section 25 companies under companies act...

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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

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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

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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

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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

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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

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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

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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

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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.

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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.