WHAT IS A NON-PROFIT MAKING COMPANY
Any association desirous of being incorporated as a company with limited liability, without the addition of the word “Limited” or the words “Private Limited” as the case may be, shall make an application in writing to the Registrar of Companies (formerly Regional Director) on behalf of such company/proposed company for grant of licence under section 25 of the Companies Act, 1956.
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 Registrar of Companies (formerly Central Government) recognizing them as such. Such companies should intend to apply its profits, if any or other income only in promoting its objects and must also prohibit payment of dividend to its members. Thus there are three criteria for determining whether a particular company is section 25 company or not:
(a) The object for which the company is proposed to be formed or already formed is to promote commerce, art, science, religion, charity or any other useful object;
(b) Profits, if any, earned in carrying out the object and other income are proposed to be applied only for promoting its objects; and
(c) The company intends to prohibit the payment of dividend to its members.
OBJECTIVE OF SECTION 25
The objective of section 25 of the Companies Act, 1956 is to provide special benefits and privilege to such companies, which are formed for the purpose of:
(a) Promoting commerce, art, science, religion, charity or any other useful object, and
(b) Apply its profits and incomes for promotion of its objects and prohibit distributing them as dividends.
Such associations enjoy their standing as a company and at the same time are not required to suffix the words “Private Limited” or the word “Limited” as required under section 13(1)(a).
MEMBERSHIP IN SECTION 25
Though a partnership firm is not a legal person like a body corporate, section 25(4) of this section enable the firm to become member of any association registered under this section such as chamber of commerce or club or charitable institution and enjoy all such privileges as are enjoyed by bodies corporate which become members of such associations. Membership of such firm shall cease upon dissolution of the firm. However, the partners of the firm may continue to be the members of such company in their individual capacity.
It is advisable that the firm should obtain membership in the individual name of the partners as they may agree.
SHARE CAPITAL
As per the provision of section 3 of the Companies Act, 1956, a private company is required to have a minimum paid-up capital of Rs. 1Lakh and Public Company is required to have minimum share capital of Rs. 5 Lakh. However section 25 companies have been exempted from this requirement regarding minimum share capital by virtue of sub-section (6) inserted by Companies Amendment Act of 2000. As such they can be registered even if they have share capital less than the statutory minimum.
APPLICABILITY OF STAMP ACT AND SALES TAX LAWS
Companies registered under this section need not have their Memorandum and Article of Associations stamped under Article 39 of the Indian Stamp Act, 1899.
Registration under this section as a member club is prima facie proof that the club is not an association for profit and consequently there is no element of sale by the club to its members when refreshment are served so as to warrant levy of sales tax. (Cosmopolitan Club v Deputy Commercial Tax Officer, AIR 1952 Mad.814: (1952).
APPLICATION FOR ISSUE OF LICENCE
The procedure for forming a section 25 company and for conversion of an existing company in to section 25 company are provided in the Companies Regulation, 1956 and annexure thereto. The power under section 25 has been delegated to the ROC.
GRANTING OF LICENCE
The Registrar of Companies (formerly Regional Director) shall, after considering the objections, if any, received by it within a time fixed thereof in the notice aforesaid, and after consulting any authority, department or Ministry, as it may, in its discretion, decide, determine, whether the licence should or should not be granted.
The Registrar of Companies (formerly Regional Director) may direct the company to insert in its memorandum or in its articles such conditions of the licence as may be prescribed by the Regional Director in this behalf.
EFFECT OF REGISTRATION
After receipt of the licence from the Registrar of Companies (formerly Regional Director), the association may thereupon be registered u/s 25 of the companies Act, 1956. On registration of a company accordingly with limited liability, it shall enjoy all the privilege and exemption under the Act and the word “Limited” or the words “Private Limited” will not be included in the name of such company.
REVOCATION OF LICENCE
The Registrar of Companies (formerly Central Government) is empowered to revoke the licence granted under sub-section (1) after affording an opportunity of hearing. In terms of sub-section (7) of section 25, the licence granted may be revoked by Registrar of Companies (formerly Central Government) at any time and on such revocation, the Registrar of Companies shall enter the word “Limited” or the words “Private Limited” as the case may be at the end of the name of the company and the body shall cease to enjoy the exemptions/privileges granted to it by this section. However, before taking action the Registrar of Companies (formerly Central Government) shall give notice in writing to its intention to revoke the licence and shall offer opportunity to the company of being heard. On revocation of licence the company shall change its name within three months from the date of order or within such longer period as the Registrar of Companies (formerly Central Government) may allow and in such situation section 21 and 23 shall become applicable.
RESTRICTION ON ALTERATION OF MEMORANDUM AND ARTICLE OF ASSOCIATIONS
A company licenced under this section cannot alter any provisions of its memorandum in respect of its objects, except with the previous approval of the Registrar of Companies (formerly Central Government). If the alteration comes within any of the clause of sub-section (1) of section 17, the provisions of that section must be complied with inter alia, by obtaining the approval of CLB.
The Registrar of Companies (formerly Regional Director) exercising the power of Central Government had while issuing the licence to the company under section 25 of the Companies Act, 1956, may provide that no amendment shall be made to the Memorandum and Articles of Association of the company without the prior approval of the Central Government, {C.R. Singhania Vs Garware Club House (2003) 57 CLA 422(Bomb)}
DISCONTINUATION OF NAME ON REVOCATION OF LINCENCE
Where a licence is granted to a body the name of which contains the words “chamber of commerce” within a period of 3 months or such period as may be extended, from the date of revocation of licence by the Central Government, that name must be changed so as not to contain the said words. As regard the change of name thereupon, the company is required to comply with the provisions of section 23.
PENALITY AND COMPOUNDING OF OFFENCES
If the body makes default in complying with the requirements of sub-section (9) (failure to remove from the name of the company, the words “Chamber of Commerce”), it shall be punishable with fine up to Rs. 5000/ per day during which the default continues.
No specific penalty has been provided for the contravention of sub-section(8), in regard to alteration of the objects clause in the MOA without the approval of the Central Government. Accordingly, for such contravention, the company and its officers in default shall be punishable as laid down under section 629-A.The offence is, however, compoundable under section 621A.
MERGER AND AMELGAMATION
Section 25 companies may be amalgamated with another section 25 companies subject to the compliance with the provisions of the Act.
SECRETARIAL COMPLIANCE CERTIFICATE
If the paid-up share capital of the company is Rs. Ten lakhs or more and not required to appoint secretary, the company shall require to obtain compliance certificate under section 383A of the Companies Act and to file it with Registrar in prescribed e-form.
Regards
CS Ajay Mishra
CAclubindia
