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.