From UPSC perspective, the following things are important :
Prelims level : Not-for-Profit Company
Mains level : Corruption and money laundering
The Enforcement Directorate (ED) has summoned Rahul Gandhi and Sonia Gandhi following a trial court order in a tax assessment case of his not-for-profit company.
What is the case?
- A case alleged cheating and misappropriation of funds on part of the leaders in acquiring the newspaper.
- The alleged persons acquired it through a Section 25 company — in which they have 86% stake.
What is a Section 25 company?
- It is defined under the Companies Act, 1956.
- It is a not-for-profit charitable company.
- It is formed with the sole object of promoting commerce, art, science, religion, charity, or any other useful object.
- It 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 the environment among others.
Fiscal activities allowed
- 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 such 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.
Why are such companies formed?
- Most people looking to form a charitable entity go for forming a company under Section 25, now Section 8, rather than a Trust structure.
- This is because most foreign donors like to contribute to a company rather than Trust because they are more transparent and provide more disclosures.
- 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.