Historically, in India, an NGO is associated with either a Trust or a Society in its legal form. Over recent years, a new legal form as a Corporate NGO has started to sprout some roots. As of March 2019, it is estimated that there are about 10,000 Not For Profit companies registered in India out of an estimate active company database of 11.60 lac, less than 1% of the Corporate universe.
What’s influencing a Corporate Form
NGO’s have been set up by family businesses, inspired philanthropists, or by a group of like-minded individuals wishing to do good. However, their financial information was mostly a private matter, although they may have raised donations from the general public. Financial information of Trusts and Societies is mainly a matter between the Trustees and the Income Tax Department with almost no public disclosure.
With the CSR mandate to the Corporate world since 2014, it has now thrust their attention, resources, and managerial capabilities into this unorganized and relatively opaque NGO world. Based on a recent India Philanthropy Report conducted by Bain & Company Inc, the current estimated CSR spends to the social sector is about 12% at Rs 8,400 Crores out of a total annual spend of Rs 70,000 Crores. However, the more interesting dynamic is the challenge of the Corporate attempt to professionalize the NGO sector and its many challenges from organizational strength, leadership, ability to attract talent, transparent information, technology and processes, social goals and measures and sustainability.
Professionals as NGO Leaders
Thanks to the CSR mandate, which is a mechanism that bridges the Corporate with the Social sector, in parallel there are some beginnings of the organized Voluntary movement from students at Schools, Colleges, Corporate Executives, a few digital volunteer platforms like Digi Sevak, iVolunteer, Youth for Seva, etc has sparked a cultural shift. These trends have accentuated the need for public disclosure of funds raised and expended, social objectives attained, etc. Therefore in this new quest for transparency and professionalism, the new leaders have and are considering the Corporate Form as a better legal vehicle of their NGO.
2 Types of a Corporate NGO
The Corporate form of an NGO is also referred by the technical term as a Section 8 Company under The Companies Act 2013, which was akin to a Sec 25 Co under The Companies Act 1956. As a Founder, if you are considering setting up a Sec 8 Company, you have two options. Option#1 is a Company with Share Capital or Option#2 a Company limited by Guarantee. What are the considerations to exercise these options? If you believe that your cause, network and your ability to raise resources as donations is the basis of starting and running your Non-Profit then Option 2 is a desirable one as there is no need to raise any capital to get your initiative off the ground, apart from setting up and registration costs. While on the other hand, you wish to seed the organization and commence the activities with people and infrastructure, then you may prefer to set up a company with a Share Capital and hence Option 1 may be the choice.
A Sec 8 company has some disadvantages of much higher compliance especially under The Companies Act such as MCA filings, higher administrative costs on Accounting, Audit and Company Secretarial services, a higher level of professional competencies to adhere to Accounting standards prescribed for Companies. With these obvious disadvantages, why should a Founder or a Founding team consider a Sec 8 company as a suitable legal vehicle to carry out its social mission becomes a moot question.
The principal reason that influences selection of a Sec 8 company form is the desire and willingness for financial transparency as the audited financial statements is available in the public domain on the MCA site, apart from several other factors of changing profile of founding team with increasing number of professionals joining the social sector, better ability to fundraise from Corporates with CSR mandates as they are culturally akin and prefer funding such NGO’s , better framework of governance under The Companies Act of regularity of Board and General Body Meetings, recording of minutes and maintenance of Statutory Registers, delegation of powers, a better perception and positioning of role and responsibility versus personal attachment to the organisation and a method to periodically carry out a rotation of Board members and their roles etc. A sec 8 company, by and large, has a better positioning of public confidence and is able to attract talent, professions, and funding for its cause.