Section 8 Companies play a pivotal role in advancing charitable, educational, social, and environmental causes in India. While many are initially incorporated as companies limited by shares, some organizations later opt to convert into a company limited by guarantee to better reflect their non-profit nature and funding mechanisms.
At My Legal Business LLP, we provide end-to-end services to support organizations in this transformation, ensuring complete compliance with the Companies Act, 2013.
Why to Convert?
Over time, a guarantee structure often aligns more closely with a Section 8 company’s mission removing shareholding implications and enabling a more donation-driven or grant-based funding model. This is particularly relevant for NGOs and donor-backed institutions.
- Build trust with donors and CSR partners.
- Aligns Structure with Non-Profit Objectives.
- Eliminate shareholder-centric governance.
- Ensure limited liability through nominal guarantee amounts.
- Operate with flexibility in fundraising and grant utilization.
- Strengthen transparency and credibility for global funding.
- Additionally, with mandatory dematerialization of shares for companies limited by shares, many companies prefer converting to a Section 8 Company limited by guarantee to avoid share related compliances.
Key Differences: Limited by Shares vs. Limited by Guarantee
| Feature | Limited by Shares | Limited by Guarantee |
| Ownership | Based on shareholding | Based on members’ guarantee obligation |
| Liability | Limited to unpaid share capital | Limited to amount guaranteed on winding up |
| Capital Structure | Requires share subscription | No share capital; funded through grants, donations, etc. |
| Governance | Shareholders/Members + Board of Directors | Members + Board of Directors |
| Best Suited For | Early-stage or closely held non-profits | Larger, publicly supported NGOs or donor-funded entities |
Legal Framework under Companies Act, 2013
1. Section 18 of the Companies Act, 2013:
Section 18 of the Companies Act, 2013 permits a company to convert from one class to another by altering its memorandum and articles of association. However, it does not explicitly cover the conversion of a Section 8 company limited by shares into one limited by guarantee.
While the section broadly authorizes class conversions, the rules remain silent or ambiguous on this specific direction of conversion, leading to interpretational challenges in practice.
2. The Companies (Incorporation) Rules, 2014 (“Incorporation Rules”) deal with conversion in limited circumstances.
A. Rule 37 outlines the process of converting an unlimited liability company whether with or without share capital into a limited liability company, either by shares or guarantee. This requires approval through a special resolution at a general meeting, followed by filing Form INC-27 and publishing a notice in Form INC-27A.
B. Rule 39 outlines the procedure for converting a company (other than a Section 8 company) into a company limited by shares. It involves passing a special resolution, deleting the guarantee clause from the Memorandum of Association, amending the Articles, filing Form MGT-14, and submitting Form INC-27.
Applicability to Section 8 Companies:
This rule does not apply to the conversion of a Section 8 company limited by shares into a Section 8 company limited by guarantee, and is therefore not relevant in such cases.
The Companies (Incorporation) Rules do not provide a specific procedure for converting a company limited by shares into one limited by guarantee. This regulatory gap was highlighted in Azim Premji Trust Services Pvt. Ltd., C.P. (CAA) No. 52/BB/2022, where it was held that the absence of notified rules does not bar such conversion, as it is permissible under Section 18 of the Companies Act, 2013.
3. Does Section 66 of the Companies Act, 2013 apply when converting a company limited by shares into one limited by guarantee?
Short answer: Yes, but only if the conversion involves reduction of share capital.
Key Points:
- Section 66 of the Companies Act, 2013 applies strictly to cases involving reduction of share capital.
- If a Section 8 company limited by shares converts into a Section 8 company limited by guarantee without share capital, the elimination of share capital may be treated as a capital reduction triggering Section 66.
- However, if the conversion does not involve reducing or cancelling share capital, and only alters the nature of liability, Section 66 may not apply.
Section 66 is not automatically applicable to every conversion. Its relevance depends entirely on whether share capital is being reduced as part of the process.
Detailed compliance checklist
I. Compliance Requirements under Section 18 of the Companies Act, 2013
A. Pre-Application Requirements
- Board Meeting
- Approve proposal for conversion
- Approve draft altered MoA and AoA
- General Meeting
- Pass Special Resolution approving conversion and approving alteration in MOA/AOA
- File Form MGT-14 with ROC within 30 days
**Please note that Form MGT-14 shall be required for both purposes- alteration in MOA/AOA as well as for approving conversion.
- Public Notice (within 7 days of special resolution)
- Publish notice (Form INC-27A) in:
- 1 English + 1 vernacular newspaper in district of registered office
- Company website (if any)
- Dispatch notice to all creditors/debenture holders by registered/speed post/courier (with proof)
- Invite objections within 21 days of publication
- Publish notice (Form INC-27A) in:
B. Application for Conversion (within 45 days of Special Resolution)
File Form INC-27 with the following:
- Notice & Explanatory Statement of General Meeting
- Certified copy of Special Resolution
- Newspaper clippings (as published)
- Altered MoA and AoA (e-form), certified by director/CS
- Declaration (2 directors including Managing Director, if any) that:
- Conversion will not affect existing debts/obligations (except member liability)
- List of creditors/debenture holders with:
- Names, addresses, and amounts due
- Director’s declaration of dispatch of notice (with proof)
- Director’s declaration (2 directors including Managing Director, if any) on:
- Accuracy of creditor list and liability estimates
- Declaration of Solvency (2 directors including Managing Director, if any)
- Auditor’s Certificate confirming solvency and going concern status
- NOC from Sectoral Regulator, if applicable
- NOC from Secured Creditors, if any
- Declaration (2 directors including Managing Director, if any) that:
- No complaints, inspection, inquiry, or investigation pending
C. Post-Filing Process
- Registrar Review
- ROC to review application and objections
- Grant approval if satisfied
D. Ineligibility Conditions
Conversion not allowed if:
- Net worth is negative
- Application for winding up, or call-in-arrears situations exist
- Annual filings are pending
- Any inspection, inquiry, or investigation is pending
II. If the conversion entails reduction or elimination of share capital→ Section 66 route
1. Board Meeting these additional points to be considered:
- Approve proposal for reduction of share capital
- Approve draft scheme of reduction and fix date for General Meeting
2. Shareholders’ Approval
- Pass Special Resolution in General Meeting (Section 66(1)) by altering the share capital clause
- File Form MGT-14 with ROC within 30 days of passing the resolution
3. Petition to NCLT (Rule 2)
- File application (in Form RSC-1) with jurisdictional NCLT within 30 days of special resolution
- Attach:
- List of creditors (certified by auditor)
- Certificate from auditor confirming conformity with accounting standards
- Declaration of solvency (if not listed)
- MoA, AoA, copy of special resolution
- Proposed minute of reduction
4. Notice by NCLT (Rule 3–5)
- NCLT issues notice to:
- Central Government (RD)
- Registrar of Companies (ROC)
- Securities and Exchange Board of India (SEBI) – if listed company
- Creditors of the company
- Notice to be published:
- In English and vernacular newspaper
- On the company’s website (if any)
- Creditors and regulators have 3 months to file objections
5. Hearing and Order by NCLT
- NCLT hears objections, if any, and if satisfied:
- Confirms the reduction
- Approves minute of reduction
- May impose conditions, including repayment of creditors
6. Filing of Order and Minute
- File certified copy of NCLT order and minute with ROC in Form INC-28 within 30 days
- ROC registers the order and issues certificate of registration
7. Post-Reduction Compliances
- Update MoA and balance sheet
- Disclose reduction in financial statements as per Schedule III and Ind AS
Key Conditions & Restrictions
- No reduction allowed if:
- Company is in arrears in repayment of deposits or interest
- Accounting treatment not in line with notified standards (Section 133)
Advantages of Conversion
The conversion of Section 8 Company limited by shares into a Section 8 Company limited by guarantee provides:
- Donor-Friendly Structure – Attracts CSR contributions, international grants, and charitable funding.
- Elimination of Shareholding -Removes conflicts among shareholders, ensuring nonprofit focus.
- Enhanced Transparency – Guarantee-based governance builds credibility.
- Ease of Fundraising – Suitable for NGOs and non-profits relying on donations rather than equity.
- Global Acceptance – International agencies prefer guarantee-based models.
- Limited Liability – Members’ liability is capped to the guarantee amount, often nominal.
- Better Governance – Simplifies compliance and long-term management.
- Lower Administrative Costs – Eliminates expenses related to share management, issuance, and transfers.
How can My Legal Business LLP Support in conversion?
At My Legal Business LLP, we offer end-to-end legal and compliance support for the seamless conversion of a Section 8 company limited by shares into a Section 8 company limited by guarantee. Our expert team ensures full adherence to the Companies Act, 2013 and applicable regulatory provisions.
Our services include:
- Legal feasibility review and advisory
- Drafting and filing of necessary resolutions and forms (including MGT-14, INC-27)
- Amendments to the Memorandum and Articles of Association
- Guidance on compliance with Section 18 and related MCA guidelines
- Liaison with the Registrar of Companies (RoC)
- Post-conversion support and documentation
FAQs
1. Can a Section 8 company limited by shares convert into a company limited by guarantee?
Yes, such conversion is permitted under Section 18 of the Companies Act, 2013, subject to compliance with applicable legal provisions.
2. Is there a specific rule under the Companies (Incorporation) Rules for this conversion?
No specific rule currently prescribes the step-by-step process. However, the conversion is still legally valid under the Act.
3. Is approval from the members required?
Yes, the company must pass a special resolution in a general meeting approving the conversion.
4. What forms need to be filed with the Registrar of Companies (RoC)?
Form MGT-14 (for the special resolution) and Form INC-27 (for the conversion application) must be filed.
5. Does Section 66 (Reduction of Share Capital) apply?
Section 66 may apply only if the conversion involves reduction or cancellation of share capital.
6. Do the Memorandum and Articles of Association need to be amended?
Yes, both MOA and AOA must be revised to reflect the change from share capital to guarantee structure.
7. Is ROC approval mandatory?
Yes, the conversion takes effect only upon approval by the Registrar of Companies.
8. What are the benefits of converting to a company limited by guarantee?
Key benefits include no share capital requirement, simplified governance, and greater alignment with non-profit objectives.
9. Will a fresh Certificate of Incorporation be issued after conversion?
Yes, upon approval of the conversion, the Registrar of Companies will issue a fresh Certificate of Incorporation reflecting the new structure.
10. Are there any tax implications of this conversion?
While the conversion itself may not trigger tax liability, it’s advisable to consult a tax advisor to ensure compliance with Section 12A/80G registrations (if applicable) and other relevant tax provisions.
11. Can the same name be retained after conversion?
Yes, the company may retain its existing name, subject to availability and compliance with the naming guidelines under the Companies Act, 2013.
12. What is the timeline for completing the conversion?
The process typically takes 4–6 weeks, depending on document readiness and the ROC’s processing time.
13. Does the conversion affect existing licenses, registrations, or contracts?
Generally, all valid licenses, contracts, and registrations continue post-conversion, but it’s prudent to notify relevant authorities and stakeholders about the change in legal structure.
14. What happens to existing shareholders after conversion?
Upon conversion, shareholders cease to hold shares and become members (guarantors) of the company. Their liability is limited to the amount they guarantee in the Memorandum.
Difference Between MOA and AOA Explained Simply
Section 8 Microfinance Company Registration- A complete guide
Section 8 Company Registration Process Step By Step
Checklist for Conversion of Society into Section 8 Company
Benefits of Section 8 Company Registration in India