CONVERSION
Conversion typically refers to the process of changing the legal structure or status of the organization. Non-profit organizations can undergo conversion for various reasons, and the process may involve transitioning to a different legal form while maintaining the organization's mission and activities.
There are several reasons of conversion that can occur within non-profit organizations (NPOs), each with its own unique meaning and implications:
1. Financial Conversion
2. Beneficiary Conversion
3. Organizational Conversion
4. Fundraising Conversion
5. Program Conversion
Convert society or trust into section 8 company?
Section 8 company is the separate legal entity specifically incorporated for social purposes under the provisions of Section 8 of Companies Act, 2013. As compared to society or trust, a wide range of social activities can be undertaken through a single company. Also, it enjoys more credibility as section 8 company is incorporated only after approval from the Central Government. Accounts of the section 8 company is required to filed with Registrar of Companies (RoC) annually which offers better transparency.
Who can convert into a section 8 company?
Society or trust can be converted into a company registered under Section 8 of Companies Act, 2013.
Points to Remember:
1. The first thing to be kept in mind is that a society or trust can be converted only into a section 8 company limited by guarantee. It cannot be converted into a section 8 company limited by shares.
2. Also, the societies which have failed to comply with the filing requirements with the Registrar of Societies are not allowed to get converted into section 8 company.
3. A society or trust having more than 200 members cannot be converted into a section 8 company directly. Firstly, it has to reduce the number of members to below 200 and then only it can proceed for conversion.
Step 1 - Special Resolution:
First of all, a meeting of members of the society or trust is to be held for obtaining approval for conversion of society or trust into section 8 company. The said conversion shall be approved by the majority of members present in the meeting in person or through proxy. In that meeting, the proposed director shall be authorized to complete the process of conversion.
Step 2 -Name Reservation
After obtaining the member’s consent, the next step is to apply for the name reservation in Form SPICe+ Part A. While applying for name reservation, “Part I Section 8 Company” should be selected. But it is advisable before applying for names, ancillary process like preparing Digital Signature Certificates (DSC) of proposed directors and members should be completed as name is reserved only for 20 days.
Step 3 – Advertisement
Once the name applied for is reserved, an advertisement in Form URC-2 shall be published in one English and one in vernacular language newspaper for giving notice of conversion to the public and seeking objections from the public within 30 days from date of publication of advertisement. The advertisement in Form URC- 2 shall be addressed to Central Registration Centre (CRC), Indian Institute of Corporate Affairs (IICA), Plot No. 6,7 & 8, Sector 5, IMT Manesar, Gurgaon, Haryana- 122050.
It is to be noted that an application for conversion of society or trust into section 8 company can be made only after 15 days but before expiry of 30 days from date of advertisement giving notice of conversion.
Step 4 - Application for Conversion
Application for Conversion is made in Form URC-1 along with Form SPICe+ Part B, Form Agile Pro and Consent of members in Form INC-9. Form URC- 1 is an additional form filed with the incorporation forms.
Step 5 - Memorandum and Articles of Association
Whether the Memorandum and Articles of Association of the proposed Section 8 company to be filed electronically or physically as an attachment under Form SPICe+ Part B depends on the number of members. If the number of members of the Section 8 company is up to 7 members, then the Memorandum and Articles of Association will be filed in electronic form. If the number of members of the section 8 company is more than 7, then physical Memorandum and Articles of Association shall be attached as an attachment under Form SPICe+ Part B.
As the society or trust that is to be converted in section 8 company, is limited by guarantee, in case of Memorandum of Association, Table B in Schedule I of Companies Act, 2013 shall be referred and in case of Articles of Association, Table H in Schedule I of Companies Act, 2013 shall be referred.
Other Attachments in Form SPICe+ Part B:
1. Proof of address for the registered office of the company along with no objection certificate from the owner of the address.
2. Aadhar Card of members and proposed directors of the company
3. Bank Statement or Utility Bill not older than 2 months mentioning address of the members and proposed directors.
4. PAN Card of members and proposed directors.
5. Form INC- 14: Declaration by Professional
6. Form INC- 15: Declaration by Members and Directors
7. Projected Income and Expenditure Statement
8. Statement of Assets and Liabilities
9. Attachments in Form URC-1:
10. No objection certificate from secured creditors, if any.
11. Written consent from majority members present at meeting in person or through proxy.
12. Particulars of members along with details of shares held by them.
13. Declaration of two or more directors verifying details of members.
14. List of proposed directors along with DIR-2 And DIR-8.
15. Affidavit from all members for dissolution of entity.
16. Society or trust registration certificate and instruments constituting entity.
17. Copy of newspaper advertisement.
18. Certificate from CA/CS/CMA certifying compliance with Indian Stamp Act, 1899.
19. Latest Income Tax Return copy.
20. Copy of resolution declaring amount of guarantee.
21. Object of company along with declaration from all members for compliance with prohibition contained in section 8(1)(b) and 8(1)(c) of Companies Act, 2013.
22. Copy of statement of accounts of existing entity duly certified by auditor prepared not later than 15 days before the application date.
The Registrar of Companies (RoC) has 30 days from the date of publication of advertisement in Form URC-2 to decide on the application for conversion of society or trust into section 8 company. If the Registrar of Companies (RoC) is satisfied on the basis of documents furnished, a Certificate of Incorporation and a license under Section 8(1) will be issued.
Benefits of Section 8 Companies:
1. Tax Exemptions: Section 8 companies are eligible for tax exemptions under Section 80G and Section 12AA of the Income Tax Act, 1961. Donations made to these companies are also eligible for tax deductions under Section 80G of the Income Tax Act.
2. No Minimum Capital Requirement: Unlike other companies, there is no minimum capital requirement for a Section 8 company.
3. Limited Liability: The liability of the members of Section 8 company is limited to the amount of their contribution to the company.
4. Perpetual Succession: A Section 8 company has perpetual succession, which means that the company will continue to exist even if the members die or leave the company.
5. Credibility: A Section 8 company is seen as a credible entity as it is registered under the Companies Act.
Restrictions on Section 8 Companies:
1. Distribution of Profits: The profits or income of a Section 8 company can only be used for promoting its objectives, and no dividend shall be paid to the members of the company.
2. No Conversion to a Profit-Making Company: A Section 8 company cannot be converted into a profit-making company.
3. Prohibition on Alteration of Objectives: The objectives of a Section 8 company cannot be altered without the prior approval of the Central Government.
4. Stringent Compliance Requirements: Section 8 companies are required to comply with stringent regulations, including the filing of annual returns, conducting regular board meetings, and maintaining proper accounts and records.
The benefits of converting to a Section 8 company
Enhanced credibility and legal recognition: Operating as a registered company under the Companies Act provides a more formal and recognized structure.
Limited liability protection: Members' personal assets are generally protected from the company's liabilities.
Easier fundraising: Attracting donations and grants might be easier with a company structure.
Access to wider funding options :Companies can issue shares and debentures, whereas societies and trusts typically rely on donations and grants.
Most frequently asked questions:
Q.1 Can a Society registered under the Societies Registration Act, 1860 be registered/converted into Section 8 Company?
Answer: Yes. Section 8(1) of the Companies Act, 2013 allows a person or association of persons to be registered as a Section 8 Company on fulfillment of certain conditions and procedure as prescribed therein. The term “person” has not been defined in the Companies Act, 2013. Section 2(41) of the General Clauses Act, 1897 provides that “person” shall include any Company, or association or body of individuals, whether incorporated or not. Accordingly, a Society registered under the Societies Registration Act, 1860 is a person. Therefore, Society can be registered/converted as a Section 8 Company.
Q.2 Is it mandatory to publish advertisements in newspapers at the time of conversion of an entity into a Section 8 Company? If yes, in what form and manner?
Answer: Yes. Rule 20 of Companies (Incorporation) Rules, 2014 provides for the procedure for conversion of an entity into a Section 8 Company. Sub-rule (3) of rule 20 of Companies (Incorporation) Rules, 2014 provides that any entity which is desirous of being registered as section 8 Company, it, inter- alia, shall be required to publish a notice in Form No. INC- 26 within a week from the date of making the application to the Registrar in at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the proposed company is to be situated or is situated, and circulating in that district, and at least once in English language in an English newspaper circulating in that district. A copy of the notice, as published, shall be sent forthwith to the Registrar and also to be placed on the websites as may be notified by the Central Government.
Q.3 Can a Trust registered under the trust Act be registered/ converted into a Section 8 Company?
Answer: Section 8(1) of the Companies Act, 2013 allows person or association of persons to be registered as a Section 8 Company on fulfillment of certain conditions and procedure as prescribed therein. The term “person” has not been defined in the Companies Act, 2013. Section 2(41) of the General Clauses Act, 1897 provides that “person” shall include any Company, or association or body of individuals, whether incorporated or not. Accordingly, a Trust is a person. Therefore, there is no bar in conversion of trust to Section 8 Companies.
Q.4 What are the common challenges faced during the conversion process?
Answer: There are common challenges faced during the conversion process:
* Obtaining approvals from stakeholders and regulatory bodies
* Ensuring compliance with all legal and documentation requirements
* Adapting to the more structured governance of a company
* Managing increased compliance obligations
Q.5 Why Consider Conversion?
Answer: While societies and trusts serve valuable purposes, limitations can arise. Strict regulations, limited fundraising options, and lack of limited liability protection can hinder their growth and impact. Conversely, Section 8 companies offer several advantages:
Enhanced credibility: Operating as a registered company under the Companies Act provides a more formal and recognized structure, fostering trust with stakeholders.
Limited liability protection: Protects members' personal assets from the company's liabilities, offering a crucial safeguard.
Access to wider funding: Issuing shares and debentures opens doors to diverse funding avenues beyond traditional donations and grants.
Improved governance: A defined board structure with clear roles and responsibilities fosters better decision-making and accountability.