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Companies under Section 25 of Companies Act

Written By Admin on Friday, 14 December 2012 | Friday, December 14, 2012


A non profit organizations is eligible to be registered under section 25 of the Companies Act, 1956. Such an organization may be eligible for exemptions as available to a charitable trust in case the relevant conditions are satisfied.

Registration procedure
An application in form 1A is to be made to the Registrar of Companies along with a fee of Rs. 500/- Desired names for the organization in the order of preference are to be mentioned in the application form. Normally, the Registrar inform about the availability of the name within 7 days.

Once the name is approved by the Registrar, the Memorandum and Articles of Association are prepared. Companies registered under section 25 are exempted from payment of stamp duty in respect of their Articles of Association and Memorandum, vide. Articles 1o and 39 of the Bombay Stamp Act, 1958. Thereafter, an application to the Regional Director having offices at Mumbai / Calcutta / Kanpur / Chennai is to be made for issue of licence under section 25 of the Companies Act, 1956 (hereinafter referred to as ‘the Act’). The following documents are required to be submitted to the Regional Director for issue of licence required under section 25 of the Act.
  1. Draft of the Memorandum and Articles of Association. (in triplicate).
  2. Details such as name, address, occupation of the promoters. (in triplicate).
  3. List of companies, associations in which the promoters are directors or hold responsible position with the description of the position held.
  4. List of the proposed members of the Board of Directors.
  5. Declaration signed by an Advocate / Chartered Accountant / Company Secretary on non-judicial stamp paper of appropriate value.
  6. The proposed sources of income and the expenditures thereof.
  7. A note on the proposed activities and also the past activities, if any.
  8. A statement of the grounds for making an application under section 25. In this statement a reference to the relevant clause in the Memorandum of Association regarding the Vision and Mission of the proposed company should be made.
  9. Declaration signed by all the promoters on non-judicial Stamp Paper of appropriate value.
  10. In case of an existing society applying for conversion into a section 25 company, audited statement of accounts and annual report of the society for the past two years (in triplicate) should be submitted.
  11. A certified copy of the notice to be published in newspapers.
The application should accompanied by a draft of Rs. 500/- drawn in favour of "Pay and Accounts Officer, Department of Company Affairs".
A copy of the application with all enclosures and papers should be sent to the concerned Registrar of Companies of the state in which the Registered office of the organization is situated.

Within one week of making an application to the Regional Director a notice is required to be published in one English newspaper and one vernacular newspaper of the local area in which the Registered Office is situated.

Grant of Licence and Certificate of incorporation
The Regional Director scrutinises the application received by him. The Registrar of Companies to whom a copy is sent, also forwards his recommendations to the Regional Director.
The Regional Director may ask for further clarification or explanation as he deems fit from the applicants as well as from the Registrar. Based on his scrutiny of application and recommendations received, he grants the licence on behalf of Central Govt.

The Government by issue of licence allow an association be registered as a company with limited liability for the members, without the addition to its name of the word "Limited" or the words "Private Limited".

After receiving the licence / approval an application is to be made to the Registrar of Companies (ROC) along with following documents :
  1. Printed copy of the Memorandum and Articles of Association.
  2. The licence granted by the Regional Director.
  3. One copy of Form 1
  4. One copy of Form 18
  5. Two copies of Form 32
  6. The requisite amount of fees payable which is Rs. 50 plus Rs. 10 per document; i.e., Form1, Form 18, Form 32.
The Registrar of Companies after scrutinizing the requisite documents shall issue a Certificate of Incorporation.

Objects of the company
The main instrument of any section 25 company is the memorandum and articles of association, wherein the aims and objects and mode of management of the company are mentioned. The objects of such company include promotion of Commerce, Art, Religion, and Charity etc.

The objects clause can be changed only with the prior sanction of Central Government. The area of operation is not restricted to the particular region in which the company is registered.

Application of profit
The important condition in case of company registered u/s 25 is that the income and property of the company is to be wholly applied for the promotion of the object as provided in its Memorandum of Association and no profit can be paid directly or indirectly, by way of divided or bonus to the members of the company.

Management of the Company
Minimum seven individuals are required to register a company under section 25 of the Act. Founder members of the company can be Directors of the company. 1/3rd of the Directors liable to retire have to retire by rotation every year. Remuneration is payable to the Directors as per schedule 13 of the Companies Act. But no prior permission of Central Govt. is required unless it crosses a certain limit.

The set up of the company is democratic. Every member on payment of fees enjoys voting rights. Every member has a right to demand the accounts and annual report.
Provision of Companies Act regarding holding meetings, keeping minutes, maintaining Registers and filing compliances are to be strictly followed.

Maintainance of accounts
The provisions of the Companies Act, 1956 regarding maintenance of accounts apply to the company registered under section 25 of the Act. Hence the annual accounts need to be audited and the Profit and Loss account should be prepared in the format prescribed under Schedule VI of the Act. Companies (Auditor's Report) order, 2003; by is clause 1(2)(iii) exempts a company licensed to operate under section 25 of the Companies Act.

Intercorporate loan and advances
Section 372A of the Companies Act, govern the provisions of intercorporate loans and advances. If a section 25 company has share capital, provisions of section 372A of the Act apply to such company as they apply to any other company. If the section 25 company does not have share capital, it will still have free reserves and percentage under section 372A is to be computed in relation to such free reserves.

Advantages of section 25 companies
All the advantages of incorporation are enjoyed by such bodies and yet they are conferred the privilege of not adding the words ‘limited’ or ‘private limited’. The officers and members enjoy limited liability and total immunity from the personal liability. The governing body of the company normally controls the admission and even a partnership firm can be the member. All the provisions of the Companies Act, 1956 apply to section 25 companies unless otherwise provided. In exercise of the powers conferred by sub-section (6) of section 25 the Central Government exempts section 25 companies from the provisions of sections 147, 160(1)(aa) 166(2), 259, 264(1), 280, 282, 303(2) fully and partly from the provisions of sections 2(45), 171(1), 193, 209(4A), 219, 257, 285, 287, 292, 299 and 301.

Unlike a Charitable Trust no administrative charges are to be paid for any donation received by the Organization. The company need not obtain any permission from any authority for sale of immovable property.

Over and above these advantages, section 25 company is also eligible to claim exemption u/s 11 of the Income Tax Act, 1961.

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 .

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 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.

Following table would provide easy comparison between a section 25 company and a trust.

Section 25 company
Trust
(1)
Governed by Companies Act, 1956
Governed by Bombay Public Trusts Act, 1950
(2)
Central Govt. Permission through the Regional Director necessary
Not necessary
(3)
Under jurisdiction of Registrar of Companies
Under jurisdiction of Charity Commissioner
(4)
Memorandum and Articles of Association as main document
Trust Deed as main document
(5)
No stamp paper necessary for memorandum and articles of association
Trust deed to be executed on non judicial stamp paper
(6)
Objects clause can be altered with prior sanction of Central Govt.
Permission of Charity Commissioner required to change objects of the Trust
(7)
No permission necessary from any authority for sale of immovable property
Prior permission of Charity Commissioner required
(8)
No administrative charges to be paid for any donation received.
2% of the donation received are to be paid as
administrative charges to the Charity Commissioner.
No charges to be  paid on donation received towards corpus.
(9)
Minimum seven members required
Minimum two trustees required
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