Mergers & Amalgamations Simplified

TRANSFER OF ASSETS AND LIABILITIES OF A LIMITED LIABILITY PARTNERSHIP TO A COMPANY
A company has the right to purchase any business entity on taking the approvals from the Board of Directors unless the resolution of the shareholders is required. The business entity may be purchased by a company either by way of amalgamating the seller entity with it, or by acquiring the shares and acquiring the assets and liabilities by an agreement. Companies Act, 1956 provides under Part IX for conversion of an existing partnership firm to a company and Chapter V of the Part VI of the Companies Act, 1956 provides for the compromises and arrangement and amalgamation between the companies and its creditors.
Whereas the limited liability partnership Act,[LLP] 2008 also provides for the transfer of its assets and liabilities to a company by following procedure laid down under section 60 of the LLP Act, 2008.
If the acquisitions of a business is structured according to the above said provisions of the Act the acquirer is not required to pay the Income Tax as the transaction of the transfer of assets and liabilities to Transferee Company is not regarded as the capital transfer.
LLP Act, 2008 is silent in respect of the sale of the undertakings of the LLP or sale of the entire business and assets and liabilities of an LLP to other business entity other than an LLP such as to a company or partnership firm. The relevant schedules to the LLP Act, 2008 provides for the conversion of an existing company or partnership firm into LLP but it does not provide for the conversion of the LLP into a company or normal partnership firm. The part IX of the Companies Act, 1956 which contains the provisions for conversion of existing partnership firm into a company is also silent on this issue, which is the part supposed to contain the provisions of the same.
As the LLP Act, 2008 is silent on the sale or conversion of existing LLP to a company or partnership firm it has to be assumed that the Act does not restrict an LLP to sell off its entire business , assets and liabilities to a company and shuts down later under the provisions of the LLP Act. As it is not possible for an LLP to amalgamate with another company, if an LLP wants to sell off its undertaking it has to follow the procedure laid down under the provisions of Section 50B of the Income Tax Act, 1961. In case of slump sale acquirer does not enjoy the provisions of tax exemptions which are available on following the procedure laid in part IX and also Chapter V of the Part VI of the Companies Act, 1956.
Acquisition of an LLP through Slump Sale
Section 50B of the IT Act provides for selling off one or more undertakings of the business. The consideration for acquisition of assets and liabilities under slump sale is required to be paid on the net worth of the LLP. The seller of the business is taxed for the profits or loss made on slump sale as long term capital gain or short term capital gain. The seller is required to report to the tax authorities under Form No. 3CEA along with the return of income a report of an accountant indicating the computation of the net worth of the LLP.

PROCEDURE FOR TRANSFER OF ASSETS AND LIABILITIES OF AN LLP TO A COMPANY:
1. Conducting a due diligence of the LLP to identify the assets and liabilities of the LLP as on the date.
2. Identification of the creditors of the company including the amount outstanding to any statutory authority.
3. Identify all the partners as on date.
4. Unless otherwise is provided under the LLP agreement convene a meeting of the partners to pass a resolution to transfer the assets and liabilities.
5. Unless otherwise is provided under the LLP agreement convene a meeting of the creditors to pass a resolution of creditors.
6. Making an agreement/term sheet between the seller and buyer for the transaction.
7. Calculate the net worth of the LLP which is certified by a chartered accountant or a valuer.
8. Transfer the entire assets and liabilities to the acquirer.
9. Pay necessary stamp duty and registration fees on transfer of the assets.
Company [Acquirer] has to convene a meeting of the Board of Directors of the company for the acquisition of the Limited Liability Partnership.

CS Prasanna Naganur
Date: June 14, 2012
Place: Bangalore

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Alternative Investment funds – brief outlook.

Posted on May 26, 2012 by csprasannanaganur

Prasanna Naganur

Associates

Company Secretaries

Bangalore

Securities Exchange Board of India (SEBI) vide Notification No. LAD-NRO/GN/2012-13/04/11262 repealed the existing venture capital fund regulations and has issued the new regulations for regulation of the complete fund market. Earlier the fund market was regulated by the SEBI (Venture Capital Fund) Regulations, SEBI (Mutual Fund) Regulations and SEBI (Collective Investment Vehicle) Regulations. Though these regulations were there to regulate the fund market, SEBI has felt to have further stringent regulations in respect of the funds having private pool of capital. In consideration of such stringent regulations SEBI on May 21, 2012 has issued the SEBI (Alternative Investment Fund) Regulations, 2012. However, mutual funds and collective investment vehicles are out of the scope new regulations. The rationale behind the fund market is to develop the SME or MSE sector in India and to grow such industries into large enterprises. In case of the large companies funds are generally invested by public and also by certain financial institutions and also by qualified institutional investors. As it is not possible for startups having the good track record to approach public directly for the funds, funds having the private capital can provide the financial support upto a level of achieving the character of large entity. With this backdrop we make an attempt to inform the people in the fund market about the new regulations and its consequences on the existing funds.

Meaning and Definition of Alternative Investment Fund (AIF)

Alternative investment funds as per the new regulations means that the fund which collects the capital from the private likeminded people by issue of placement memorandum and comprises the stipulated maximum corpus and stipulated number of investors and invests such fund in the specified areas and collects the return on the date of maturity of the scheme or fund. SEBI (Alternative Investment Fund) Regulations define an AIF as “any fund established or incorporated as a trust or a company or a limited liability partnership or a body corporate which

Is a privately pooled investment vehicle which collects funds from the investors whether Indian or foreign, which invests it in accordance with a defined investment policy for the benefit of its investors; and
Is not covered under the Securities Exchange Board of India (Mutual Fund) Regulations, 1996 and Securities Exchange Board of India (Collective Investment Vehicle) Regulations, 1999 or any other regulation of the Board to regulate the fund market.

Funds which are not considered as AIF

Proviso to the sub regulation (ii) of the Regulation 2 exempts certain class of funds from the application of the new regulations. The following are funds which are out of the net of these new AIF regulations:

Family trust set up for the benefit of the “relatives” as defined under the Companies Act, 1956.
ESOP trust Set up in accordance with the SEBI regulations.
Employee welfare trust or gratuity trust set up for the benefit of the employees.
Holding companies within the meaning of section 4 of the Companies Act, 1956.
Other special purpose vehicle not established by the fund managers including securitization trust which are regulated by a specific regulatory framework.
Funds managed by a securitization company or a reconstruction company which is registered with the Reserve Bank of India in accordance with the provisions of the SERFACI Act, 2002.
Any such pool of funds which are directly regulated by the Government of India.

New category of AIFs and investment conditions:

New regulation has categorized the AIFs broadly into three. Under Category I AIFs, Venture capital Fund, SME Fund, Social sector fund and infrastructure funds are included and private equity and private debt funds are included under the category II AIFs, under Category III hedge funds have been included. The category of funds is differentiated from each other from the perspective of the investment conditions imposed by the regulation.

Category I AIFs are defined as AIFs which invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified;

For the purpose of this clause, Alternative Investment Funds which are generally perceived to have positive spillover effects on economy and for which the Board or Government of India or other regulators in India might consider providing incentives or concessions shall be included and such funds which are formed as trusts or companies shall be construed as ―venture capital company‖ or ―venture capital fund‖ as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961.

Category II AIFs are defined as AIFs which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in these regulations;

Explanation.─ For the purpose of this clause, Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator shall be included.

Category III AIFs are defined as AIFs which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

Explanation.─ For the purpose of this clause, Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator shall be included.

CATEGORY OF AIF	INVESTMENT CONDITIONS	OTHER CONDITIONS
All category –I AIF	Shall invest in investee companies or venture capital undertaking or special purpose vehicle or limited liability partnership or in units of other AIF as specified in the regulations. Fund of category I AIF may invest in units of category I AIF of same sub category.	Provided that they shall not invest in units of fund of other fund. Provided further that the investment conditions as specified in sub –regulations (2), (3), (4) and (5) are not applicable to such regulations. Category I investment funds shall not borrow funds or engage in any leverage for the temporary funding for not more than 30 days on not more than four times in a year.
Category I- Venture Capital Fund	At least 2/3^rd of the corpus shall be invested in unlisted equity shares or equity linked instruments of a VCU or companies listed or proposed to be listed o SME exchange or SME segment of an exchange. Not more than 1/3^rd shall be invested in IPOs of VCU proposed to be listed or debt or debt instrument of a VCU in which the investment is already made in equity instruments or preferential allotment including through qualified institutional placement, of equity shares or equity linked instruments of a listed company subject to a lock in period of one year or special purpose vehicles which are created for the promotion of investment.	No
Category I- SME Fund	At least 75% in unlisted *Securities* or partnership interest of a VCU or investee companies which are SME or companies which are listed or proposed to be listed in SME.	No
Category I-Social Security Fund	75% shall be invested in unlisted securities or partnership interest of social ventures.	No
Category I – Infrastructure Fund	75% shall be invested in the unlisted securities or partnership interest of VCU or investee companies which are SME or companies which are listed or proposed to be listed on SME exchange.	No
Category II- Private Equity or Debt Fund	No specific percentage is given but primarily invest on unlisted investee company or in units of AIF as per placement memorandum.	Category I investment funds shall not borrow funds or engage in any leverage for the temporary funding for not more than 30 days on not more than four times in a year however, borrowing shall not be more than 10 percent. However, these funds are allowed to engage in hedging as per the guidelines.
Category III – Hedge Funds	May invest in securities of listed or unlisted securities, derivatives or complex or structured instruments.	No

Impact of the new regulations on the existing Venture Capital Funds registered under the SEBI (Venture Capital Funds) Regulations. 1996

The existing venture capital funds which are registered under the existing regulations shall continue to be regulated by the SEBI (Venture Capital Fund) Regulations, 1996 till the winding up of such fund and such funds shall not launch any new scheme after the notification of new AIF regulations. The venture Capital funds interested to continue in the Funds market as such are required to make re registration under the new regulations within a period six months of notification of these regulations, provided 2/3^rd of the investors in such fund should approve for the re registration. The application for the re registration has to be made under Form A with an demand draft of Rs. 1,00,000 in favor of “Securities and Exchange Board of India” payable a Mumbai.

Other salient features of the AIF Regulations

AIF shall disclose the investment strategy at the time of collection of the capital and any such to such investment strategy shall require approval of the 2/3^rd of the investors of the fund.
Fund can be raised within or outside India and an AIF shall have a minimum corpus of twenty Crores and AIF shall not accept the investment from an investor below Rs. One Crores. However, from an employee or manager of the fund the AIF can accept a minimum of Rs. Twenty Five Lakhs.
The manager or sponsor of the fund shall have a continuing interest of not less two and half percent of the corpus or five crore rupees whichever is lower in the form of investment in the AIF and it should not be in the form of waiver of management fees. In case of Category III AIF the continuing interest shall be at least ten percent or ten crore rupees whichever is lower.
No scheme of the fund shall have more than one thousand investors
The fund shall not solicit or collect funds except by way of private placement.
AIFs may launch the schemes subject to filing of the placement memorandum within thirty days of the launch of the scheme.
Category I and II AIF shall have a close ended scheme.
Category I and II AIF shall have a minimum tenure of three years for the scheme.
Category III AIFs shall have open ended or close ended scheme.
Units of close ended may be listed in the stock exchanges. However the listing will be permitted only after the close of the funds.

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Limited Liability Partnership

Posted on May 11, 2012 by csprasannanaganur

Limited Liability Partnership

IN BRIEF

5/10/2012

Prasanna Naganur

Associates

Company Secretaries

Bangalore

Mob: +91 9611805806 | Ph: 080 2669 0224

Limited Liability Partnership (LLP) is a legal structure of the business like a company, partnership firm and the co-operative society. With effect from the January 7, 2009 the Limited Liability Partnership Act, 2008 has been given into effect by the Central Government. LLP is a blend of the limited liability and the partnership firm.

The rules in respect of registration and operational aspects under the LLP Act,2008 viz. LLP Rules, 2009, were issued on 1st April, 2009. The rules in respect of conversion of a partnership firm, a private company and an unlisted public company into LLPs were made effective w.e.f. 31st May, 2009. The Government has also launched a website namely, http://www.llp.gov.in on 1st April, 2009 for operationalization of various processes provided under the LLP Rules, 2009.

As per the provisions of Section 3 of the Limited Liability partnership Act, 2008 an LLP is treated as a body corporate and is a separate legal entity distinct from its partners. Like a company LLP has the perpetual succession.

As per Section 6 (1) minimum two partners are required to form an LLP. The LLP also should have minimum two designated partners out which one must be a resident. LLP Act does not provide the clear meaning of the term designated partner, but it is said in the Act that any partner designated as designated partner in accordance with section 7 is a designated partner. If the LLP has the body corporate as its partners then the nominees of each body corporate shall act as designated partners. It can be said that a person who spend his complete time for the management of the LLP can be called as a designated partner.

Limited liability partnership is allowed to do any business except the business not for profit. Limited Liability partnership agreement is the incorporation document. The incorporation document has to be prepared in accordance with the provisions of Section 11 (2). On filing the proper incorporation document with the registrar, he shall register the incorporation document and shall give the certificate of registration within a period of 14 days.

On registration of the LLP it is capable of acquiring, owning, holding and developing or disposing of the property, whether movable or immovable, tangible or intangible and is capable having the common seal, (optional) and doing and suffering such other acts and things as the body corporate may lawfully do an suffer. And such LLP is also capable of being sued and it can sue as well.

PROCEDURE FOR INCORPORATION OF AN LLP

1. Any one of the proposed partners should have a Digital Signature.

2. The proposed partners should have Designated Partner Identification Number by making an application to the DIN Cell. .

3. Form 1 has to be filed to reserve the name of the proposed LLP. Details of the proposed designated partners have to be provided in the form.

4. Once the name of the LLP is reserved Form 2 has to be filed along with the Incorporation document and subscriber’s statement.

5. At the time of filing the Form 2, Form 3 LLP agreement and Form 4 for the appointment of designated partners can be filed.

6. On satisfaction of the documents filed Registrar will issue a certificate of registration in Form No. 16.

LIABILITY OF PARTNERS IN LLP

As per the provisions of section 28 (1) a partner is not liable, directly or indirectly for any obligation of the LLP which is created by the Designated partners before the formation of the LLP. However, if a partner commits any omission or wrongful act he is liable for such acts in his personal capacity, but the other partners will not be personally liable for the acts done by any other partner of the LLP. In this way the liability of the partner is limited.

LIABILITY OF DESIGNATED PARTNERS

As designated partners are the partners who spend their entire time for management of the LLP, their liability is quite different from the normal partners. As per section 8 designated partners are liable for all the acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of this Act and all penalties imposed on the LLP. In this case also the liability of the partners is limited. Since the partners other than the Designated Partners will not be held liable for the acts of the omission of the designated partners. In this case as the designated partners are defaulted in meeting their duties imposed by the Act they are liable for the penalties imposed by the Act. This cannot be interpreted that the liability of the partners is unlimited. In case of the Companies Act also directors of the limited companies are held responsible for the offences made by them by non complying the provisions of the Companies Act, like filing default in filing the Annual Returns, Balance Sheet etc with the ROC. This does not mean that the liability of the directors who is also a shareholder (member) of the company is unlimited. Hence, the payment of penalty by a designated partner in his personal capacity due to non compliance of the provisions of the LLP Act does not make the liability of the Designated Partners unlimited.

TAXATION OF THE LLP

As per the press note dated issued by the Ministry of Corporate Affairs an LLP is treated as a normal partnership firm from the perspective of the Income Tax angle. A partnership firm under the Income Tax Act is allowed to deduct the expenses incurred by it in paying the remuneration to its partners and the interest paid to the partners on their capital. The amount of the profit arrived after such deduction will be taxed at the rate in force as per the Finance Act. The income of the partners from the partnership firm such as salary and the interest on capital will be taxed in their individual capacity but the share of profit from the partnership firm will exempted from tax in the hands of the partners. In the similar way an LLP is also taxed. For instance A and B are the partners of the XYZ LLP. The gross income of the LLP for the financial year 2010 -2011 is Rs. 1Cr. The LLP has paid the remuneration to the partners Rs. 10 Lakhs each to the partners and the LLP has also paid the Rs. 1 Lakhs to each partner as interest on their capital and the partners have shared the profits equally. Hence, the net income of the LLP for the F.Y. 2010-2011 is Rs. 78 Lakhs (assuming that there is no other exp). Hence the taxable income of the LLP will be Rs. 78 Lakhs. The partners will be taxed on their income of Rs. 11 lakhs each in their individual capacity and the share of profit from the LLP will be exempt in the hands of the partners.

APPLICATION OF THE MAT TO THE LLP

With effect from the financial year 01/04/2012 the provisions of Section 115 JC of the Chapter XII – BA of the Income Tax Act, 1961 will be applicable to the Limited Liability Partnership.

Accordingly, where the regular income tax payable by an LLP for a previous year is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of the LLP for such previous year and it shall be liable to pay income tax on such total income at the rate of eighteen and one-half percent.

Adjusted total income shall be the total income before giving effect to this chapter as increased by

1. Deductions claimed, if any, under any section included in Chapter VI-A under heading “Deductions in respect of certain incomes” and

2. Deduction claimed, if any, under section 10 AA.

However, every LLP to which this section applies shall obtain a certificate from an accountant certifying that the adjusted total income and the alternate minimum tax have been computed in accordance with the provisions of this Chapter and furnish such report on or before the due date of filing of return under sub-section (1) of section 139.

FOREIGN DIRECT INVESTMENT (FDI) IN LLP

Limited Liability Partnership firms are allowed to accept the direct investment from the foreign countries. As the LLP act allows non residents to act as Designated Partners, allowing the investment from such nonresident DP would be prudent to form the Partnership interest in the LLP. The FDI is permitted with certain conditions. In case of the sectors where 100% FDI is not allowed approval of the FIPB is a must for such LLPs. In case of the LLP where is 100% FDI is allowed such LLP are permitted to take the FDI under automatic route provided:

1. There should not be any FDI linked performance conditions

2. Such LLP are not required to carry on the business of agriculture/plantation activities, real estate business and print media sector.

3. An Indian company having the FDI can make the downstream investments in an LLP, provided the company and the LLP should be engaged in the sectors where 100% FDI is allowed.

4. LLPs having FDI are not allowed to invest in any domestic LLPs.

5. The foreign capital contribution is allowed only in the form of cash consideration, received by inward remittance through the normal banking channels or through the debit to NRE/FCNR account of the person concerned which is maintained with the Authorized Dealers.

6. Investment by FII or FVCI is not allowed in an LLP.

7. LLP are also not eligible to accept any External Commercial Borrowings.

8. An LLP having the FDI can only have the body corporate which is registered under the Companies Act, 1956 as its Designated Partner. Even an LLP cannot act as designated partner in such LLP.

9. A company having the Foreign Direct investment is allowed to convert into an LLP on satisfaction of all the above conditions and the prior approval of the FIPB is a must for such conversion.

CLOSURE OF LLP

An LLP can be closed either by filing an application in the court for voluntary winding or by the compulsory winding up by the court. The winding up of the LLP shall be made as per the LLP (winding up ) Rules, 2010. In case of voluntary winding up a resolution having three fourth majority of partners is required to be passed and the majority of the partners should make a declaration of solvency, where the LLP has creditors such LLP should obtain the consent from minimum 2/3^rd of its creditors to wind up such LLP.

Where an LLP is unable to pay its debts winding up by the tribunal comes into picture. Winding up by tribunal happens on the following grounds:

a. if a creditor, by assignment or otherwise, to whom the LLP is indebted for an amount exceeding one lakh rupees then due, has served on the LLP, by causing it to be delivered at its registered office, by registered post or otherwise, a demand requiring the LLP to pay the amount so due and the LLP has failed to pay the such amount within twenty-one days after the receipt of such demand or to provide adequate security or re-structure or compound the debt to the reasonable satisfaction of the creditor;

b. if any execution or other process issued on a decree or order of any Court or Tribunal in favor of a creditor of the LLP is returned unsatisfied in whole or in part; or

c. if it is proved to the satisfaction of the Tribunal that the LLP is unable to pay its debts, and, in determining whether a LLP is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the LLP.

However, An LLP can make application to the Registrar for striking off of its name from the Register of LLP. Where any LLP which is not operating for a period of two years or more from the date of incorporation registrar can take action suo motu to strike off the name of the LLP and where an LLP is not operating for one year can make an application, with the consent of all partners, to the Registrar for striking off of the LLP.

ENDS

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Limited Liability Partnership- Brief Outlook

Posted on May 11, 2012 by csprasannanaganur

Limited Liability Partnership

IN BRIEF

5/10/2012

Prasanna Naganur

Associates

Company Secretaries

Bangalore

Mob: +91 9611805806 | Ph: 080 2669 0224

PROCEDURE FOR INCORPORATION OF AN LLP

Any one of the proposed partners should have a Digital Signature.
The proposed partners should have Designated Partner Identification Number by making an application to the DIN Cell. .
Form 1 has to be filed to reserve the name of the proposed LLP. Details of the proposed designated partners have to be provided in the form.
Once the name of the LLP is reserved Form 2 has to be filed along with the Incorporation document and subscriber’s statement.
At the time of filing the Form 2, Form 3 LLP agreement and Form 4 for the appointment of designated partners can be filed.
On satisfaction of the documents filed Registrar will issue a certificate of registration in Form No. 16.

LIABILITY OF PARTNERS IN LLP

LIABILITY OF DESIGNATED PARTNERS

TAXATION OF THE LLP

APPLICATION OF THE MAT TO THE LLP

With effect from the financial year 01/04/2012 the provisions of Section 115 JC of the Chapter XII – BA of the Income Tax Act, 1961 will be applicable to the Limited Liability Partnership.

Adjusted total income shall be the total income before giving effect to this chapter as increased by

Deductions claimed, if any, under any section included in Chapter VI-A under heading “Deductions in respect of certain incomes” and
Deduction claimed, if any, under section 10 AA.

FOREIGN DIRECT INVESTMENT (FDI) IN LLP

There should not be any FDI linked performance conditions
Such LLP are not required to carry on the business of agriculture/plantation activities, real estate business and print media sector.
An Indian company having the FDI can make the downstream investments in an LLP, provided the company and the LLP should be engaged in the sectors where 100% FDI is allowed.
LLPs having FDI are not allowed to invest in any domestic LLPs.
The foreign capital contribution is allowed only in the form of cash consideration, received by inward remittance through the normal banking channels or through the debit to NRE/FCNR account of the person concerned which is maintained with the Authorized Dealers.
Investment by FII or FVCI is not allowed in an LLP.
LLP are also not eligible to accept any External Commercial Borrowings.
An LLP having the FDI can only have the body corporate which is registered under the Companies Act, 1956 as its Designated Partner. Even an LLP cannot act as designated partner in such LLP.
A company having the Foreign Direct investment is allowed to convert into an LLP on satisfaction of all the above conditions and the prior approval of the FIPB is a must for such conversion.

CLOSURE OF LLP

Where an LLP is unable to pay its debts winding up by the tribunal comes into picture. Winding up by tribunal happens on the following grounds:

if a creditor, by assignment or otherwise, to whom the LLP is indebted for an amount exceeding one lakh rupees then due, has served on the LLP, by causing it to be delivered at its registered office, by registered post or otherwise, a demand requiring the LLP to pay the amount so due and the LLP has failed to pay the such amount within twenty-one days after the receipt of such demand or to provide adequate security or re-structure or compound the debt to the reasonable satisfaction of the creditor;
if any execution or other process issued on a decree or order of any Court or Tribunal in favor of a creditor of the LLP is returned unsatisfied in whole or in part; or
if it is proved to the satisfaction of the Tribunal that the LLP is unable to pay its debts, and, in determining whether a LLP is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the LLP.

ENDS

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NGO Registration

Posted on February 9, 2012 by csprasannanaganur

NGO REGISTRATION PROCESS

Overview of the NGOs

Prasanna A. Naganur

Practicing Company Secretary

No.249/H, 2^nd Main, 2^nd C Cross, Girinagar, 1^st Phase

Bangalore – 560085

A.N. Prasanna

2/9/2012

Contents

1. Introduction to the Non Government Organization. 3

2. Difference Between the NGO & NPO.. 4

3. Legal Structure of the NGO.. 4

4. Registration Procedure of Legal Structures. 5

5. Laws Applicable to the NGO.. 6

6. Government Grants. 7

1. Introduction to the Non Government Organization

Non government Organizations (NGO) are the organizations those work for the benefit of the general public and select public. These organization carry on the operations on non profit basis, meaning the income generated or subscriptions received will be invested for the purpose of development of the public. These organizations work indirectly on behalf of the government and helps the central or the state government to achieve its objects. Non government Organizations can work on any area which helps the general public. Initially the promoters of the NGO have to invest the money for operation of the trust and further it can obtain the funds from the public as subscription for achieving the objects of the NGO. The government will provide the funds to the NGOs for carrying on the operations of the NGO on an application to the concerned departments.

NGO generally formed for the benefits of the general public in the following areas.

Animal Husbandry dairy & Fishing
Aged/Elderly people benefits
Agriculture
Art & Culture
Biotechnology
Children
Civic issues
Disaster Management
Dalit upliftment
Education & Literacy
Environment & Forests
Food Processing
Health & Family welfare
HIV/AIDS
Housing
Human Rights
Information & Communication
Legal Awareness
Labor & Employment
Micro Finance Or Self Help Groups
Minority Issues
Micro Small & Medium Enterprises
Sports
Tourism
And Such Other objectives that help the General Public

2. Difference Between the NGO & NPO

The objectives of the both NGO and NPO are similar, but the difference is in obtaining the Funds and investing the Funds. In case of an NGO the funds are generally collected from the Government as the NGOs are the representatives of the Government whereas in case of NPO the investment by the promoters of the NPO is more and there after they go to the public for the funds.

In case of NPOs the income generated by the operations will be re invested into the NPO and no profit will be distributed to the members of the NPO. Whereas in case of NGOs the maximum funds obtained will be from the government.

3. Legal Structure of the NGO

The different legal structures of NGOs are stated in the below figure

a. Registration of NGO as Trust under Indian Trust Act, 1882

An NGO can be registered as Trust. Trusts are divided into private trust and public trust. In case of the private trust the beneficiary will be a particular benefit for whose benefit the trust is formed, whereas in case of the public trust the beneficiary are the general public. The NGO are formed as public trusts and the beneficiaries will be the general public. It is not clear under the law for the regulation of the public trusts. Registration of an NGO as trust is a simple method.

b. Registration of the NGO as Society

An NGO can be registered as a Society under the Societies Registration Act. The NGO will be regulated by the Registrar of Society. The formation of NGO as society is a time taking process.

c. Registration of Section 25 Company

Section 25 companies are companies registered under the Companies Act, 1956 as other companies. In case of Section 25 company an additional approval of the Regional Director is required to be obtained. The level of compliance is very high as compared to the trust. Registration of NGO as Section 25 Company will take more time.

4. Registration Procedure of Legal Structures.

a. Registration procedure for trust.

For registration of a trust minimum two persons are required.
Trust Deed is the major document for registration of the trust.
Trust deed must be stamped with appropriate stamp duty.
Trust deed has to be registered with sub registrar of the place of the trust.
Trust deed needs to be signed by both the trusties.
Sub registrar may require the personal presence of the trustee & creator of the trust.
Trustee and the Creator of the trust have to bring the relevant proof of their residence and the NOC from the owner of the place of the trust.

b. Registration procedure for the Society

Name 4-5 of the proposed society
Minimum 7 Persons-

* President

Vice President

* Secretary

Joint Secretary

*Treasurer

Executive Member

Name, Address, Age, Occupation, Father’s Name
Address Proof- Voter I.D / Driving license/ Passport
Power of Attorney of the premises where society is to be registered
Electricity Bill / House tax Receipt / Water Bill photocopy
If rented, Rent deed and Rent receipt
NOC from Landlord
Memorandum of Association
Articles of association

c. Registration of NGO as Section 25 Company

Minimum six proposed names in the order of preference are reqired.
Minimum two persons are required to form Section 25 Company.
Director Identification Number.
Digital Signature for signing and filing the Forms online.
Memorandum of association.
Articles of Association.
Background of the Promoters of the Company.
Approval from the Regional Director.

5. Laws Applicable to the NGO

Applicable laws to the NGO depend upon the legal structure of the NGO. If an NGO is registered as Trust, then the Indian Trust Act will be applicable. If the NGO is registered as a society then the Societies Registration Act becomes applicable and if the trust is registered as Section 25 Company then the provisions of the Companies Act, 1956 becomes applicable.

An NGO in order to get the investments from the public it has to get registered under the Income Tax Act, 1961. Under the Income Tax Act, 1961 Registration under Section 12 AA is required to claim the exemption from taxing the income generated out of the property held under the trust. Another registration is registration under Section 80G. The registration under section 80 G provides the benefits to the investors to claim exemption from taxing their income out which the investment to the Ngo is made. If the NGO is registered under these to sections it becomes easy to the trust to get the funds and to reach its goal.

6. Government Grants

The government of India provides the funds to the NGOs on making application to the Government. The Application needs to be made with proper explanation on the proposed area of the NGO. The government has established various schemes for the NGO.

The various participating Ministries/Departments/Government Bodies under the Government and NGO partnership Scheme are:

Disclaimer:

The readers of this note are hereby informed that this note is not considered as the legal advice from Prasanna Naganur, Practicing Company Secretary. The intention of this note is only to inform the clients of Prasanna Naganur to make them understand the basic information of the NGOs this is not considered as any suggestion, legal advice, from Prasanna Naganur, Practicing Company Secretary. Prasanna Naganur, Practicing Company Secretary is not held responsible for any person acting based on this information without his prior consultation. It is advised to the readers to take the advice from their consultants on these areas before taking any decisions on this note.

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4. Registration Procedure of Legal Structures.

5. Laws Applicable to the NGO

6. Government Grants

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