Section 8 Company
Not all companies have objectives of making profits by carrying out trade and
commerce. Many companies primarily have charitable and non-profit objectives.
Such entities are referred to as a Section 8 Company because they get recognition
under Section 8 of Companies Act, 2013. These companies dedicate all their
incomes and profits towards the furtherance of their objectives.
Definition of Section 8 Company
The Companies Act defines a Section 8 company as one whose objectives is
to promote fields of arts, commerce, science, research, education, sports, charity,
social welfare, religion, environment protection, or other similar objectives. These
companies also apply their profits towards the furtherance of their cause and do not
pay any dividend to their members.
These companies were previously defined under Section 25 of Companies Act,
1956 with more or less the same provisions. The new Act has, however, prescribed
more objectives that Section 8 companies can have.
Famous examples of Section 8 companies include Federation of Indian Chambers
of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII).
The objectiveof these companies is facilitating the growth of trade and commerce
and India.
Features of a Section 8 Company
A Section 8 company comprises of the following distinct features that most other
kinds of companies do not have:
i. Charitable objectives: Section 8 companies do not aim to make profits.
Their objectives are purely charitable in nature. They aim to further
causes like science, culture, research, sports, religion, etc.
ii. No minimum share capital: Section 8 companies, unlike all other
companies, do not require a prescribed minimum paid-up share capital.
iii. Limited liability: Members of these companies can only have limited
liability. Their liabilities cannot be unlimited in any case.
iv. Government license: Such companies can function only if they have the
Central Government’s license. The Government can revoke this license
as well.
v. Privileges: Since these companies possess charitable objectives, the
Companies Act has accorded several benefits and exemptions to them.
vi. Firms as members: Apart from individuals and associations of persons,
Section 8 also allows firms to be members of these companies.
Formation of Section 8 Company
A person or an association of persons can make an application to the Registrar of
Companies using requisite forms to form a company with charitable objectives
under Section 8 of Companies Act. The Central Government, if satisfied, can accept
such an application upon any terms and conditions imposed under the license
granted by it. Once accepted, the Registrar of Companies will register the company
after the applicants pay all requisite fees.
It is important to note that such companies can only be limited companies. All
privileges and obligations of limited companies apply in this case. Further, these
companies also do not need to include the words “Limited” or “Private Limited” in
their names, as all other companies have to.
Since the existence of such companies is based on the license granted to them,
they cannot even alter their memorandum or articles of association without the
Central Government’s permission. They also cannot do anything that the license
disallows.
Cancellation of License
Section 8 companies require a grant of a license by the Central Government. All
such licenses are revocable as well on the following grounds:
the company contravenes provisions of Section 8;
terms of the license are violated;
when its conduct is fraudulent, or it violates its own objectives and
public policy.
The Government can even order the company to be wound-up or amalgamated
with another similar company under certain circumstances. The Government has
to hear the company before passing such orders.
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.
Advantages/Privileges
People generally prefer to conduct charitable activities by forming Section 8
companies instead of regular NGOs and associations. This is because they have
limited liability, so their personal assets will not be used in paying debts of the
company. Here are some advantages that these companies enjoy:
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
Despite numerous merits, these companies also have the following drawbacks:
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.
Solved Example on Section 8 Company
Question: Ankit and Ankita wish to fulfill their passion for caring for animals by
professionally working towards this cause. Guide them through the process of
forming a Section 8 company for this purpose.
Answer: Ankit and Ankita will first have to make an application under Section 8 of
Companies Act to the Registrar of Companies under requisite forms and pay fees
mentioned therein. They will have to submit their memorandum and articles of
association along with their application. The memorandum must state that they
will carry out the cause of animal welfare without profit motives.
If convinced with their objectives, the Central Government will grant them a
