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SECTION 25 COMPANIES

Section 25 companies are those companies which are formed for the sole purpose of promoting
commerce, art, science, religion, charity or any other useful object and have been granted a licence by the
central government recognizing them as such. Such companies should intend to apply its profits, if any, or
other income only in promoting its objects and must also prohibit payment of dividend to its members.
Thus there are three criteria for determining whether a particular company is section 25 company or not:

• Its objects should be only to promote commerce, art, science, religion, charity or any other useful
object.

• It should intend to apply its profits or other incomes only in promoting its objects; and

• Central government should have granted a license to such a company recognizing them as such,

These types of companies can be either public company or private company having a limited liability.
The biggest advantage of securing a license from Central Govt. under section 25 is that such company is
allowed to drop the word ‘limited’ or ‘private limited’ from their names. So these companies can continue
to enjoy their stature as a Limited company without disclosing to the public whether the liability of its
members is limited by share or guarantee. As these companies do not have the object of creating profits
from its business activities and instead are indulged in activities useful to society the legislature intends to
grant them some advantages and privileges on them for ensuring that such companies carry on their
activities without undue hassles. Apart from enjoying many privileges and advantages they do have some
obligations which they are required to adhere to.

PRIVILEGES AND ADVANTAGES

The section 25 company enjoys all advantages that any other limited company registered under
companies act enjoys. But apart from these advantages there are some specific privileges conferred upon
them that distinguish them from other companies. These privileges are in nature of exemptions from some
provisions of the companies act or apply with some modifications to section 25 company.

All companies having limited liability are required to use the term ‘limited’ or ‘private limited’ as the
case may be in their names as required by section 13. But section 25 companies are allowed to dispense
with the use of term ‘limited’ or ‘private limited’ from their names [sub-sec. (6)]. This helps the company
to enjoy limited liability without disclosing to the public the nature of liability of its members.
A partnership firm is allowed to be a member of the section 25 company [sub-sec (4)] inspite of the fact
that the law does not recognizes them as a legal person. The only limitation in this regard is that on
dissolution of such a firm its membership of the company ceases.

Minimum Share Capital: As per the provision of section 3 of the companies act a private
company is required to have a minimum share capital of rupees one lakh and public company is
required to have minimum share capital of five lakh rupees. However Section 25 Companies
have been exempted from this requirement regarding minimum share capital by insertion of
sub-section (6) through Amendment Act of 2000. As such they can be registered even if they
have share capital les than the statutory minimum.

Publication of Name: By provisions of section 147 of the companies act every company
registered under the act is required to paint or affix and to keep painted or affixed its name and
address of its registered office on the outside of every office or place where its business is
carried on in a conspicuous position and in easily legible letters. It is further required to have its
name engraved in legible characters on its seal and is required to its name and address of its
registered office mentioned in all its business letters, bill heads, letter papers, publications, bills,
receipts, etc. However a section 25 company has been exempted from the provisions of this
section and as such is not required to mention its name and address as required in case of all
other companies.

Annual Returns of a Company not having Share Capital: Every company not having a share
capital is required by provisions of section 160 to file within 60 days of every Annual General
Meeting a return with the Registrar containing following particulars: i) address of its registered
office; ii) names and address of its members with date on which they became members and
names of members who ceased to be so from last AGM with date on which they left the
company; and iii) particulars of persons who are Directors, Managers or Secretary of the
company on the date of the return. Section 25 Company without a share capital is also required
to file returns with the Registrar as required by section 160 but it has been exempted from
mentioning the particulars of the members who are presently with the company or have ceased
to be members since holding of its last AGM.

Time and Place of AGM: Every company registered under the companies Act is required by
section 166(2) to hold its Annual General Meeting during business hours and on a day that is
not a public holiday and has to be held at its registered office or at a place within the limits of
city, town or village where its registered office is situated. Section 25 Company has been
exempted from this provision provided the time place and date of the AGM has been decided
before hand by the Board of Directors having regard to the direction given by the company in a
General Meeting. As such they are free to determine the date, place and time of its AGM
according to their convenience and feasibility the only condition being that time, place and date
of such meeting should have been pre determined by the Board of Directors in accordance with
directions of the company if any.

Notice of AGM: By virtue of section 171(1) a company is required to call AGM by giving not
less than 21 days notice in writing to its members. Date on which meeting is to be held and date
on which such a notice is served has to be excluded in computing the period of 21 days for
purpose of section 171. But Section 25 Company has been given some relief in this regard by
allowing them to hold an AGM after giving a notice of 14 days length instead of 21 days as
required by section 171(1). Therefore they can call an AGM at a short notice of 14 days instead
of 21 days.

Maintaining of Books of Accounts: Every company is required by section 209(4-A) to


maintain books of accounts relating to a period of eight years immediately preceding current
year alongwith its vouchers. However a Section 25 Company is required to maintain books of
account relating to a period of only four years instead of eight years immediately preceding the
current year.

Service of Copies of Certain Documents: A company is required to send a copy of every


balance sheet (including profit and loss account) and other documents required by law to be laid
before a company in the General Meeting to its members, debenture holders and debenture
trustees at least 21 days before the date on which such a meeting is to be held in accordance
with section 219(1). But a Section 25 Company is allowed to send the required documents at
least fourteen days before the date of meeting instead of 21 days [vide Notification No. GSR 73
dated 30-12-1965].

Right of Persons other that Retiring Director to stand for Directorship: Section 257 deals
with the procedure to be followed in case a person who is not a retiring director intends to stand
for directorship of the company. If the Articles of the Section 25 Company provide for election of
the Directors by ballot system then the provisions of section 257 will not apply to such a
company and as a result a person who is not a retiring director and is intending to stand for
directorship will not have to follow the procedure laid down by section 257. But if the Articles of
the company do not provide for election of director by ballot then section 257 will have to be
complied in whole.

Increase in Number of Directors: Under section 259 a public company is not allowed to
increase the number of it directors beyond the permissible limits under its articles without the
approval of Central Government provided such increase results in total number of directors to
go beyond twelve. But Section 25 Companies are exempted from this section and are thus free
to increase the number of its directors without seeking approval of central government[vide
Notification No. 2767, dated 5-8-1964].

Filing of Consent for Directorship: Every person who intends to stand for directorship in accordance
with section 257 is required by section 264(1) to file with the company his consent to act as a director if
he gets appointed as such. This section is meant for the persons who are seeking afresh appointment and
not for those who are seeking reappointment as director. It ensures that a person does not refuse to act as
director after his appointment on ground that his consent was not taken by the company. But sub-section
(1) has been made non-applicable to the Section 25 Company and as such a person seeking appointment
as director for first time need not file his consent in advance with the company for working as a director if
appointed.

Board Meetings: Under section 285 the meeting of Board of Directors should be held at least once in
every three months and four meetings should be held in a year. However section 25 companies are
required to hold meetings of Board of Directors/Executive Committee/Governing Committee only once in
every six months [vide Notification No. SO 1578 dated 1-7-1968]. The rest of the section 285 will apply
to section 25 companies as it is, therefore section 25 companies are allowed to hold Board meetings only
once in six months but should have held four meetings in a year.

Quorum for Meetings: The required quorum for a board meeting of any company under section 287 is
one/third of its total strength which is arrived at after deducting the number of interested directors from
the total number of directors on the Board or at least two whichever is higher. But the section 25 company
is exempt from this section to the extent that the required quorum for any board meeting is eight members
or one/fourth of its total strength whichever is less provided it should not be less than two members in any
case.

Exercise of certain Powers: Under section 292 there are certain specified powers which a Board of
Directors of the concerned company can exercise only by passing of resolution at the meeting. The Board
can exercise all other powers by passing of resolutions by circulation instead of taking them at meetings
by following the procedure specified in section 289 of the Act. However section 25 companies are
allowed to decide following three matters by passing a resolution by circulation instead of at meetings:

• the power to borrow moneys other than on debentures,

• the power to invest funds of the company, and

• the power to make loans.

The remaining powers specified in section 292 viz., power to make calls on shareholders in
respect of money unpaid on their shares; power to authorize by back of shares in accordance
with section 77A; and power to issue debentures, can be exercised only by passing of
resolutions at duly conducted meeting of Board of Directors of section 25 company [vide
Notification No. 2767, dated 5-8-1964].

Disclosure of Interest: Under section 297 a company is not allowed to enter into contract for (i)
purchase, sale or supply of any goods, material or services; or (ii) for underwriting subscription
of any shares in or debentures of company, with a director of the company; or his relative; or a
firm in which such a director or relative is a partner; or a partner in such a firm; or a private
company in which such director is member or director unless consent of the Board of Directors
has been obtained before entering into such contract[sub-sec. (1)]. If any of the persons or
entity mentioned above regularly trades or does business in the subject matter of contract and
such contract is made for cash at prevailing market prices then consent of Board is required
only in those cases where cost of such contract exceeds five thousand rupees aggregate in a
particular year[sub section (2)]. Consent of Board can be obtained within three months from
date on which such contract is entered into if there arises some urgent necessity even if cost or
value of such contract exceeds rupees five thousand in a year.[sub-sec. (3)]. Section 299 lays
down the circumstances when disclosure of interests by Directors of the company is mandatory
and procedure in regard to such disclosure. It directs a director to disclose his interest (direct or
indirect) or concern in any contract or arrangement made or proposed by the company at the
first meeting of Board when such contract is being considered or at first meeting held after he
became interested in a contract already entered into by the company. But in case of section 25
companies section 299 applies only to the matters covered by sub-section (1) and (3) of section
297. It follows that section 25 companies are allowed to enter into contracts or arrangements
with all of the persons or entity mentioned earlier if such person or entity regularly does trade or
business in the subject matter of such contract or arrangement and cost of such contract is
made at prevailing market prices without seeking the consent of the Board of Directors even if
the cost of such contract exceeds five thousand rupees aggregate in a year. Hence section 25
companies are allowed to conduct trade or business with private companies, firms or persons
where some director may be having an interest provided such private company, firm or person
regularly does trade or business in such a contract without seeking approval of Board again and
again where the cost of such contracts exceeds five thousand rupees in a particular year in
which such a contract is entered or seeking approval of central government where share capital
of the company exceeds one crore rupees.

Maintenance of Registers of Contracts: Under section 301 a company is required to maintain


register of all the contracts to which section 297 or 299 applies. But a section 25 company is
exempt to the extent that it allowed to maintain register of only those contracts to which sub-
sections (1) and (3) of section 297 apply. Thus they are exempted from maintaining registers of
those contracts which are made in pursuance of sub-section (2) of section 297 or are covered
by section 299.

Maintenance of Register of Directors: Under section 303 of the companies act every
company is required to maintain a register containing particulars of its Directors, Managing
Directors, Managers and Secretary in manner prescribed in sub-section (1). These companies
are further required to send to the Registrar of Company a duplicate in prescribed form
containing all particulars of such register and a notification in duplicate informing the Registrar of
nay changes among its Directors, Managing Directors, Managers or Secretary within 30 days of
such changes or appointment of First Directors of the company [sub-sec. (2)]. Section 25
company has been exempted from operation of sub-section (2) of section 303 and as such they
are not required to notify changes among its directors, etc to the Registrar. They are only
required to maintain Registers of their Directors, Managing Directors, Managers and Secretary
in prescribed format containing specified particulars and updating the register by making
changes in it as when there is some change among the Directors, Managing Directors,
Managers and Secretary of the company.

Qualification for Secretaryship: Every company registered under the companies act is
required to have a Secretary as defined under section 2(45) and having prescribed
qualifications as laid down in the companies act itself and in Companies (Appointment and
Qualifications of Secretary) Rules, 1988 and is required to be appointed in accordance with
Chapter IV (sections 383-A) of the companies act. However a Section 25 Company is exempt
from the provision of section to the extent that the rules regarding the qualification of a
Secretary do not apply to them [vide Notification NO. F.2/3/76-CLV dated 09-01-1976]. As
section 2(45) do not apply to them they are free to appoint any person as its Secretary whom it
feels fit and proper for the same.

Applicability of CARO: Section 25 Companies are exempted from applicability of Companies


Auditor’s Report Order 2003(CARO). CARO has been made applicable to all companies from 1st
January 2004. But CARO expressly exempts section 25 companies from its applicability vide
Clause 2(iii) of Para I of the Order.

Payment of Registration Fees: The fees payable by a Section 25 Company at the time of
registration and further increase of its share capital has been kept very low in comparison to
other companies and is at present fixed at mere Rs. 50/- irrespective of the authorized amount
of share capital (Circular No. 6 dated 24-06-1996 and Notification No. SO 3879 dated 22-12-
1962)

Stamping of Memorandum and Articles: The Articles and Memorandum of a Section 25


Company are not required to be stamped in accordance with the Indian Stamp Act, 1899.

OBLIGATIONS

Though a Section 25 Company has many advantages and enjoys many privileges yet there are
some statutory obligations which are required to be complied with and taken care of by such
companies.

• A Section 25 Company has to ensure that its profits and all other incomes are utilised
only for the purpose of promoting its objects and not for any other purpose.

• It should also ensure that its profits are not distributed as dividend among its members.

• Section 25 Company cannot alter its objects clause in its Memorandum without seeking
the written approval of central government [sub section (8)].

• If the Central Government has imposed some conditions and regulations upon the
company for granting a licence under section 25 then such a company is bind by such
conditions and has to ensure adequate compliance with them. Where such conditions
and regulations have been imposed then such conditions and regulations are required to
be included in the Articles or/and memorandum of the company as may be directed by
the government.

• Section 25 Company is regarded as a ‘company’ within the meaning of the Income Tax
Act, 1961 and as such its income is taxable according to the applicable rates similar to
those applying to other companies.

• If an existing company obtains a licence under section 25 it has to ensure that its objects
are confined to those mentioned in section 25 itself and if not make proper alteration to
its memorandum and articles.

• Apart from above mentioned privileges a Section 25 Company enjoys all other
advantages that a company registered under the companies act has after incorporation.
Similarly it is required to comply with all other provisions of the Act just like any other
normal company from which it has not been expressly exempted. As such it will be
subject to penalties if there is a default in compliance with any of the provision of the
Companies Act. Such a default can also result in revocation of the licence granted by the
central government under section 25.