Is the Appointment of an Independent Director Compulsory for a Section 8 Company?
The Companies Act 2013 provides the guidelines for Section 8 companies, which are focused on advancing causes like religion, charity, helping society, environmental protection, education, arts, science, sports, and more. These companies are set up with the purpose of supporting these types of social welfare activities. In this article we will talk about whether it is mandatory for a Section 8 Company to Appoint an Independent Director.
Primary Function Of A Section 8 Company
If there’s uncertainty regarding Section 8 and public companies, it’s important to note that both public and private companies have the potential to transform into Section 8 companies. In India, this transformation requires official authorization from the government. Furthermore, any modifications to the company’s objectives also demand approval from the government.
Under the Section 8 structure, a company is permitted to pursue profit-generation alongside its primary goals. However, distributing these profits to shareholders is prohibited. Instead, these gains must be reinvested to develop the primary objectives or ongoing projects of the company.
Function Of An Independent Director In A Company
An independent director for a company is a non-executive board member chosen to enhance the company’s reputation and governance standards. This director maintains no direct affiliation with the company, allowing them to offer impartial insights for the company’s benefit.
The Companies Act of 2013 outlines the specific role and responsibilities of an independent director within a company. This legislation clarifies the process of appointing independent directors, their duties, and additional obligations. According to Section 149 of the Companies Act, 2013, the appointment of independent directors is governed. These directors play the roles of mentors, guides, and advisors to the organization. Let’s explore the distinct responsibilities of an independent director:
- Navigating Challenges: An independent director assists the organization in addressing and overcoming various challenges, providing valuable support during difficult times.
- Informed Decision-Making: By participating in the company’s decision-making processes, an independent director contributes to making critical choices that steer the company’s direction.
- Strategic Insight: Independent directors offer independent judgment to formulate effective strategies, ensuring better performance, manage risks, allocate resources, make key appointments, and developing the standards of conduct.
- Evaluation and Objectivity: It is the duty of the independent director to objectively assess the performance and skills of the other members.
- Balancing Interests: These directors play a important role in maintaining a balance between the interests of the company’s stakeholders and shareholders, ensuring the company’s overall well-being.
Hence, if you are uncertain about whether a Section 8 company can appoint an independent director, it’s important to understand that such companies are not required to appoint independent directors. Section 8 Companies are exempt from the independent director mandate, including the related provisions under section 149(1) of the Companies Act, 2013, as per a notification dated June 05, 2016.
Benefits Of A Section 8 Company
Here are the Benefits of Establishing a Section 8 Company:
1. Limitation in Liability
Section 8 companies enjoy a special protection where their liability is limited. This means they are not responsible for the company’s debts. According to the Company Act of 2013, the company and its members are seen as different entities, almost like separate individuals. This law treats the company as if it were a person created by law, for legal purposes.
Section 8 companies possess a restricted liability status, which consequently exempts them from any obligation towards the company’s debts. The company and its members are recognized as separate persons, and according to the Companies Act of 2013, the company or organization is considered as an artificial juridical person.
2. Benefits of Paying Taxes
Companies that are registered under Section 80G and 12A of the Income Tax Act, 1961, operate similar to trusts. These companies can accept donations and are eligible for certain tax benefits. Additionally, they might receive reduced stamp duty fees in some states when acquiring property.
3. Specific Identity
A Section 8 company is a type of legal organization that is separate from its directors and shareholders. This company has the legal authority to own property, and it can take loans or debts in its own name. It also has a legal identity and can pursue its goals. It can can also transfer its share and its ownership. When it comes to changing how the company is organized, like merging, demerging, or acquisition, there are important rules to follow under the Companies Act of 2013.
4. Educational Institutions Establishment
Section 8 companies are allowed to establish schools and colleges. In 2016, they were given permission by the Medical Council of India to create medical colleges. Before that, only Section 25 companies had the power to start educational institutions. In 2013, this authority was also given to Section 8 companies.
Exemptions of Section 8 Companies
Section 8 companies are entitled to certain special benefits based on notifications from June 5, 2015, and June 13, 2017. These benefits include:
- A Section 8 company can convene its initial board meeting within six months from its incorporation date.
- The role of a company secretary in a Section 8 company is open to anyone, and affiliation with ICSI is not obligatory.
- In contrast to regular companies, Section 8 companies can issue a notice for a general meeting just 14 days prior to the scheduled date, whereas other companies are required to provide a 21-day notice.
- Section 8 companies have the privilege of including financial statements, consolidated financial statements, auditor’s reports, and other valid documents with their financial records. These materials can be presented during their general meetings.
- Unlike other entities, Section 8 companies are not obligated to maintain official minutes of Board meetings, General Meetings, and resolutions.
- Section 8 companies have flexibility in appointing directors based on their specific needs. Unlike Public Limited Companies, which require a minimum of three directors, and Private Companies, which require a minimum of two directors.
- Section 8 companies are exempt from the mandatory appointment of Independent directors.
- These companies are not bound to establish Board committees such as audit committee, nomination committee, or remuneration committee.
- According to Section 179 of the Act, these companies are authorized to raise funds, invest company funds, and offer loans or security using their available resources.
Corporate Social Responsibility of Section 8 Companies
Suppose a publicly company intends to establish a Section 8 Company with incorporated provisions for CSR. In this scenario, the necessity to provide a previous performance history does not apply, particularly when the Section 8 company is utilized as an executing entity for CSR initiatives. However, it is obligatory for the Section 8 company to be formally registered under both Section 12A and Section 80G of the Income Tax Act. This registration criterion is essential for the Section 8 company to participate as a CSR implementation agency.
Additionally, the Section 8 company is required to file Form CSR-1 with MCA. Following this procedure, the company will receive a CSR Registration Number, particularly if the company plans to undertake CSR projects starting from April 01, 2021. As per the regulations, a Section 8 company is also qualified to possess assets originating from CSR contributions by other companies, which can be utilized for their forthcoming CSR objectives.
Conclusion
A Section 8 company has main purposes and goals that are interesting because it receives special benefits and exceptions in its operations. But unlike regular companies, it doesn’t need to have a separate director according to the Company Act of 2013. This act lets a Section 8 company manage itself. You can learn more about the legal aspects of this from companysuggestion.
