section 25 companies under companies act...
TRANSCRIPT
www.spsmiter.blogspot.com
SECTION 25 COMPANIES UNDER COMPANIES ACT 1956
Under Indian law, 3 legal forms exist for Non-Profit organizations:
1. Trusts
2. Societies
3. Section 25 companies
Due to better laws, Section 25 companies have the most reliable strongest
organizational structure. Section 25 companies are those companies which
are formed for the sole purpose of promoting commerce, art, science,
religion, charity or any other useful object and have been granted a licence
by the central government recognizing them as such. Thus, there are three
criteria for determining whether a particular company is section 25
company or not:
1) Its objects should be only to promote commerce, art, science, religion,
charity or any other useful object.
2) It should intend to apply its profits or other incomes only in promoting
its objects; and
3) Central government should have granted a licence to such a company
recognizing them as such, these types of companies can be either public
company or private company having a limited liability.
FORMATION PROCEDURE OF SECTION 25 COMPANIES:
Step – 1 Form 1A: Name approval: An application in E-Form 1A has
to be made for availability of name to the registrar of companies, with
a fee of Rs. 500/-. It can be filed electronically. Six name in preferential
order need to be proposed
Step-2 Application to Regional Director: After the availability of name
www.spsmiter.blogspot.com
is confirmed, an application should be made in writing to the regional
director of the company law board for granting license under this
section. The application must include copies of the memorandum and
articles of association of the proposed company, as well as a number of
other documents, including a statement of assets and a brief description of
the work proposed to be done upon registration.
Step – 3 Filing of Application copy to the RoC: The applicants must
also furnish to the registrar of companies (of the state in which the
registered office of the proposed company is to be, or is situate) a copy
of the application and each of the other documents that had been filed
before the regional director of the company law board.
Step – 4 Publication of Notice: Within a week from the date of making
the application to the regional director of the company law board, the
applicants are required to publish a notice in the prescribed manner
at least once in at least two news papers. One notice should be in an
English newspaper circulating in that district and in a 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.
Step – 5 Grant of Approval: If the registrar satisfies that the
application is complete in all respects and in the best interest of the
country, regional director can grant the licence under this section with
or without conditions and may also direct the company to insert in its
memorandum, or in its articles, or in both, such conditions of the
licence as may be specified by him in this behalf
Step – 6 Other Incorporation formalities: After obtaining licence
under section 25 the company shall be formed as a normal
company and the other formalities of incorporation shall be complied
with.
Step – 7 Registration under Section 80G: If a section 25 company gets
itself registered under section 80G then the person or the organization
making a donation to the NGO will get a deduction of 50% from
his/its taxable income. The company has to apply in Form No. 10G to
www.spsmiter.blogspot.com
the Commissioner of Income Tax for such registration. Normally this
approval is granted for 2-3 years but can be granted earlier depending
upon the situations.
Grant of licence to an existing company:
An existing company should pass special resolution to restrict its object for
non-profit making purposes and also obtain approval of the Company Law
Board for the same. Name of the company should be changed (including
deletion of the word ‘limited’ or ‘private limited’ ) with the permission of
the Central Government .
The ADVANTAGES of section 25 companies over other companies
registered under companies act are discussed below:
1) All companies having limited liability are required to use the term
‘limited’ or ‘private limited’ as the case may be in their names as required
by section 13. But section 25 companies are allowed to dispense with the
use of term ‘limited’ or ‘private limited’ from their names [sub-sec. (6)].
This helps the company to enjoy limited liability without disclosing to the
public the nature of liability of its members.
2) A partnership firm is allowed to be a member of the section 25
company [sub-sec (4)] inspite of the fact that the law does not recognizes
them as a legal person. The only limitation in this regard is that on
dissolution of such a firm its membership of the company ceases.
3) Minimum Share Capital: As per the provision of section 3 of the
companies act a private company is required to have a minimum share
capital of rupees one lakh and public company is required to have
minimum share capital of five lakh rupees. However Section 25
Companies have been exempted from this requirement regarding minimum
share capital by insertion of sub-section (6) through Amendment Act of
2000. As such they can be registered even if they have share capital less
than the statutory minimum.
4) Publication of Name: A section 25 company has been exempted from
www.spsmiter.blogspot.com
the provisions of section 147 and as such is not required to mention its
name and address as required in case of all other companies.
5) Annual Returns of a Company not having Share Capital: Section 25
Company without a share capital is also required to file returns with the
Registrar as required by section 160 but it has been exempted from
mentioning the particulars of the members who are presently with the
company or have ceased to be members since holding of its last AGM.
6) Time and Place of AGM: Section 25 Company has been exempted
from provisions provided under section 166(2), As such they are free to
determine the date, place and time of its AGM according to their
convenience and feasibility the only condition being that time, place and
date of such meeting should have been pre determined by the Board of
Directors in accordance with directions of the company if any.
7) Notice of AGM: By virtue of section 171(1) a company is required to
call AGM by giving not less than 21 days notice in writing to its members.
But Section 25 Company has been given some relief in this regard by
allowing them to hold an AGM after giving a notice of 14 days length
instead of 21 days as required by section 171(1).
8) Maintaining of Books of Accounts: Every company is required by
section 209(4-A) to maintain books of accounts relating to a period of
eight years immediately preceding current year along with its vouchers.
However a Section 25 Company is required to maintain books of account
relating to a period of only four years instead of eight years immediately
preceding the current year.
9) Increase in Number of Directors: Under section 259 a public
company is not allowed to increase the number of it directors beyond the
permissible limits under its articles without the approval of Central
Government provided such increase results in total number of directors to
go beyond twelve. But Section 25 Companies are exempted from this
section and are thus free to increase the number of its directors without
seeking approval of central government[vide Notification No. 2767, dated
www.spsmiter.blogspot.com
5-8-1964].
10) Board Meetings: Under section 285 the meeting of Board of Directors
should be held at least once in every three months and four meetings
should be held in a year. However section 25 companies are required to
hold meetings of Board of Directors/Executive Committee/Governing
Committee only once in every six months [vide Notification No. SO 1578
dated 1-7-1968]. The rest of the section 285 will apply to section 25
companies as it is, therefore section 25 companies are allowed to hold
Board meetings only once in six months but should have held four
meetings in a year.
11) Quorum for Meetings: The required quorum for a board meeting of
any company under section 287 is one/third of its total strength which is
arrived at after deducting the number of interested directors from the total
number of directors on the Board or at least two whichever is higher. But
the section 25 company is exempt from this section to the extent that the
required quorum for any board meeting is eight members or one/fourth of
its total strength whichever is less provided it should not be less than two
members in any case.
12) Exercise of certain Powers: Section 25 companies are allowed to
decide following three matters by passing a resolution by circulation
instead of at meetings: · the power to borrow moneys other than on
debentures, · the power to invest funds of the company, and · the power to
make loans. The remaining powers specified in section 292 viz., power to
make calls on shareholders in respect of money unpaid on their shares;
power to authorise by back of shares in accordance with section 77A; and
power to issue debentures, can be exercised only by passing of resolutions
at duly conducted meeting of Board of Directors of section 25 company
[vide Notification No. 2767, dated 5-8-1964].
13) Maintenance of Registers of Contracts: Under section 301 a company
is required to maintain register of all the contracts to which section 297 or
299 applies. But a section 25 company is exempt to the extent that it
allowed to maintain register of only those contracts to which sub-sections
(1) and (3) of section 297 apply. Thus they are exempted from maintaining
www.spsmiter.blogspot.com
registers of those contracts which are made in pursuance of sub-section (2)
of section 297 or are covered by section 299.
14) Maintenance of Register of Directors: Section 25 company has been
exempted from operation of sub-section (2) of section 303 and as such they
are not required to notify changes among its directors, etc to the Registrar.
They are only required to maintain Registers of their Directors, Managing
Directors, Managers and Secretary in prescribed format containing
specified particulars and updating the register by making changes in it as
when there is some change among the Directors, Managing Directors,
Managers and Secretary of the company.
15) Qualification for Secretaryship: A Section 25 Company is exempt
from the provision of section2(45) to the extent that the rules regarding the
qualification of a Secretary do not apply to them [vide Notification NO.
F.2/3/76-CLV dated 09-01-1976]. As section 2(45) do not apply to them
they are free to appoint any person as its Secretary whom it feels fit and
proper for the same.
16) Applicability of CARO: Section 25 Companies are exempted from
applicability of Companies Auditor’s Report Order 2003(CARO). CARO
has been made applicable to all companies from 1st January 2004. But
CARO expressly exempts section 25 companies from its applicability vide
Clause 2(iii) of Para I of the Order.
17) Payment of Registration Fees: The fees payable by a Section 25
Company at the time of registration and further increase of its share capital
has been kept very low in comparison to other companies and is at present
fixed at mere Rs. 50/- irrespective of the authorized amount of share
capital (Circular No. 6 dated 24-06-1996 and Notification No. SO 3879
dated 22-12-1962)
18) Stamping of Memorandum and Articles: The Articles and
Memorandum of a Section 25 Company are not required to be stamped in
accordance with the Indian Stamp Act, 1899.
19) Raising Money: A Company can sell shares of the Company to the
www.spsmiter.blogspot.com
public or can accept deposits from public and can therefore raise money
easier than other business structure types. The modes of financing business
carried on by company are numerous
20) Easy Transferable Ownership: The shares and other interest of any
member in the Company shall be a movable property and can be
transferable in the manner provided by the Articles, which is otherwise not
easily possible in other business forms. Therefore , it is easier to become or
leave the membership of the Company or otherwise it is easier to transfer
the ownership.
Drawbacks or Obligations of section 25 companies:
Though a Section 25 Company has many advantages and enjoys many
privileges yet there are some statutory obligations which are required to be
complied with and taken care of by such companies.
1) A Section 25 Company has to ensure that its profits and all other
incomes are utilised only for the purpose of promoting its objects and not
for any other purpose.
2) It should also ensure that its profits are not distributed as dividend
among its members.
3) Section 25 Company cannot alter its objects clause in its Memorandum
without seeking the written approval of central government [sub section
(8)].
4) If the Central Government has imposed some conditions and regulations
upon the company for granting a licence under section 25 then such a
company is bound by such conditions and has to ensure adequate
compliance with them. Where such conditions and regulations have been
imposed then such conditions and regulations are required to be included
in the Articles or/and memorandum of the company as may be directed by
the government.
www.spsmiter.blogspot.com
5) Section 25 Company is regarded as a ‘company’ within the meaning of
the Income Tax Act, 1961 and as such its income is taxable according to
the applicable rates similar to those applying to other companies.
6) If an existing company obtains a licence under section 25 it has to
ensure that its objects are confined to those mentioned in section 25 itself
and if not make proper alteration to its memorandum and articles.
7) Long Closing Proceedings: It is generally not easy to close the company
as compared to other forms of business, the procedure to close is long and
involves compliance of various formalities, at times it takes 1-2 years to
completely wind-up the company. Moreover in certain cases, it is
necessary to take the permission of the High Court to close the Company.
Revocation of Licence: The Central Government after giving reasonable
opportunity of hearing can revoke the licence by passing a speaking order.
Winding up of the company It can also be wound up if the objects for
which it had been established have been fully achieved. The surplus assets
if any may be given to a similar charitable cause.
Hence, having noticed various benefits and drawbacks of section 25
companies, its clear that such companies are a well regulated form of non-
profit organizations and the prescribed incorporation and dissolution
procedures and other provisions helps the government in keeping a check
on the working of such companies.