Applicability of Section 80 of the Telangana Endowments Act, 1987 to property held by Section 8 Companies

Section 8 of the Companies Act, 2013 (“Companies Act”) provides for persons or an association of persons to form a limited company that has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, or any such other objects.^[1] Subject to being sanctioned with a license from the Central Government,  the registrar of companies may register such persons or an association of persons as a company under Section 8 of the Companies Act, and the company is entitled to operate without the suffix ‘Limited’ or ‘Private Limited’ in its name^[2](“Section 8 Company”).  

Section 8 Company is subject to a mandatory non-distribution constraint i.e., profits and other income must be applied solely towards furtherance of its objects^[3], coupled with an express prohibition on payment of dividends or other distributions to members under Section 8(1)(c)^[4] of the Companies Act. As per Section 8(2) of the Companies Act, Section 8 Company may enjoy all the privileges which includes tax exemptions, approvals for receiving donations or contributions, including foreign contributions, allotment of land and other immovable properties that it can own whether by purchase, grant, allotment, donation or otherwise while being subject to all the obligations of limited companies.  

This article examines the applicability of restriction on alienation of immovable property contemplated under Section 80 of the Telangana Charitable and Hindu Religious Institutions and Endowments Act, 1987 (“Endowments Act”) to the immovable properties held by a Section 8 Company.  

Restriction on Alienation of Immovable Property under the Endowments Act

As per Section 1(4) and 1(5) of the Endowments Act, ‘charitable institutions’ includes any establishment, association formed for a charitable purpose.^[5] Section 8 Companies are formed solely to promote inter alia religion, charity, social welfare, education, research, commerce, art, science, sports, protection of the environment or any other similar object.^[6]

The Endowments Act applies to all public charitable institutions^[7] formed for a charitable purpose^[8] and religious institutions, whether registered or not, in the State of Telangana. Further, as per Section 80 of the Endowments Act, a prior sanction from the Commissioner^[9] must be obtained for any gift, sale, exchange, or mortgage, of any immovable property belonging or endowed for the purpose of any charitable or religious institution or endowment. In view thereof, any immovable property given or endowed for or belonging to a charitable institution falling within the statutory definition^[10] contemplated under the Endowments Act, prior permission from the Commissioner is required for any gift, sale, exchange, or mortgage, of any such property under the Endowments Act, including such immovable properties held by Section 8 Company.  

For a Section 8 company to qualify as a ‘charitable institution’ under the Endowments Act, incorporation under Section 8 of the Companies Act is neither conclusive nor determinative. The inquiry is definition driven. The entity must fall within the statutory conception of an establishment or organisation formed for a ‘charitable purpose’ as defined under the Companies Act, such as relief of poverty, education, medical relief, or advancement of general public utility not being of an exclusively religious nature. Beyond objects, it is to examine whether the institution possesses a public character, namely, whether its activities are directed toward the public or a sufficiently identifiable section thereof. Notably, for the purposes of Section 80 of the Endowments Act, the focus remains property-centric, where restrictions on alienation are attracted only where property is shown to ‘belong to’ or be specifically endowed for such an institution. Corporate ownership alone does not, without demonstrable dedication, convert assets into statutory endowment property.

Conversion of Section 8 Company

Section 18 of the Companies Act permits a company of any class to convert itself into another class by altering its memorandum and articles of association, while preserving continuity of debts, liabilities, obligations, and contracts^[11]. Section 8(4)(ii) of the Companies Act provides that a company registered under Section 8 of the Companies Act may convert itself into a company of any other kind, subject to prescribed conditions and with the prior approval of the Central Government, a function now delegated to the Regional Director (“RD”)^[12].

Rule 22 of the Companies (Incorporation) Rules, 2014, prescribes a heightened scrutiny process for conversion of a Section 8 Company which includes issuance of public notice in Form INC-19 in vernacular and English newspapers, publication on the company’s website, and service of notice upon a range of authorities, including income-tax authorities, the Charity Commissioner, the Chief Secretary of the State, and other sectoral regulators^[13].

Upon approving the conversion of Section 8 Company to a company of any other kind, the RD may impose certain conditions, including requiring the company to relinquish exemptions or privileges enjoyed by virtue of its Section 8 Company status,^[14] where immovable property was allotted, acquired free of cost or at a concessional rate from the government or any authority, the RD may require the company to pay the differential between the acquisition cost and the market price at the time of conversion^[15].  

This framework stipulated under the Companies Act entrusts the RD with discretionary authority to neutralise the concessional advantage derived from State support prior to conversion and to prevent private appropriation of assets accumulated during the company’s operation under the Section 8 regime. Such newly formed company, upon altering its charter documents,^[16] holds and deals with its property as an ordinary company under the Companies Act and general property law, subject to, however, any conditions imposed in the conversion order and to any statutory restrictions independently applicable to specific properties.

Conclusion

Immovable properties held by a Section 8 Company prior to their conversion into a company of any other nature attract the restriction on alienation stipulated under Section 80 of the Endowments Act, where such properties qualify as “endowments” within the statutory definition. While there are limited judicial precedents directly addressing the position after a Section 8 Company ceases to operate for public purposes, the conversion framework under the Companies (Incorporation) Rules, 2014 requires disclosure of such assets and enables the RD to impose appropriate conditions at the time of approving the conversion of a Section 8 Company. Authoritative judicial decisions specifically addressing the application of endowment restrictions post-conversion are the need of the hour to bring clarity and consistency to this evolving intersection of company law and the state endowment law. 

References

[1] Section 8 (1) (a) of Companies Act, 2013

[2] Companies Act, 2013, s 8; see also Companies Act, 1956, s 25 (repealed).

[3] Section 8 (1) (b) Companies Act, 2013

[4] Companies Act, 2013, s 8(1)(c).

[5] Charitable Purpose includes: (a) relief of poverty or distress; (b) education; (c) medical relief; (d) advancement of any other object of utility or welfare to the general public or a section thereof not being an object of an exclusively religious nature.

[6] Supra n.1.

[7] Section 1(4) charitable institution means any establishment, undertaking, organization or association formed for a charitable purpose and includes a specific endowment and dharmadayam.  

[8] Supra n.5.

[9] Commissioner and the Additional Commissioner appointed under Section 3 of the Endowments Act.  

[10] Supra n.5,7

[11] Companies Act, 2013, s 18.

[12] Companies Act, 2013, s 8(4)(ii); see Ministry of Corporate Affairs Notification GSR 466(E), dated 5 June 2015 (delegation of powers to Regional Directors).

[13] Companies (Incorporation) Rules, 2014, r 22(2); Form INC-19.

[14] Companies (Incorporation) Rules, 2014, r 22(9)(a).

[15] Companies (Incorporation) Rules, 2014, r 22(9)(b).

[16] Upon it ceasing to be a charitable institution or a religious institution not having such property that belonged to or was given or was endowed for the support of a religious or a charitable purpose or for the performance of any service or charity of a public nature connected therewith.  

‍