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Not-for-Profit Company

Context:

The Enforcement Directorate (ED) has summoned a very young political leader (aged 50s) following a trial court order in a tax assessment case of his not-for-profit company.

Relevance:

GS II-  Governance, Transparency & Accountability, Citizens Charters

Dimensions of the Article:

  1. What really is the situation?
  2. What is a Section 25 company?
  3. Prominent examples of Section 25 or Section 8 companies
  4. Why are such companies formed?

What really is the situation?

  • The leaders were accused of deceiving and misappropriating funds in the acquisition of the newspaper in one case.
  • The claimed individuals obtained it through a Section 25 company in which they own 86 percent of the stock.

What is a Section 25 company?

  • As per the Companies Act, 1956, a Section 25 company — similar to what is defined under Section 8 under Companies Act, 2013 — is a not-for-profit charitable company formed with the sole object of “promoting commerce, art, science, religion, charity, or any other useful object, and intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members”.
  • Section 8 of the Companies Act, 2013 includes other objects such as sports, education, research, social welfare and protection of environment among others.
  • While it could be a public or a private company, a Section 25 company is prohibited from payment of any dividend to its members.
  • Section 25 states that by its constitution the company is required/ intends to apply its profits, if any, or other income in promoting its objects and is prohibited from paying any dividend to its members.

Prominent examples of Section 25 or Section 8 companies

  • According to details available with the Ministry of Corporate Affairs, a large number of companies have been formed under the Section.
  • Among these are Reliance Foundation, Reliance Research Institute, Azim Premji Foundation, Coca Cola India Foundation, and Amazon Academic Foundation.

Why are such companies formed?

  • Most people looking to form a charitable entity go for forming a company under Section 25, now Section 8, rather than a Trust structure.
  • This is because most foreign donors like to contribute to a company rather than Trust because they are more transparent and provide more disclosures.
  • If a company has to be converted into a not-for-profit company, they can’t be converted into a Trust, however, they can be converted into a Section 25/ Section 8 company.

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October 2022
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