In India, certain activities (such as establishment and running of educational institutions¹) can be undertaken only by charitable institutions (“NPO”) such as public charitable trusts, societies or section 8 companies². Such NPOs are also entitled to avail tax exemptions under the Income-tax Act, 1961 (“IT Act”). Generally, the entity selection is based on several factors such as the level of regulation involved for the NPO and transparency required in its operation, liability of members, permissibility under the applicable regulations governing the activity etc., and usually a public charitable trust or society is the preferred option.

However, once the entity has been established and is in operation, the NPO owing to various factors (such as need to reduce the number of members from the minimum 7 members required by a society and to ensure better accountability) may decide to convert itself into a different charitable entity and such a decision would require an assessment on whether such conversion is permissible under law. The Companies Act, 2013 (“Act”) [read with the Companies (Authorised to Register) Rules, 2014] provides such an enablement for registration of inter alia an operating society as a company limited by guarantee³ under Section 8 of the Act.

Some of the salient features regarding such registration/conversion of a society as a Section 8 company are as under:

1. Eligibility and Company Classification

1.1   For the purposes of conversion, the general body of the society would need to pass the required resolutions with 3/4^th majority for registration as a company under Act. A company proposed to be registered under the Act          having less than 7 (seven) members will be registered as a private company.

1.2   Upon registration of a society as a company under the Act, no application for conversion into a company of any other kind, except conversion from a private company to a public company or vice-versa, can be made till the            expiry of a period of 10 (ten) years from the date of conversion/incorporation under the Act.

2. Pre-requisites

A society seeking registration under the Act is required to undertake the following obligations:

1. Prior to registration, obtaining consent/no-objection from the secured creditors of the society, if any.
2. Publishing in a newspaper, an advertisement (one in English and one in vernacular language) giving notice about proposed registration, seeking objections within 21 (twenty-one) days from publication and address them suitably.
3. Service of notice to the Registrar of Societies (“RoS”) under which it is originally registered seeking his objections, if any, to be made by such concerned RoS to the Registrar of Companies (“RoC”), within a period of 21 (twenty-one) days from the date of such notice.⁴
4. In case of registration under Section 12A of the IT Act, intimation by the society to the income tax authorities regarding its intention to register as a company.
5. Filing of affidavits/undertakings by all the members to confirm that the society will apply for dissolution to the RoS in the event of registration under the Act.
6. Filing of annual or other returns, statutorily required to be filed with the RoS, to be eligible to apply for registration.

3. Application Process

An application is required to be made by the society to the RoC for its registration as a company. Such application is required to be accompanied with various documentation/information which inter alia includes the following:

1. a list showing the names, addresses and occupations of all persons, who on a day, not being more than 6 (six) clear days before the day of seeking registration, were members of the society with proof of membership;
2. a list showing the proposed first directors of the company;
3. a list containing the names and addresses of the members of the governing body of the society;
4. statement of accounts, prepared not later than 15 (fifteen) days preceding the date of seeking registration and certified by the auditor together with the audited financial statements of the previous year, wherever applicable;
5. copies of the advertisements as stated at point 2(ii.) above, proof of service vis-à-vis point 2(iii) and point 2(iv) above; and
6. statement of proceedings, if any, by or against the society which are pending in any court or any other authority.

4. Vesting of Property/Saving of Existing Liabilities

4.1 Upon registration as a company, all property (movable and immovable, including actionable claims) belonging to or vested in the society at the date of its registration under the Act, shall, on such registration, pass to and vest in the company as incorporated under the Act for all the estate and interest of the company therein.

4.2 Registration of the society as a company shall not affect its rights or liabilities in respect of any debt or obligation incurred, or any contract entered into, by, to, with, or on behalf of, the society before registration.

4.3 All legal suits and proceedings taken by or against the company and/or any officer thereof, which was pending at the time of the registration of the company under this process, may be continued in the same manner as if the registration has not taken place.

5. Post Registration Compliances: Pursuant to registration, the registered company would be required to give an intimation within 15 (fifteen) days to the RoS (under which it is originally registered) along with documentation for its dissolution.

Conclusion

Registration of a society as a section 8 company may offer an alterative option for entity’s operation as a company with lesser members, more transparency in operation and accounts etc. However, prior to making the decision to convert into a company, the society must assess the implications for its extant operational registrations and licenses. For instance, a section 8 company may need to re-apply to regulatory authorities for its licenses as the society will need to surrender its licenses prior to dissolution. Furthermore, the society should also assess the conditions of its exemption approval/registration under the IT Act and should immediately re-apply with the tax authority for continued tax exemptions for its activities. As is evident that the process for fresh registration as a company and dissolution of the existing society is tedious but it provides ease of operation, better control and accountability in operations in the long term.

Endnotes

¹ The aforesaid condition is generally subject to State legislations which may sometimes allow for-profit companies as well to set up educational institutions.

² A company registered under Section 8 of the Act which (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.

³ In terms of the Act, ’a company limited by guarantee’ means “a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up”. 

⁴ In the event no objections are received, it is presumed that the RoS  has no objection, and the notice shall disclose the purpose and substance of matters in relation to objections.