National Herald case & Section 8 of Companies Act

Before we delve deeper into the specifics of the Section 8 of the Companies Act, let us first skim through the case which brought it into the news.

Congress chief Sonia Gandhi and party MP Rahul Gandhi were recently summoned by the Enforcement Directorate for questioning in a case of money laundering registered against them. Sonia could not appear as she was admitted to Delhi’s Ganga Ram hospital due to Covid-19 complications. But Rahul did.

So what is the case? In 1938, Jawahar Lal Nehru had founded a newspaper called National Herald-- which went on to become a prominent voice against British rule. Its publishing company, Associated Journals Limited or AJL, also used to take out Hindi paper Navjivan and Urdu daily Qaumi Awaz.

But, over the years, it lost steam. And about 70 years later, in 2008, AJL stopped publishing the papers due to continued losses. Meanwhile, to save the paper, Congress had given interest-free loans to AJL reportedly from the party funds. By 2008, AJL -- which had about 1,000 shareholders -- owed about Rs 90 crore to Congress.

It was then that AJL stocks were transferred to Young Indian (YIL) -- a private charitable company formed by Gandhis in 2010 under Section 25 of the Companies Act. In 2013, BJP MP Subramanian Swamy filed a complaint alleging corruption. He asked how AJL -- which had assets worth Rs 2,000 crore in prime locations-- can be bought for just Rs 50lakh?

Congress rejected the charges. It said that YIL was a not-for-profit company, and no profit or dividend can be doled out to its shareholders or directors – in this case the Gandhis. The party also insisted that AJL continues to be the owner of National Herald and there is no transfer of property.

So what is Section 8 of Companies Act and why firms are floated under this provision.
 

If a company is being floated to promote social welfare, it can either get itself registered as a trust under the Trust Act, 1882 or the Societies Registration Act, 1860. Or it can choose to register itself as a not-for-profit organisation under Section 8 of the Companies Act, 2013 -- previously under Section 25 of the Companies Act, 1956.

A company is registered as a non-profit organisation (NPO) under the Section 8 to promote education, charity, religion, arts, commerce, environment, sports, science, research, social welfare. And the profit earned by the organisation cannot be used for paying out dividends to its members. It can only be used to promote the purpose it has been set up for.

The licence for such companies is issued by the central government. While the authorization for the trust is given by state governments.  And these companies can get the tax benefits if it gets registration under section 80G and 12AA of IT act.

Some examples of Section 8 companies are Azim Premji Foundation, Reliance Foundation, Reliance Research Institute, Coca Cola India Foundation and Amazon Academic Foundation.