue an order approving the conversion of the company into a company of any other kind subject to such terms and conditions as may be imposed as it may deem fit.

The Rule prescribes several conditions which may also be imposed. These are as under:
a) The company shall give up and shall not claim, with effect from the date its conversion takes effect, any special status, exemptions or privileges that it enjoyed by virtue of having been registered under section 8;

b) If the company had acquired any immovable property free of cost or at a concessional cost from any government or authority, it may be required to pay the difference between the cost at which it acquired such property and the market price of such property at the time of conversion either to the government or to the authority that provided the immovable property;

c) Any accumulated profit or unutilized income of the company brought forward from previous years shall be first used to settle all outstanding statutory dues, amounts due to lenders claims of creditors, suppliers, service providers and others including employees and lastly any loans advanced by the promoters or members or any other amounts due to them and the balance, if any, shall be transferred to the Investor Education and Protection Fund. within thirty days of receiving the approval for conversion.

Before imposing the conditions or rejecting the application, the company shall be given a reasonable opportunity of being heard by the Regional Director.

Step 9: If conversion is approved, alter memorandum and articles

On receipt of the approval of the Regional Director the company shall pass a special resolution for amending its memorandum of association and articles of association consequent to the conversion of the section 8 company into a company of any other kind.

Step 10: Obtain fresh certificate of incorporation

The Company shall thereafter file with the Registrar:

a) a certified copy of the approval of the Regional Director,

b) Amended memorandum of association and articles of association of the company; and
c) A declaration by the directors that the conditions, if any imposed by the Regional Director have been fully complied with.(([Rule 2.19(9)(ii) ))

On receipt of the aforesaid documents, the Registrar of Companies shall register the documents and issue a fresh Certificate of Incorporation.

Penalty:
Section 8 company who makes default in complying with the provisions of section 8 shall be punishable with fine which shall not be less than Rs. 10,00,000/- but which may extend to Rs. 1,00,00,000/-.

Further, the directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or fine which shall not be less than Rs. 25,000/- but may extend to Rs. 25,00,000/- or with both, imprisonment and fine.

Nature of offence:

Since officers of section 8 company may be punished with imprisonment, it is necessary to decide nature of offence.

As violation of section 8 is not covered under sub-section 6 of section 212, it is non-cognizable offence as provided in section 439.

Court to take cognizance of offence of section 8 only upon complaint filed by either:
a) shareholders of the company; or

b) the Registrar of Companies; or

c) a person authorised by the Central Government.

And offence shall be triable only by a special court, as provided under clause (a) of sub-section 1 of section 436.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section, where it decides that no prosecution be launched. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government. Only company may apply for compounding for violation of section 8. Since directors and officers of section 8 company who is in default are punishable with fine or imprisonment or both, they cannot avail compounding mechanism to settle the contravention.

Summary of forms and records:

Form no. INC.12 for application to be made for obtaining the license.
Form no. INC.13 for Memorandum of Association of the proposed company.
Form no. INC.14  for declaration about compliance of section 8 and rules made there under by any of the prescribed professionals.

Form no. INC.15 for a declaration by each person making the application.
Form no. INC-26 for notice to be published in the newspaper.

Form no. INC.16 and form no. INC.17 as applicable for the form of license to be granted by the Registrar.

Form no. MGT14 for filing certified true copy of the special resolution along with a copy of the Notice and the explanatory statement with the Registrar.
Form No. INC.18 for filing an application for approval for converting itself into a

company of any other kind with the Regional Director.

Form No.INC.19 for publishing a copy of the notice shall be sent immediately to the Regional Director.

Form No. INC.20 for intimating to the Registrar by the company to convert its status and change of name accordingly in case of revocation of license.