Section 25 company: A not-for-profit company with defined objectives

BJP MP Subramanian Swamy had in his complaint in 2013 alleged cheating and misappropriation of funds on part of the Gandhis in acquiring the newspaper. He had alleged that the Gandhis acquired properties owned by the National Herald by buying the newspaper’s erstwhile publishers, AJL, through an organisation called Young India — a Section 25 company — in which they have 86% stake. Sonia and Rahul had been granted bail in the case by the trial court on December 19, 2015.

While the Congress has described the case as “weird” since “no money was involved”, it said that AJL became an indebted company and it converted its debt into equity by assigning its debt to a new company— Young India — and became debt-free.

The Congress has said that since Young India has been created under a special provision of the Companies Act — Section 25 — it has to be a not-for-profit company and no dividend can be given to its shareholders or directors.

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So, what is a Section 25 company?

As per the Companies Act, 1956, a Section 25 company — similar to what is defined under Section 8 under Companies Act, 2013 — is a not-for-profit charitable company formed with the sole object of “promoting commerce, art, science, religion, charity, or any other useful object, and intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members”.

Section 8 of the Companies Act, 2013 includes other objects such as sports, education, research, social welfare and protection of environment among others.

While it could be a public or a private company, a Section 25 company is prohibited from payment of any dividend to its members. Section 25 states that by its constitution the company is required/ intends to apply its profits, if any, or other income in promoting its objects and is prohibited from paying any dividend to its members.”

What are prominent examples of Section 25 or Section 8 companies?

According to details available with the Ministry of Corporate Affairs, a large number of companies have been formed under the Section. Among these are Reliance Foundation, Reliance Research Institute, Azim Premji Foundation, Coca Cola India Foundation, and Amazon Academic Foundation.

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Why are companies formed under Section 25 when there is a Trust structure in place?

Experts say that most people looking to form a charitable entity go for forming a company under Section 25, now Section 8, rather than a Trust structure because most foreign donors like to contribute to a company rather than Trust because they are more transparent and provide more disclosures.

Tax experts say that if a company has to be converted into a not for profit company, they can’t be converted into a Trust, however, they can be converted into a Section 25/ Section 8 company.