Incorporation of NGOs under Section 8 of the Companies Act: A Comprehensive Guide
Introduction
Non-Governmental Organizations (NGOs) are crucial agents of change in addressing social issues, championing diverse causes, and contributing to the betterment of society. In order to facilitate the establishment and functioning of these organizations in India, the Companies Act of 2013 introduced Section 8, specifically tailored to govern the incorporation of companies with charitable objectives. This comprehensive guide aims to provide a detailed overview of the incorporation process for NGOs under Section 8 of the Companies Act, along with a discussion of key provisions and compliance requirements.
Formation of Companies with Charitable Objects, etc.
Objectives
Under Section 8 of the Companies Act, 2013, entities can be formed with a primary focus on promoting a wide array of charitable and social objectives. These objectives encompass but are not limited to the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, and similar noble causes. This provision encourages the establishment of organizations dedicated to societal well-being, placing it above profit generation. It is essential to note that Section 8 companies cannot engage in manufacturing business. Furthermore, their Memorandum of Association may include provisions for other lawful activities that contribute to the pursuit of their core objectives.
Income and Dividend
Section 8 companies are distinguished by their commitment to utilizing profits or income generated to advance their stated objectives. These organizations are mandated to reinvest any profits or income towards the furtherance of their charitable goals. Significantly, Section 8 companies are explicitly prohibited from distributing dividends to their members. This restriction ensures that financial resources are channeled back into the pursuit of charitable purposes, rather than being distributed to shareholders.
Licensing Process
The process of incorporating a Section 8 company involves obtaining a license from the Central Government. Here is a step-by-step overview of the procedure:
- Application for License: Any person or association of persons interested in establishing a Section 8 company must apply for a license from the Registrar of Companies (ROC), accompanied by the prescribed fee.
- Central Government’s Discretion: Upon receiving the application, the Central Government possesses the authority to grant the license, subject to conditions it deems appropriate. If approved, this license permits the entity to be registered as a limited company under Section 8 without the necessity of appending “Limited” or “Private Limited” to its name.
- Documentary Requirements: The application should be supported by essential documents, including the memorandum and articles of association of the proposed company. Additionally, a declaration from a qualified professional, such as an Advocate, Chartered Accountant, Cost Accountant, or Company Secretary, must affirm compliance with Section 8 provisions and relevant legal requirements.
- No. of Persons Required: A Section 8 company can be formed by any two persons (including family members), and even a firm may become a member of such a company.
- Financial Projections: An estimate of the company’s projected annual income and expenditure for the next three years, outlining income sources and intended expenditure on its charitable objectives, must be provided.
- Stamp Duty: Stamp duty on the memorandum and articles of association of a company or on any increase in share capital is governed by the Indian Stamp Act, 1899, as adopted by the respective state or the Stamp Act of the respective state. Some states offer preferential stamp duty rates for MOA/AOA of Section 8 companies or for increases in authorized share capital.
- License Issuance: Upon satisfaction with the application and accompanying documents, the Central Government may issue the license. With this license in hand, the entity can proceed with the incorporation process. Under the electronic filing regime, the license and registration certificate come simultaneously.
Post-Incorporation Compliances
After successfully incorporating as a Section 8 company, organizations must diligently adhere to specific compliance requirements:
- Annual Filing: Submission of annual financial statements, including the balance sheet and income statement, to the ROC.
- Audit: Conducting an annual audit and filing audited financial statements.
- Alteration of Objectives: Any modifications to the company’s objectives or memorandum and articles require prior approval from the Central Government.
- Conversion: A Section 8 company may only convert itself into a company of another type after complying with prescribed conditions.
- License Revocation: The Central Government reserves the right to revoke the license if the company contravenes any Section 8 requirements or conducts its affairs fraudulently or in a manner prejudicial to the public interest.
- Liquidation and amalgamation: If on the winding up or dissolution of a company registered under this section, there remains, after the satisfaction of its debts and liabilities, any asset, they may be transferred to another company registered under this section and having similar objects, subject to such conditions as the NCLT may impose, or may be sold and proceeds thereof credited to Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code, 2016. Further, a company registered under this section shall amalgamate only with another company registered under this section and having similar objects.
Conclusion
Incorporating an NGO under Section 8 of the Companies Act is a well-structured process designed to encourage organizations with charitable objectives. By adhering to the prescribed procedures and complying with post-incorporation requirements, these entities can focus on their mission to contribute positively to society without the burden of profit-making objectives. Section 8 provides a legal framework that fosters altruism, innovation, and progress in various fields, ultimately leading to a better and more equitable society.
It is important to note that the contents of this article are provided for informational purposes only and do not constitute legal advice or opinions. For specific legal guidance tailored to individual circumstances or concerns, it is essential to seek legal counsel or consult with a qualified legal professional. For any queries or legal assistance, please contact Actum Legal at lforlaw@yahoo.com or 8588828190. Actum Legal is your resource for legal expertise and assistance.