Can Section 8 Companies have shareholders?

12 Responses to Can Section 8 Companies have shareholders?

1. Rajesh Arya says:

   January 7, 2016 at 3:38 pm

   Mr. Mittal, I did not say that section 8 companies will fall into the TP regime! I have been managing the transfer pricing for quite a number of years and understand that it’s altogether a different ballgame. My question was about impact of relaxed attitude of MHA towards foreign companies setting up subsidiaries in India, followed by FCRA permissions to conveniently bring funds in. Thanks for your patience!
2. Subhash Mittal says:

   December 29, 2015 at 6:30 am

   I generally agree with the comments above, but would like to highlight that FDI policy does not cover non-profit or social sector per se. Thus there is no specific policy in this regard under FDI. Having said that, I would like to emphasis that foreign non-profit companies can float a S.8 company in India. However as rightly stated above, such companies if they would like to undertake non-proit activities in India would need to apply for FCRA.

   Thus presently domain of S.8 company falls under three departments separately
   1. Formation of Company under Ministry of Corporate affairs or as Registrar of Companies which regulates formation of company. Specific rules have been formulated for these and by complying with these rules, one can easily register a S. 8 company.
   2. RBI: This is to report and seek necessary approval for share subscription. Again clear rules are there and should be followed for receipt of share capital and intimation to RBI. Please note these funds under FCRA may be treated as Foreign Contribution but under RBI it is taken as share subscription only.
   3. FCRA Dept. : Problem starts here. Even for receiving share capital, one would need Prior Permission of FCRA Dept. This is a time consuming process, till last year this was even so more time consuming, since the Dept did not have a policy to allow foreign funds to such companies, however since then Dept. has formulated the policy and is now allowing receipt of foreign share capital as well as contribution. Although normal inspection and other processes still are time-consuming.

   Regarding specific question of Rajesh Arya, I also concur with views of Avneesh Matta that FCRA & S.12A registration are two separate issues dealt by two different depts. and Dept is known to have issued FCRA permission even if the organisation did not have 12A registration. Regarding 100% shareholding I can say with some confidence that a foreign non-profit can even float 100% subsidiary in India and also receive FCRA registration.
   • Rajesh Arya says:

     December 30, 2015 at 7:32 am

     Thanks Mr. Mittal, appreciate your invaluable feedback.
   • Rajesh Arya says:

     January 4, 2016 at 4:04 am

     I have a question Mr. Mittal. After 100% acquisition of the Indian section 8 company, how MHA will perceive a prior permission to receive funds from the foreign parent? Will it red carpet the path to invite foreign funds from the parent company? Or will it make the transaction simpler after FCRA number is obtained?
     • Subhash Mittal says:

       January 4, 2016 at 10:34 am

       I doubt about the red carpet, however FCRA has now guidelines in case of organisations with foreign interest. Certainly once such an organisation receives prior permission / registration they will be treated as any other FCRA organisation.
       • Rajesh Arya says:

         January 5, 2016 at 7:14 am

         Thanks Mr. Mittal! My apprehension is about jeopardized interest of the Revenue Department (Income Tax), if the new guidelines permit simplified (or even barricaded) receipt of contribution from a foreign parent via MHA route. Not sure whether the Government is all set to forego the revenue under its transfer price regime, if FCRA enables foreign companies to set up 100% subsidiaries to channelize their funds into India!

         But from your views it sounds that the new entrants can now create foreign subsidiaries to send funds in India instead of germinating LLC or LLP.

         Regards!
         • Subhash Mittal says:

           January 6, 2016 at 12:01 pm

           Let us not forget we are talking of S.8 companies which fall under Not For Profit. So presumption is that there are no transfer pricing issues, as companies are likely to receive funds in India and not transfer it out of country. I am sure any funds transferred out of country would be scrutinised by Income Tax dept. quite thoroughly, considering CBDT S. 11 restrictions.
3. Rajesh Arya says:

   December 28, 2015 at 10:27 am

   Thanks for clarifying that –

   – acquisition of 100% of share capital of the Indian section 8 company by a foreign company will not have an impact on 12A (since the objects of the company are not undergoing any change); and

   – FCRA registration / Prior Permissions can still be obtained under the provisions regulating the foreign contribution

   provided the company complies with FEMA and FCRA requirement regulating foreign capital infusion.
4. Rajesh Arya says:

   December 23, 2015 at 7:07 am

   Hello Mr. Matta.

   I have couple of questions for your expert opinion –

   1. What could be the legal implication, if a foreign company acquires 100% share capital of a section 8 company? This company currently has a share capital invested by two resident Indians.

   2. I understand that 12A approval will straightaway be cancelled. If there is a possibility that FCRA or Prior Permission can never be obtained after 100% foreign acquisition, is there a maximum ceiling on foreign capital infusion which can escape such consequences?

   Many thanks,

   Rajesh
   • jagdish says:

     December 23, 2015 at 1:10 pm

     I agree with Mr. Mattas comments that there is no bar on section 8 company to have share capital. Further change in shareholders will not impact the section 12A registration under I.T.Act since sec. 12 A registration means that the objects of the company are charitable and change in shareholding will not impact the objects of the company unless the objects are also changed in which case a fresh registration u/s 12A will have to be applied.
   • Avineesh Matta says:

     December 24, 2015 at 10:54 am

     1. Please note that investment in Indian Companies is regulated by FDI Policy and FEMA 20. Having said so, equity infusion in a section 8 company cannot be termed as investment since it partake the character of a ‘contribution’ and thus in case of foreign holding it shall be illegal to acquire equity without complying with FCRA.

     2. No minimum levels are prescribed for any kind of exemption for a foreign equity in section 8 company.
5. Avineesh Matta says:

   December 14, 2015 at 1:20 pm

   There is no bar on Section 8 Companies to have share capital. section 8 Not-for-Profit companies can be incorporated either as those as limited by Guarantee or as having Share Capital as demarcated in MoA at the time of incorporation. Please note that nether section 4 nor section 8 restrict such companies to have either of the options.

Comments are closed.