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 objective of 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:
- 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.
- No minimum share capital: Section 8 companies, unlike all other companies, do not require a prescribed minimum paid-up share capital.
- Limited liability: Members of these companies can only have limited liability. Their liabilities cannot be unlimited in any case.
- Government license: Such companies can function only if they have the Central Government’s license. The Government can revoke this license as well.
- Privileges: Since these companies possess charitable objectives, the Companies Act has accorded several benefits and exemptions to them.
- 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.
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.
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.
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.