SEC 8 COMPANIES- A CORPORATE FORM OF NON PROFIT ORGANISATION

SEC 8 COMPANIES- A CORPORATE FORM OF NON PROFIT ORGANISATION

India’s rich experience in philanthropy which received more publicity over last few years and many wealthy individuals are coming forward to donate for country’s poor. Non Governmental organizations (NGO) are also playing great role in this process. Tata Trusts, a CSR wing of Tata Group, is directly involving in charitable activities in pursuance to its policy outlined by Mr. Ratan Tata years back. Tata Trusts, is holding two third of tata sons shares, will constitute various charitable programme in various new geographies jointly with government and corporates as part of its philanthropy.

There are mainly 3 types of NGOs in India involved in charitable activities, the details of which are given below:

1.  Societies registered under Societies Registration Act 1860 (being Central Act for incorporation of NGO and almost all states of country have adopted the statute for creating its state level authorities).

2.  Trusts formed under Indian Trusts Act 1880 (either Private trust or Public trust).

3.  Section 8 Company as per Companies Act, 2013 (Section 25 as per Companies Act, 1956).

Companies incorporated not for profit under Sec 8 of the Companies Act, 2013 either as public company or private company, are considered as best form of organizational framework. The statutory reports and audited financials are available online on public inspection. One Person Company (OPC) cannot be incorporated as a Section 8 Company as per the provisions of the Act. The main purpose of section 8 company is mainly for the social welfare of the society. Infosys Foundation, Reliance Foundation, TATA Foundation, Reliance Research Institute are some of the examples of Sec 8 companies registered under the Act. In this article, an attempt has been made to enumerate on various exemption and major provisions applicable to such Companies.

ABOUT SEC 8 COMPANY

As per Sec 8 (1) of the Companies Act, 2013, where it is proved to the satisfaction of the Central Government* that a person or an association of persons proposed to be registered under this Act as a limited company:

(a)   has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

(b)   intends to apply its profits, if any, or other income in promoting its objects; and

(c)   intends to prohibit the payment of any dividend to its members,

the Central Government* may, by license issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word "Limited", or as the case may be, the words "Private Limited”, and thereupon the Registrar of Companies (RoC) shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

* The powers have been delegated to Registrar of Companies vide notification dated May 21, 2014

FEATURES OF SECTION 8 COMPANIES

·      Members of such company don’t give any dividend.

·      Such company can’t be treated as small company.

·      Any profit or income of such company shall be used only for the promotion of its objects.

·      A special license is required for its incorporation.

·      Such company cannot be converted into one person company

·      No minimum share capital required for such company.

·      Such company need not use suffix ‘Private Limited’ or ‘Limited’ with its name.

·      Articles of Association (AoA) of such company shall be amended only with the prior approval of Central Government ie., RoC.

·      Such company shall amalgamate only with another company registered under section 8 of the Act and having similar objects.

Section 8 Company enjoys all the privileges and subject to all the obligations of limited companies. However such companies have following exemptions as detailed below:

IMPORTANT EXEMPTIONS:

1.    Any person can be appointed as Company Secretary even if he/she is not a member of Institute of Company Secretaries of India (ICSI).

2.    A general meeting may be called by giving 14 clear days notice instead of 21 clear days.

3.    It shall be enough for a Section 8 Company to hold at least one meeting within every six calendar months instead of holding four meetings a year.

4.    The provision related to recording of minutes of general meetings, board meeting other meetings and resolutions passed by Postal Ballot under Sec 118 of the Act has been withdrawn except where company’s articles provide for confirmation by way of circulation of minutes.

5.    The maximum limit of 15 directors and appointment of more than 15 directors by passing special resolution has been withdrawn.

6.    Conditions requiring and governing appointment of Independent Directors under Sec 149 (4) to (13) & 150 have also been waived off.

7.    Provisions of Sec 160 w.r.t. right of persons other than retiring director to stand for directorship, shall not applicable to these companies whose AoA provide for election of directors by ballot.

8.    The maximum limit of directorship a person can hold in more than 20 companies has been relaxed.

9.    The provisions related to the meeting of Board od Directors under Sec 173 (1) shall apply to the extent that Board shall meet atleast once in every 6 calendar months.

10. The Quorum for the Board Meeting of such company shall be either 8 members of 25% of total strength whichever is less instead of 2 directors or 1/3^rd of total strength whichever is higher (which is applicable to other companies).

11. Appointment of Independent Directors forming majority in case of Audit Committee of the Company shall not apply pursuant to Sec 177 of the Act.

12. Provisions of Sec 178 of the Act w.r.t constitution of Nomination and Remuneration Committee and Stakeholders Relationship Committee shall not apply to such companies.

13. A partnership firm can become member of a such Company.

14. There is an specific exemption to Section 8 from complying with the Secretarial Standards. However, such companies may comply with secretarial standards in order to have better governance in the company.

INCORPORATION OF SECTION 8 COMPANY:

Particulars

1.  Apply for name using Reserve Unique Service (“RUN”) using the link www.mca.gov.in

2.  File e-Form INC-12 with the following attachments: ·   Draft Memorandum of Association as per Form No. INC-13 ·   Draft Articles of Association of the Company ·   Declaration as per Form No. INC-14 b by professional ·   Declaration as per Form No. INC-15 by the applicant ·   Estimated income and expenditure for next three years ·   Proposed business plan and activities to be undertaken ·   Note that the Form INC-12 has to be approved and then only we can proceed with filing of SPICe Forms.

3.  File SPICe (INC-32) along with the following attachments: ·   Memorandum of Association. ·   Articles of Association. ·   Declaration (INC-9) from all subscribers and first Directors. ·   Consent to act as Director. ·   Proof of identity of all subscriber and first Directors. ·   Copy of self attested PAN card. ·   Proof of residence of all subscriber and first Directors not older than two months.

4.  RoC issues Certificate of Incorporation along with PAN and TAN.

5.  File INC 22 (for notice of situation of registered office) along with lease deed/ rent agreement along with utility bills and building tax receipt.

REVOCATION OF THE LICENSE

As per the Sec 8(6) of the Act, the Central Government ie RoC may by order revoke the license of the company if the company contravenes

a.    any of the requirements of this section or

b.    any of the conditions subject to which a license is issued or

c.    any activity of the company which are conducted fraudulently or

d.    are  in contrast to public interest.

On occurring of such event as given above, the Central Government ie., RoC can direct the company to convert its status to private or public company and change its name by adding the suffix ‘Limited’ or ‘Private Limited’ and there upon the RoC shall register the company accordingly. 

The Central Government ie., RoC may, if it is satisfied that it is essential in the public interest, direct such company to be wound up or amalgamated with another company that is registered under this section. But such orders can only be given after the company has been given a reasonable chance to be heard and then a copy of the order shall be filed with RoC.

As per Sec 8 (8) where a licence is revoked under sub-section (6) and where the Central Government is satisfied that it is essential in the public interest that the company registered under this section should be amalgamated with another company registered under this section and having similar objects, then, notwithstanding anything to the contrary contained in this Act, the Central Government may, by order, provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and with such liabilities, duties and obligations as may be specified in the order.

PENALTY

In case a company makes any default in complying with any of the requirements laid down in this Section 8 of the Act, the company shall be punishable –

·   with fine not less than 10 Lakh rupees and which can be extended up to 1 Crore rupees,

·   Every directors and officer of the company in default shall be punishable with imprisonment for a term which can be of three years with fine which shall not be less than 25,000 rupees but which can extend to 25 Lakh rupees,

·   Or with both.

SEC 8 COMPANY VS CORPORATE SOCIAL RESPONSIBILITY

Sec 135 of the Act mandates that every class of companies shall constitute Corporate Social Responsibility (CSR) Committee and spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy read  with Sch VII.

It is pertinent to note that Board of Directors of the Company may decide to undertake its CSR acitivies through company established under Section 8 of the Act or registered trust  or a registered society established by the Company either singly or jointly with other companies provided that such company/ trust/ society shall have established track record of 3 years in undertaking similar programmes.

CONCLUSION:

Big corporates are moving towards adherence of the social responsibility and the Corporate form of non profit organization is considered as best for philanthropy including CSR. 

SIGNIFICANT BENEFICIAL OWNERSHIP – A WAKE-UP CALL FOR THE DISCLOSURE!

INTRODUCTION

The Corporate vehicle is considered as channel by defaulters for siphoning of funds for illegitimate purposes like money laundering, tax evasion, corruption, terror financing and illegal activities. In the wake to prevent the misuse of funds & money laundering, the Financial Action Task Force (FATF), an inter-governmental organization formulated various recommendations to tap such funds and based on the same, Ministry of Corporate Affairs (“MCA”) notified revised Section 89 (10) and 90 of the Companies Act, 2013 (“the Act”) through Companies (Amendment) Act, 2017 (“the Amendment Act”) read with the Companies (Significant Beneficial Owners) Rules, 2018 (“the 2018 Rules”) which came into effect from 14.06.2018 and amended through Companies (Significant Beneficial Owners) Amendment Rules, 2019 (“the 2019 Rules”) dated 08.02.2019. Such regulatory framework brought in mainly to identify individual (natural person) who hold significant stake indirectly in reporting company and who is standing behind the screen.

This article deliberates on various provisions of the Act together with respective rules thereunder in respect of Significant Beneficial Owners (“SBO”) along with examples.

UNDERSTAND THE CONCEPT “SIGNIFICANT BENEFICIAL OWNER”

The SBO is defined under Rule 2 (h) of the 2019 Rules and in relation to a reporting company⁽¹⁾, SBO means individual who acting alone or together⁽²⁾ or through one or more person or trust, possesses one or more of following rights or entitlement in such reporting Company, namely:-

(i)   holds indirectly, or together with any direct holdings, not less than 10% of the shares⁽³⁾;

(ii)  holds indirectly, or together with any direct holdings, not less than 10% of the voting rights in the shares;

(iii) has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;

(iv) has right to exercise, or actually exercises, significant influence⁽⁴⁾ or control⁽⁵⁾, in any manner other than through direct-holdings alone:

Various definitions connected to the concept “SBO”

⁽¹⁾"Reporting Company" means a company as defined in section 2 (20) of the Act, required to comply with the requirements of section 90 of the Act. (Rule 2 (f) of 2019 Rules)

⁽²⁾if any individual (s) acting through any person or trust, act with a common intent or purpose of exercising any rights or entitlements, or exercising control or significant influence, over a reporting company, pursuant to an agreement or understanding, formal or informal, such individual, or individuals, acting through any person or trust, as the case may be, shall be deemed to be 'acting together'. (Explanation V to Rule 2(h) of 2019 Rules)

⁽³⁾ The instruments in the form of Global Depository Receipts(GDR), Compulsorily Convertible Preference Shares or Compulsorily Convertible Debentures shall be treated as 'shares'.

⁽⁴⁾ "Significant Influence" means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies (Rule 2 (i) of 2019 Rules)

⁽³⁾"control" means control as defined in Section 2 (27) of the Act to include

a) right to appoint majority of directors or

b) to control the management or

c) policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly including

by virtue of their shareholding or management rights or shareholders agreements or voting agreement or in any other manner. (Rule 2 (b) of 2019 Rules along with Sec 2 (27) of the Act)

The Points to be noted to become SBO:

IMPORTANCE OF “INDIRECT HOLDING OF RIGHT OR ENTITLEMENT”

It is pertinent to note that if an individual who holds any of the aforesaid rights or entitlement indirectly in the reporting company, then such individual is considered as “SBO”. Now let’s understand the concept “Indirect holding of right or entitlement”. An individual shall be considered to hold a right or entitlement indirectly in the reporting company, if he satisfies any of the following criteria, in respect of a member of the reporting company.

Sl. No.	Member of Reporting Company	Who is an SBO
1	Body Corporate (whether incorporated or registered in India or abroad)	a.  An individual holds majority stake in such Body Corporate; or b.  An individual holds majority stake in the ultimate holding company (whether incorporated or registered in India or abroad) of such Body Corporate.
2	Hindu Undivided Family (HUF)	An individual who is the Karta of the HUF
3	Partnership entity (through itself or a partner)	a.  Individual who is a partner; or b.  Individual who holds majority stake in the body corporate which is a partner of such partnership entity; or c.   Individual who holds majority stake in the ultimate holding company of the body corporate which is a partner of such partnership entity.
4	Trust (through trustee)	a.  individual is a trustee in case of a discretionary trust or a charitable trust (discretionary trust means trust whose beneficiary is not known in advance); b.  Individual who is a beneficiary in case of a specific trust (Specific trust means trust whose beneficiary is known in advance); c.   Individual who is the author or settlor in case of a revocable trust.
5	a.   a pooled investment vehicle; or b.   an entity controlled by the pooled investment vehicle, based in member State of the Financial Action Task Force (FATF) on Money Laundering & the regulator of the securities market in such member State is a member of the International Organization of Securities Commission (IOSC)	a.   Individual is a general partner; or b.   Individual is an investment manager; or c.   Individual is a CEO where the investment manager of such pooled vehicle is a body corporate or a partnership entity.

Various definitions connected to the concept “Indirect holding of right or entitlement”

"majority stake" means;-

·   holding more than one-half of the equity share capital in the body corporate; or

·   holding more than one-half of the voting rights in the body corporate; or

·   having the right to receive or participate in more than one-half of the distributable dividend or any other distribution by the body corporate;(Rule 2 (d) of 2019 Rules)

"Partnership Entity" means a partnership firm registered under the Indian Partnership Act, 1932 or a limited liability partnership registered under the Limited Liability Partnership Act, 2008. (Rule 2 (e) of 2019 Rules)

 

Figure I

Mr. N has to give disclaration as to SBO in realation to M/s. ABC Limited which is reporting Company.

ESTABLISHING “DIRECT HOLDING OF RIGHTS OR ENTITLEMENT”

An individual who hold rights or entitlements directly in reporting Company, the concept of SBO will not attract. We can now determine the concept of “direct holding of rights or entitlement”. An individual shall be considered to hold a right or entitlement directly in the reporting company, if he satisfies any of the following criteria, namely.

INTERPRETATION OF “BENEFICIAL INTEREST” UNDER SEC 89

There are 2 different concepts under the Sec 89 ie. REGISTERED OWNER (legal owner) and BENEFICIAL OWNER. Registered owner means a person whose name is entered in the Register of Members of the company as the holder of shares in that company but who does not hold the beneficial interest in such shares whereas Beneficial owner means a person holding and exempted from furnishing declaration or acquiring a beneficial interest in shares of a company not registered in his name. Let us take an example to understand the concept. Suppose a public company (“Holding Company”) is holding 100% investment in a subsidiary company and to comply with minimum legal requirement of members under the Act, the holding company appoints 6 nominees (registered owner/ ostensible owner) in the reporting company. For the purposes of Sec 89 and 90, beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—

(i)   exercise or cause to be exercised any or all of the rights attached to such share; or

(ii)  receive or participate in any dividend or other distribution in respect of such share.

The Concept was first introduced under Sec 187 C of the Companies Act, 1956 through companies (Amendment) Act, 1974 came into effect from 01.02.1975. The main purpose of this provision is to ensure that all benami holding of shares has to be reported by the Benamidar and beneficial owner.

As per Sec 89 (1) of the Act, a registered owner shall file a declaration (including changes whenever occurred in beneficial interest) in Form MGT-4 with the company, within a period of 30 days from the date on which his name is entered in the Register of Members of such company.

The duty to make declaration under the section arises only in the case where holder of shares accepts/ competent court finds that he is only a nominee holder on behalf of some other person. Where a company given money to another person to enable the latter to invest the money in shares and latter was not to hold any beneficial interest in such shares, the Company’s refusal to register such shares on the ground that the declaration under the Section was not made was held to be justified. The declaration had to be made only after register. The question of declaration arises only when the name of the buyer was entered in the register of members. (Hemangini Finance & Leasing P Ltd V. Tamilnad Mercantile Bank Limited)

As per Sec 89 (2) of the Act, a beneficial owner shall file a declaration (including changes whenever occurred in beneficial interest) disclosing such interest in Form No. MGT 5 with the company within 30 days after acquiring such beneficial interest in the shares of the company.

As per Sec 89 (6) of the Act, where any declaration under the section, is received by the company, the company shall make a note of such declaration in the Register of Members and shall file a return in e-form MGT-6 with RoC within a period of 30 days from the date of receipt of declaration by it

Exemption under Sec 89:

1.    a trust which is created, to set up a Mutual Fund or Venture Capital Fund or such other fund as may be approved by the SEBI.

2.    Government Company (Notification dated June 5, 2015)

3.    Specified IFSC Public Company - In Sub-section (6) of section 89, for the words “thirty days” read as “sixty days”. (Notification Date 4th January, 2017)

4.    Specified IFSC Private Company - In Sub-section (6) of section 89, for the words “thirty days” read as “sixty days”. (Notification Date 4th January, 2017)

5.    Sec 9 (2) of Depositories Act, 1996, provisions of Sec 89 of the Act shall not apply to securities held by a depository on behalf of beneficial owners.

The Section 89 and 90 are separate provisions. If we are complying with Sec 89, the adherence of Sec 90 of the Act will not come as the latter section attracts only if there is an individual who is holding any of the rights or entitlements indirectly in the reporting company.

OBLIGATION OF SBO UNDER SEC 90 (Rule 3)

a.    SBO shall file a declaration in Form No. BEN-1 to the reporting company within 90 days from such commencement.

b.    Every individual, who subsequently becomes a SBO or where his SBO undergoes any change shall file a declaration in Form No. BEN-1 to the Reporting Company, within 30 days of acquiring such SBO or any change therein.

OBLIGATION OF REPORTING COMPANY UNDER SEC 90 (Rule 4)

·      Upon receipt of declaration under rule 3, the reporting company shall file a return in Form No. BEN-2 with the RoC in respect of such declaration, within a period of 30 days from the date of receipt of such declaration by it, along with the fees as prescribed in the respective rules.

Clarification

As per MCA General Circular No. 07/2018 dated 06.09.2018, the time limit for filing the e-form BEN-2 would be 30 days from the date of deployment of such e-form on the MCA-21 portal and no additional fee shall be levied if the same is filed within 30 days from the date of deployment of the said e-form.

·      Every reporting company shall take necessary steps to find out SBO and cause such individual to make a declaration in Form No. BEN-1.

·      A company shall give notice seeking information to any person (whether or not a member of the company) whom the company knows or has reasonable cause to believe:

a.  to be a SBO of the company;

b.  to be having knowledge of the identity of SBO or another person likely to have such knowledge; or

c.  to have been a SBO of the company at any time during the three years immediately preceding the date on which the notice is issued,

and who is not registered as a SBO with the company as required under section 90 (5), in Form No. BEN-4. (Sec 90 (5) read with Rule 6)

·      Every reporting company shall in all cases where its member (other than an individual), holds not less than ten per cent of its;-

a.    shares, or

b.    voting rights, or

c.    right to receive or participate in the dividend or any other distribution payable in a financial year,

give notice to such member, seeking information in accordance with subsection (5) of section 90, in Form No. BEN-4.

REGISTER OF SBO (Rule 5)

The company shall maintain a register of SBO in Form No. BEN-3 and shall be open for inspection during business hours on every working day as the board may decide on payment of such fee which shall not exceeding Rs. 50 for each inspection. 

APPLICATION TO THE NCLT (Rule 7)

The reporting company shall apply to the NCLT within 15 days of expiry of period as specified in notice,

i.    Where any person fails to give the information required by the notice in Form No. BEN-4, within a period of not exceeding 30 days of the date of the notice; or

 ii.  Where the information given is not satisfactory.

CONSEQUENCE OF TRIBUNAL ORDER

The Tribunal may order directing that the shares in question be subject to restrictions as follows:

a.  restrictions on the transfer of interest attached to the shares in question;

b.  suspension of the right to receive dividend or any other distribution in relation to the shares in question;

c.  suspension of voting rights in relation to the shares in question;

d.  any other restriction on all or any of the rights attached with the shares in question.

NON-APPLICABILITY OF 2019 RULES (Rule 8)

These rules shall not be made applicable to the extent the share of the reporting company is held by,

(a)  IEPF Authority constituted under Section 125 (5) of the Act;

(b)  its holding reporting company:

Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.

(c)  the Central Government, State Government or any local Authority;

(d)  (i) a reporting company, or

(ii) a body corporate, or

(iii) an entity,

controlled by the Central Government or by any State Government (s) or partly by the Central Government and partly by one or more State Governments;

(e)  SEBI registered Investment Vehicles such as Mutual Funds, Alternative Investment Funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India,

(f)   lnvestment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

ADDITIONAL COMPLIANCE IN CASE OF LISTED COMPANIES

SEBI vide Circular No SEBI/HO/CFD/CMD1/CIR/P/2018/0000000149 dated 07.12.2018 (‘SEBI Circular’) required every listed entities to disclose the details pertaining to SBO in the format prescribed in the said Circular while submitting the shareholding pattern for the quarter ended March 31, 2019.

CONCLUDING REMARKS

The disclosures submitted in the regard are expected to bring transparency of shareholding and at same time help the government recognize the benami transactions and prevent money laundering activities.

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