EXEMPTION TO NON PROFIT COMPANIES


On 5th June 2015, Ministry of Corporate Affairs posted here a draft notification to be published in Official Gazette announcing some exemption to Not for profit Companies.

As there is no effective date is announced in the Notification, this notification shall come into effect on the date of its publication in the Official Gazette.

[UPDATE 19th June 2015: MCA uploaded copy of Official Gazette dated 5th June 2015, in which this Notification is published. Meaning that; These exemption came into force from that date.]

The Notification is issued in exercise of power conferred by Clauses (a) and (b) of Sub – section (1) and sub – section (2) of 462 read with Section 8 of the Companies Act, 2013. A copy of this notification has been laid in draft before both Houses of Parliament as required by sub-section (2) of section 462 of the Companies Act, 2013.

Paragraph 2 of the Notification cast a condition on the Not for Profit Companies:

“The Companies covered under Section 8 of the Companies Act, 2013, while complying with such exceptions, modifications adaptations, as specified in column (3) of the aforesaid Table [Given in Paragraph 1 of the Notification], shall ensure that the interests of their shareholders are protected.”

This is a subjective condition and may complicate litigations. This may also open for Secretarial Standards and Circulars.

Now, we discuss exemption granted under Paragraph 1 of the Notification.

Company Secretary [Section 2(24)]:

This clause shall not apply to not for profit companies.

This means any person other than defined in Section 2(1)(c) of the Company Secretaries Act 1980 may be a secretary of not for profit companies.

Private and Public Company [Section 2(68) and (71)]:

According to exemptions, requirement of minimum paid up share capital not apply to not for profit companies.

Recently, the Companies (Amendment) Act, 2015 said to be removed minimum paid up capital requirement for all companies either private or public. Please read it again, terms “as may be prescribed” are still there in these clauses. Government curtailed its own power to prescribe any minimum paid up capital in case of not for profit companies.

This endorse my earlier views, government may soon prescribe some minimum paid up capital in case of companies other than not for profit companies.

Annual General Meeting [Section 96(2)]:

A second proviso after first proviso but before explanation is being inserted.

“Provided further that the time, date, and place of each annual general meeting are decided upon beforehand by the board of directors having regard to the directions, if any, given by the company in its general meeting.”

This means company in general meeting may make some directions for directors to decide time, date and place of next annual general meetings and directors shall follow these directions.

Notice of Meetings [Section 101(1)]:

A general meeting of a not for profit company may be called by giving not less than clear twenty one fourteen days’ notice either in writing or through electronic mode in such manner as may be prescribed.

Minutes of meetings [Section 118]:

The section shall not apply to a not for profit company as a whole except that minutes may be recorded within thirty days of the conclusion of every meeting in case of companies where the articles of association provide for confirmation of minutes by circulation.

Right of member to copies of audited financial statement [Section 136(1)]:

A copy of the financial statements, including consolidated financial statements, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than twenty-one days Fourteen days before the date of the meeting

Board of Directors [Section 149]:

Sub – section (1), first proviso to sub – section (1), sub – sections (4) to (11), clause (i) of sub – section (12) and sub – section (13) of Section 149 shall not apply to a not for profit company.

Second proviso to sub – section (1) requiring at least one woman director, sub – section (2) requiring compliance of sub – section (1) within one year, sub – section (3) asking at least one resident director and sub – section (12)(ii) liability of non – executive directors shall apply to a not for profit company.

Accordingly a not for profit company may have its own provision regarding size of boards, rotation of directors, and independent directors. Some may ask, what is role of independent directors here. Is not its possible captive CSR Foundations registered as not for profit company may want to appoint independent consultants in its boards as independent directors? Practically yes but legally no.

In case, a not for profit company appoint an independent director, he shall not get protection under sub – section (12) because its clause (i) is not applicable to a not for profit company.

Selection of Independent Directors [Section 150]:

This exemption is just a statement to confirm position as section 149(5) is already not applicable.

Appointment of Directors [Section 152(5)]:

This sub – section provides that a person appointed as a director shall not act as a director unless he gives his consent to hold the office as director and such consent has been filed with the Registrar within thirty days of his appointment in such manner as may be prescribed.

This sub – section shall not apply in case of a not for profit company.

I do not find it helpful. How can a person be appointed as director without his consent?

Right of persons other than retiring directors to stand for directorship [Section 160]:

Section 160 shall not apply to a not for profit company if its articles provide for election of directors by ballot.

Where such election by ballot is not provided in the articles, Section 160 shall apply.

Number of Directorship [Section 165(1)]:

According to Section 165(1), no person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time.

This sub – section shall not apply in case of a not for profit company. This means directorship of a not for profit company shall not be counted for the purpose of this sub – section.

Meeting of Board [Section 173]:

In case of a not for profit company, the Board of Directors of a not for profit company shall hold at least one meeting within every six colander month. There is no minimum or maximum gap between two meeting of board of directors of a not profit company is provided.

The maximum gap between board meetings of a not for profit company may be 365 days (consider case of a leap year) and minimum gap of a single second.

Quorum of meetings of Board [Section 174(1)]:

Section 174(1) reads, “the quorum for a meeting of the Board of Directors of a company shall be one – third of its total strength or two directors, whichever is higher, and the participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum under this sub-section.

In case of a not for profit company, this sub – section along with a special proviso shall read, “The quorum for a meeting of the Board of Directors of a company shall be one – third of its total strength or two directors, whichever is higher either eight members or twenty five percent of its total strength whichever is less and the participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum under this sub-section. Provided that; the quorum shall not be less than two members”.

Audit Committee [Section 177(2)]:

The Audit Committee of a not for profit company shall consist of a minimum of three directors with independent directors forming a majority.

Nomination and Remuneration Committee and Stakeholders Relationship Committee [Section 178]:

Section 178 shall not apply to a not for profit company.

Powers of Board [Section 179(3)]:

The matters referred in clauses (d) to borrow monies, (e) to invest the funds of the company, and (f) to grant loans or give guarantee or provide security in respect of loans may be decided by Board by circulation instead of at a meeting.

This exemption also exempt filing of resolution under section 117(1) in respect of matters specified in these clauses.

Disclosure of interest by director [184(2)]:

Section 184(2) shall apply to a not for profit company only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.

In case of transactions with value of not exceeding one lakh interest director may participate in such meeting with or without disclosure of interest.

Register of contracts or arrangements in which directors are interested [Section 189]:

Section 189 shall apply to a not for profit company only if the transaction with reference to section 188 on the basis of terms and conditions of the contract or arrangement exceeds one lakh rupees.

In case of transactions with value of not exceeding one lakh, there is no requirement to enter details of transaction, in register of contract of arrangements.

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.

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2 responses to “EXEMPTION TO NON PROFIT COMPANIES

  1. Pingback: Index of Companies Law Posts | AishMGhrana

  2. Pingback: Directorship within limit | AishMGhrana

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