In this article, Dibyendu Roy, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses Formation and Registration of Non-Profit organizations in India.
A ‘Non-Profit organization’, means an entity not established for the purpose of making a profit, or not entered into, for money, as per an English Dictionary. We will be discussing the various types of non-profit organisation in the Indian scenario- their formation and how can they be registered with authorities to do their activities.
In India, there are three different types of non-profit organisation exists as per type of registration with authorities. They are – Trusts, Societies and Non-profit Companies under section 8 of the Companies Act, 2013. We will be discussing all of them below.
Formation of a Trust and registration
A Trusts can be differentiated into Public or Private Trust. If it is for the benefit of a substantial section of people, it can be called a Public Trust, whereas a Private Trust could be for the benefit of a limited number of people having a specific objective. A Trust could be formed with a minimum member of at-least two and no limit in a maximum number of members. It can be formed under the State Act, if any, or under Bombay Trust Act, 1950 and needs to be registered under the Deputy Registrar or Charity Commissioner, as the case may be, with the State into which it belongs to, for eligibility of tax exemption. A Trust is to be authored by a person in the form of a Trust deed with specific objectives. A “trustee” means a person alone or in association with other persons, the Trust property is vested into. Generally, Indian citizens are chosen as trustees, though there is no prohibition against foreigners serving in this capacity.
Trust could be registered for different objectives, such as Providing relief to poverty or distress; rendering education; medical help; social welfare and public benefit like recreation facilities etc.
Limitation to trustee
Trust property cannot be used by a trustee of a public Trust for their own interest or private advantage, though Trust property is vested to the trustees. There could not be any agreement by a trustee, in which a personal interest of him that conflicts or could possibly conflict with the interests of the beneficiaries of the trust (beneficiaries’ interests, the trustees are bound to protect). Power delegation of a Trustees is not possible to others, i.e any of their duties, functions or powers to a co-trustee or any other person. Basically, a trustee cannot delegate authority with respect to the duties that require discretion.
An object of a Trust is generally irrevocable in India. If a Trust becomes inoperative for considerable duration, the Charity Commissioner could undertake a revival process for the same. In case, there is a difficulty to operate a Trust with its object as mentioned in the Trust deed, the object could be modified as near as possible, to the original object of the Trust in concurrence with the authority. Thus, the authority, Charity Commissioner, ensures that the charitable nature of a trust will be honored, although, the original, specific purposes of the trust cannot be continued.
Formation of a Society and registration
Societies in India is governed by the Societies Registration Act 1860 as well as State Act notified for different states.
A Society can be formed by at least seven individuals or Institutions with a common object of like ‘any literary, scientific, or charitable purpose’ as per the Societies Registration Act 1860. A Memorandum of Association is required to be submitted to Registrar of Societies by the members, willing to form a Society. Registration is required to legalize the Society and to obtain income tax exemption.
A Memorandum of Association requires to contain the following: the name of the society to be registered; the object of the society, i.e the basic purpose to form the Society; the names, addresses, and occupations of the governing body members. The governing body members are elected or selected as per Rules framed by the Society and are responsible for management of all the affairs of the Society. Framed rules and regulations of the society, certified by at least three members, is required to be submitted, along with the Memorandum of Association to the Registrar of Societies, under whose jurisdiction the Society falls into. Any Indian can be a member of a Society and there is no bar to include a Foreigner in a Society.
Let us discuss the types of a Societies which can obtain registration under the Act mentioned. It can be formed for any charitable purpose; Societies for utilization of military orphan funds or societies established at the several erstwhile presidencies of India is also there; it may be formed to promote science, literature, or fine arts; for knowledge dissemination on various subjects including Politics; a Society can be established for maintenance of libraries or reading-rooms for use among the members or for public; Society for museums and galleries of paintings and other works of art is possible, collections of natural history, mechanical and philosophical inventions, instruments, or designs are also eligible under the Societies Registration Act 1860.
Management of a Society
A Society is usually managed by a governing council or managing committee. The general members of a Society, called ‘General body members’, delegates management of day-to-day affairs to the Managing Committee. A Managing Committee is formed as per by-laws made by the Society and usually are elected by the members. under the bylaws of the society.
A list of the names, addresses and occupations of their managing committee members is required to be submitted to the Register of Societies, annually, and any change is subjected to be notified to the authority. Annual General meeting is required to be conducted as per by-laws of a Society. Any property held by the Society is only in the name of the Society.
Dissolution of Society needs to be approved by at least three-fifths of the society’s members. All debts and liabilities are required to be settled and if there is any balance fund, it should be distributed to another Society, having similar objects of the dissolved one.
Non-profit Companies under section 8 of the Companies Act 2013
A non-profit Company can be formed under the provision of section 8 of the Companies Act, 2013, which was permitted earlier under section 25 of the Companies Act, 1956. The provision under the section is for Companies having a charitable object- like promotion of education, research, commerce, art, science, sports, social welfare, charity, protection of environment, religion, or any similar other objects. A Company is required to invest all its profit or other income to the promotion of its objects and intends to prohibit payment of dividends to its members. Minimum three individuals or legally recognised body in the form of body corporate or Firms etc. are required to form a section 8 company. The founders or promoters of the Company, to be formed, needs to submit application to the Regional Director of the Company Law Board along with copies of the Memorandum of Association and Articles of Association of the proposed company, as well as a statement of assets, brief description of the work proposed etc. A section 8 Company may not require to include ‘Limited’ or ‘Private Limited’, as the case may be, phrases with their proposed name.
The internal governance of a section 8 Company differs with a Company formed under the Act. A notification was published on 5 June 2015, by the Ministry of Corporate Affairs for Exception, modification and adaptation of the Companies Act 2013 for a Company formed under section 8. Some of the salient exceptions are i) Clause (24) under section 2, appointment of a Company Secretary is not required; ii) Paid up share capital for a Private or Public Company of INR one lakh and INR five lakhs is not applicable; iii) Fourteen days minimum notice is required for conducting a general meeting unlike a twenty-one days minimum notice as per Companies Act (section 101); iv)Minutes of a every meeting is to be recorded within thirty days of conducting the meeting and is required to be circulated to the members. Provision of section 118 other than mentioned is not applicable; v) Financial statements and other financial documents required by law needs to reach each shareholder not less than fourteen days of general meeting; vi) Section 149 for appointment and qualification of Directors, except subsections (3) for at least one Director to stay in in India at least 182 days and sub section (12) a non-executive Director’s liability, all other sub sections of the section are not applicable; vii) for quorum in a board meeting eight members or twenty five percent of members whichever is less is required instead of one third or two Directors required as per the Companies Act 2013. Viii) no provision of Nomination and remuneration clause is there for a Company formed, under section 8 (section 178); ix) Disclosure by Directors for interest in other companies will be applicable, if the transaction amount exceeds INR one lakh with related company or Body Corporate or Firms etc.
Dissolution of a Section 8 Company
The license of a section 8 company may be revoked by the Central Government if the company contravenes any of the requirements of section 8 or any of the conditions under which the license is issued. The type of violation may be a company affair conducted fraudulently, violation of its object etc. Settlement of all debts and liabilities of the Company will be made from the fund or properties available with the Company and if the fund is in excess, it cannot be distributed among the members of the company. As per provision of section 8, the remaining funds and property will be given or transferred to some other section 8 Company, having similar objects of the Company, under dissolution. There is also a provision of amalgamation with another company, registered under section 8, and having similar object. If Central Government desires a Company under dissolution may be directed to amalgamate with another Company having similar object under section 8 and can form a single Company. The new company will have specified constitution, properties, powers, rights, interest, authorities, privileges and with all liabilities, duties and obligations of erstwhile Companies, could be specified in the Government order.