A charitable or non-profit association with the aim of promoting health, social welfare, and charity can be established as a public company with limited liability under Section 42 of the Companies Act, 2017 (Act XIX of 2017 – hereinafter referred to as the “2017 Companies Act”) and governed by the Associations with Charitable and Not for Profit Objects Regulations, 2018 (the “2018 Regulations”).
To set up a Section 42 Company, a minimum of three (03) individuals is required. The registration process involves two main steps. Firstly, obtaining a license from the Securities and Exchange Commission of Pakistan (SECP). The SECP issues the license for an initial period of three (03) years, which can be renewed upon application to the SECP three (03) months before its expiration. Secondly, within sixty (60) days from the date of license issuance, the promoters must apply for incorporation as a public limited company with the relevant company registration office of the SECP.
Unlike other types of NPOs / NGOs, Section 42 Companies fall under the regulation and incorporation framework of a Federal statute, namely the 2017 Companies Act. Consequently, these entities can carry out their operations across Pakistan without the need for separate registration with provincial authorities.
Section 42 Companies serve as a viable option for those seeking to establish non-profit entities that focus on charitable objectives. The licensing and incorporation process ensures a structured approach to governance and compliance, enhancing credibility and transparency in the sector. By adhering to the 2018 Regulations, Section 42 Companies contribute to the promotion of social welfare and philanthropic activities while complying with the legal and regulatory framework in Pakistan.If you have questions regarding Section 42 Companies, their registration and compliance legal regimes and post-registration compliance please contact us at email@example.com
Update: Provincial Registration For Section 42 non-Profit companies with Charities Commissions
Provincial Governments, including the Islamabad Capital Territory, have implemented regulations requiring charities operating within a specific province/territory to register with the relevant charities’ commissions (the “Commissions”).The establishment of the Commissions has been carried out through separate enactments such as the Punjab Charities Registration Act, 2018 (Act V of 2018), the 2021 ICT Charities Registration Act, the Sindh Charities Registration and Regulation Act, 2019 (Act XVI of 2019), the Khyber Pakhtunkhwa Charities Act, 2019 (Act XXIX of 2019), and the 2019 Balochistan Charities Registration Act (collectively referred to as the “Charities Commission Acts”). These Acts share substantially similar provisions.
The term “charities” is broadly defined under the Charities Commission Acts, encompassing associations of individuals established for charitable purposes, including organizations formed under Section 42 of the Companies Act 2017. Before engaging in activities within a specific province/territory, charities under Section 42 are obligated to register with the respective Commission.
Apart from provincial registration, specific Non-Profit Organizations (NPOs) or Non-Governmental Organizations (NGOs) are legally required to register with the Federal Government of Pakistan through the Economic Affairs Division (EAD) of the Ministry of Finance or the Ministry of Interior (MOI).
Additionally, for NGOs/NPOs in Pakistan seeking to receive foreign contributions (including money, services, and goods from foreign sources), they must first enter into a Memorandum of Understanding (MOU) with the EAD, as outlined in the 2021 Policy for NGOs/NPOs receiving Foreign Contributions.
Under the 2021 NGO Policy, along with the execution of the MOU, an application for registration and the necessary supporting documents must be submitted to the EAD. The EAD then conducts a thorough examination of the application and consults with relevant stakeholders. Based on these evaluations, the EAD may either approve or reject the application. In the case of approval, an MOU is executed with the NPO/NGO, valid for up to three (03) years and renewable for an additional period of two (02) years.
To find out which documents are required to register a Section 42 Company under the Companies Act 2017 click below
Sections 42 and 43 under the Companies Act 2017
Section 42 of the Companies Act 2017 pertains to the licensing of associations with charitable and not-for-profit objectives. This section allows an association that meets specific criteria to be registered as a public limited company without using the words “Limited” or “(Guarantee) Limited” in its name. The key provisions of this section are as follows:
- Eligibility for Licensing: An association can be granted a license to be formed as a limited company if it is established for promoting various beneficial purposes such as commerce, art, science, religion, health, education, research, sports, protection of the environment, social welfare, charity, or any other useful object. The association must intend to utilize its profits and other income to promote its stated objectives and prohibit paying dividends to its members. Additionally, the objectives and activities of the association must not contravene the laws, public order, security, sovereignty, and national interests of Pakistan.
- Licensing Conditions: The license issued by the Commission may include specific conditions and regulations that the association must adhere to. These conditions will be deemed part of the memorandum and articles of association or included in one of these documents.
- Memorandum and Articles of Association: The memorandum and articles of association of the company, which is licensed under this section, must be in accordance with the form set out in Table F of the First Schedule to the Companies Act 2017 or as close to it as possible. These documents must also be approved by the Commission.
- Status of the Registered Company: Once the association is registered under this section as a public limited company, it will enjoy all the privileges and be subject to all the obligations of a limited company.
Section 42 provides a mechanism for associations with charitable and not-for-profit objectives to be registered as public limited companies without using the typical “Limited” or “(Guarantee) Limited” in their names. This allows these associations to operate as limited companies while focusing on promoting various beneficial purposes by the laws and regulations of Pakistan.
Section 42(5) of the Companies Act 2017 deals with the revocation of a company’s license. According to this section, the Commission has the authority to revoke the license of a company granted under subsection (1) under certain circumstances. The provisions of this section are as follows:
- Grounds for Revocation: The Commission may revoke the license if it is satisfied that any of the following conditions are met:
- (a) The company or its management has failed to comply with any of the terms or conditions subject to which the license was granted.
- (b) Any of the requirements specified in subsection (1) or any regulations made under this section are not met or complied with.
- (c) The affairs of the company are conducted in a manner prejudicial to the public interest.
- (d) The company has made a default in filing its financial statements or annual returns with the registrar for two consecutive financial years.
- (e) The company has acted against the interest, sovereignty, and integrity of Pakistan, the security of the State, or friendly relations with foreign States.
- (f) The number of members of the company is reduced below three.
- (g) The company is involved in unlawful or fraudulent activities, or it is run and managed by persons who commit fraud, misfeasance, or malfeasance in relation to the company.
- (h) The company is managed by persons involved in terrorist financing or money laundering, or the management has refused to act according to the requirements of the memorandum, articles, or the provisions of the Companies Act or failed to carry out the directions or decisions of the Commission or the registrar.
- (i) The company has not been carrying on its business or is not in operation for one year.
- (j) It is deemed just and equitable that the license should be revoked.
- Notice and Opportunity to be Heard: Before revoking the license, the Commission must give written notice of its intention to do so to the company. The company should be provided with an opportunity to be heard in response to the notice.
- Effect of Revocation: Once the license is revoked, the company will no longer enjoy the privileges of being a licensed association with charitable and not-for-profit objectives. The company will be subject to the usual regulations and requirements applicable to other companies under the Companies Act 2017.
In summary, Section 42(5) empowers the Commission to revoke the license of a company if it fails to comply with the terms and conditions of the license, violates the specified requirements, engages in prejudicial conduct, commits defaults, or is involved in illegal or fraudulent activities. The company must be allowed to respond before the license is revoked.
Effect of revocation of license under Section 43 of the Companies Act, 2017
Section 43 of the Companies Act, 2017 deals with the effect of the revocation of a company’s license by the Commission. Upon revocation of the license under Section 42, the following consequences shall ensue:
- The company must cease all its activities, except for the recovery of any outstanding debts owed to it.
- The company is prohibited from soliciting or receiving donations from any source.
- All assets of the company, after satisfying all its debts and liabilities, shall be transferred to another company that is licensed under Section 42. This transfer must be completed within ninety days from the date of revocation of the license, or any extended period allowed by the Commission. The recipient company is preferably expected to have similar or identical objects as the company whose license has been revoked.
- The company may retain a reasonable amount to cover the expenses of voluntary winding up or making an application to the registrar for striking the name of the company off the register, as provided in subsection (3).
- Once the requirements specified in sub-section (1) are duly complied with, the board of the company must submit a report to the registrar within fifteen days from the date of compliance. This report shall contain relevant information and supporting documents as may be specified.
- Within thirty days of acceptance of the report by the registrar, the company’s board shall initiate necessary proceedings for voluntary winding up if the company has assets and liabilities. If the company has no assets and liabilities, the board shall apply to the registrar for striking the name of the company off the register.
- Failure by the company to comply with any requirements of this section within the specified period or any extended period allowed by the Commission may lead to the Commission appointing an administrator to manage the affairs of the company. The Commission may also initiate necessary proceedings for winding up of the company.
- If any assets of the company are transferred as a result of the license revocation to another company licensed under Section 42, the members and officers of the first-mentioned company, or any of their family members, shall be ineligible to hold any office in the latter company for a period of five years from the date of the asset transfer.
- In cases where the license of a company was revoked before the commencement of this Act and the company is not in the process of winding up, this section shall apply as if the license was revoked immediately after the commencement of this Act.
The Association with Charitable and Not-for-Profit Objects Regulations 2018
Date of Issuance: 7th June 2018
Scope and Applicability: The regulations apply to all companies licensed under Section 42 of the Companies Act 2017 and Companies Ordinance 1984. They have effect regardless of anything contained in the Articles, Memorandum, contract, agreement, or resolution of the company.
Regulatory Authority: The Securities and Exchange Commission of Pakistan (SECP) issued the regulations, and it regulates the licensing of charitable and not-for-profit companies under the authority given by sections 512, 42, and 43 of the Companies Act 2017.
Definition of Section 42 Companies: Section 42 companies are limited companies formed for promoting various beneficial purposes such as commerce, art, science, religion, health, education, research, sports, protection of the environment, social welfare, charity, or any other useful object. These companies must use their profits and all other income to promote their specified objects, and no dividends can be distributed to the members.
Licensing and Revocation: The SECP can grant licenses to Section 42 companies with conditions it deems appropriate, which become part of the company’s Memorandum and Articles of Association. The license may be revoked by the SECP for various reasons, including non-compliance with license terms, failure to meet statutory requirements, prejudicial conduct, financial reporting defaults, unlawful and fraudulent purposes, involvement in terrorist activities or money laundering, and other specified grounds.
Structure of the 2018 Regulations: The regulations consist of four chapters and various forms, including application forms for a license, renewal of a license, appointment of directors or Chief Executive Officer, and transfer of assets in case of license revocation. Monthly reports detailing funds received are also required.
Licensing Process: Associations seeking to become Section 42 companies must submit NFP Form 1 along with supporting documents, and at least one promoter must have adequate experience in the proposed field/s of the company’s objects. Upon receiving the application, the SECP grants a license if all requirements, fit and proper criteria, and public interest are fulfilled, and may impose additional conditions as deemed necessary.
Amendment to Licensing Duration: Previously, Section 42 companies were granted licenses for five (5) years. However, as per Regulation 5(3), the license duration has been reduced to three (3) years.
Refusal of License and Right to be Heard: If the SECP refuses to grant a license to an association, it must issue a refusal order and provide the association with an opportunity to be heard. The Regulations do not provide a specific definition of “public interest.”
Mandatory Public Limited Company Incorporation: Regulation 6 mandates that all new companies receiving a Section 42 license must incorporate themselves as public limited companies under the provisions of the Companies Act 2017 within 60 days of receiving the license. Failure to comply may result in the SECP revoking the license. However, it is not explicitly mentioned whether existing companies (prior to the issuance of the Regulations) will be required to convert to public limited companies. The Regulations only state that existing companies will remain incorporated as they are, whether public or private. It is unclear if the SECP will enforce the conversion of existing private Section 42 companies to public limited companies in the future.
Conditions for Licensing of Section 42 Companies under the 2018 Regulations
Regulation 7 lays down additional conditions for granting a license to Section 42 companies, in addition to those specified in Regulation 5. These conditions include:
- Incorporation as Public Limited Company: The company must be registered as a public limited company with at least three promoters.
- Minimum Liability of Members: The liability of each member shall not be less than PKR 100,000 or any other amount notified by the SECP.
- Promoter’s Start-Up Donation: Each promoter, except for entity-nominated or government-nominated members, shall donate PKR 200,000 as a start-up donation or any other amount notified by the SECP.
- Reimbursement for Actual Expenses: Directors and the Chief Executive Officer may only be reimbursed for actual expenses incurred while attending meetings.
- Remuneration for Full-Time Employees: Directors and the Chief Executive Officer may be paid remuneration only if they are full-time employees of the company.
- Restriction on Remuneration to Members: Members of the company and their close relatives shall not be paid any remuneration until one year after a member quits the membership of the company. The term “close relatives” is not explicitly defined.
- Approval for Alteration of Memorandum: The Memorandum of the company cannot be altered without the permission of the SECP.
- Claiming Patronage: The company can claim the patronage of government, authorities, or celebrities only after obtaining their written consent.
- Prohibition on Functioning as Trade Organization: The company shall not function as a trade organization.
- Restriction on Offending Religious Susceptibilities: The company shall not offend or exploit religious susceptibilities of the public.
- Prohibition on Political Campaigns and Contributions: The company shall not participate in political campaigns or contribute funds to political parties or individuals.
- Permission for Promoters to Quit Membership: Promoters shall obtain permission from the SECP before quitting as members.
- Fit and Proper Criteria: All new members, directors, and the Chief Executive Officer must meet the fit and proper criteria specified in the Regulations, except for government nominees.
- Prohibition on Investment in Associated Companies: The company shall not invest in its associated companies or undertakings.
- Mandatory Company Labeling: The company must identify itself as “A company set up under section 42 of the Companies Act 2017” on all its letterheads, documents, signboards, and communication.
- Utilization of Income and Profits: No dividend shall be paid to members or close relatives; all income and profits shall be used for the promotion of the company’s objects.
- Compliance with Other Statutory Regimes: The company must obtain all necessary licenses, permissions, and approvals required under other statutory regimes to carry out specific objects.
- Restriction on Foreign Donations: The company shall not seek or accept donations from foreign sources without obtaining permission from the SECP.
- Receipt of Funds through Proper Banking Channels: All funds, donations, and grants shall be received through proper banking channels, and cash donations equal to or less than PKR 20,000 can be accepted.
- Compliance with Anti-Money Laundering Laws: The company must comply with anti-money laundering and counter-financing of terrorism laws.
- Maintenance of Registers: In addition to the registers required under the Companies Act 2017, the company must maintain registers of donors and donations and registers of donees and beneficiaries.
- Adherence to SECP’s Additional Conditions: The company shall comply with any conditions that the SECP deems fit to impose for granting and renewing licenses.
Renewal of Licence for Section 42 Companies under the 2018 Regulations
Regulation 8 governs the process of renewing the license for Section 42 companies. The application for renewal must be made within three months before the expiry of the current licence. The application, accompanied by supporting documents and the original fee payment receipt, shall be submitted to the SECP in the prescribed manner of NFP Form 2.
The SECP shall grant the renewal of the license to the company subject to the following conditions:
- Compliance with Fit and Proper Criteria: Directors and the Chief Executive Officer must meet the fit and proper criteria as specified in Regulation 10.
- Fulfillment of Other Requirements: The company must satisfy all other requirements for renewal as prescribed.
- Public Interest Consideration: The renewal of the licence must be in the public interest.
- Imposition of Additional Conditions: The SECP may impose any other conditions that it deems appropriate.
In case the SECP determines that the company fails to meet the requirements of the Companies Act 2017 or the Regulations or concludes that the renewal is not in the public interest, it may refuse to grant the renewal of the license.
Revocation of Licence for Section 42 Companies under the 2018 Regulations
Regulation 11 outlines the procedure for the revocation of a Section 42 company’s licence. In addition to the grounds specified in Section 42(5) of the Companies Act 2017, as mentioned above, the license may also be revoked for the following reasons:
- Non-Compliance with Regulation 10: If the company fails to comply with the fit and proper criteria as set out in Regulation 10.
- Failure to Timely Renew Licence: If the company fails to renew its licence within the prescribed time.
- Violation of Regulations: If the company violates any provision of the Regulations.
The revocation process starts with the SECP sending a written notice to the company’s registered office. Upon receiving the notice, the company must immediately prepare audited financials from the date of the last audited financials until the date of revocation.
Within ten days of receiving the notice, the directors must shortlist and finalize the name of a transferee company that has agreed to receive the assets of the company. After settling all debts and liabilities, the assets will be transferred through an agreement, which will detail the roles and responsibilities of both the transferor and transferee companies, the assets involved, and the mechanism for the transfer.
Subsequently, NFP Form 4, along with an affidavit of compliance, the latest audited financials, a copy of the meeting minutes where the transferee company was shortlisted, a copy of the letter of concurrence from the transferee company, a copy of the asset transfer agreement, and a certificate confirming the completion of the asset transfer, shall be submitted to the SECP.
The revocation of a Section 42 company’s license can occur if it fails to adhere to specific requirements, such as the fit and proper criteria, timely renewal of the licence, or any provision in the Regulations. The process involves careful financial reporting, asset transfer, and compliance with SECP’s directives.
The perspective of non-SECP stakeholders
From the perspective of stakeholders other than the SECP, the new Regulations for companies with charitable objects are perceived as over-regulation, potentially resulting in burdensome compliance processes and excessive paperwork. These stakeholders, including charitable organizations and their founders, raise the following concerns:
- Compliance Burden: Charitable companies already have to comply with multiple regulatory regimes, such as corporate compliance, taxation matters, and reporting for endowment fund trust, provident fund trust, and insurance. The additional requirements under the new Regulations may impose a time-consuming and resource-intensive burden on these organizations.
- Complicated Governance: The requirement for all new charitable companies to be registered as public limited companies under the Regulations is seen as complicating internal governance. This may be seen as conflicting with the provisions of the Companies Act 2017.
- Monitoring by the Government: The Regulations provide broad authority to the government to monitor the assets and income of charitable companies under the guise of “public interest.” The lack of a defined scope for “public interest” raises concerns about potential government interference and scrutiny.
- Targeted Approach: Stakeholders argue that instead of subjecting all charitable companies to rigorous regulation, specific rules targeting companies with potential risks, such as those involved in terrorism funding, could be more effective.
- Limitations on Family Involvement: Many charitable companies were founded by families who want to actively contribute to the company’s work. However, the Regulations restrict the remuneration of close relatives of members, potentially limiting family involvement.
- Redundant Reporting: Stakeholders find the requirement to maintain registers of donors, donations, donees, and beneficiaries redundant, as detailed annual financial reporting mechanisms are already in place.
Overall, stakeholders fear that the combination of the new Regulations with the existing requirements of the Companies Act 2017 may lead to a diversion of resources and time towards compliance tasks, reducing the focus on the actual charitable objectives of these organizations. They advocate for a more targeted and practical approach to regulation that does not impede the genuine work of charitable companies.
Below are some of the most Frequently Asked Questions (FAQs) on registration of a non-profit company in Pakistan under Section 42 of the Companies Act 2017 (previously Section 42 of the Companies Ordinance 1984) which is an alternative to registering a non-profit under the Societies Act:
Does a non-profit company/organization need to obtain a licence?
Yes. Any such company/organization is required to obtain a license under section 42 of the Companies Act 2017 (previously Section 42 of the Companies Ordinance 1984) from the Securities & Exchange Commission of Pakistan prior to its registration as a company limited by guarantee.
For how many years is the license valid for a Section 42 company under the Companies Act 2017 (previously Section 42 of the Companies Ordinance 1984)?
Previously, Section 42 companies were granted licenses for five (5) years. However, as per Regulation 5(3) of the above mentioned 2018 Regulations, the license duration has been reduced to three (3) years.
What is the minimum number of members needed to form a not-for-profit association as a Section 42 company under the Companies Act 2017 (previously Section 42 of the Companies Ordinance 1984)?
A minimum of three members can form an association/company that is not for profit, and that association must be registered as a company with limited liability, without the addition of the words “Limited”, “(Private) Limited” or “(Guarantee) Limited”.
Can a non-profit company incorporated as Section 42 company under the Companies Act 2017 (previously Section 42 of the Companies Ordinance 1984) have multiple objectives?
Yes, a non-profit company is allowed to have multiple objectives.
In the case of closing the non-profit company which is a Section 42 company under the Companies Act 2017 (previously Section 42 of the Companies Ordinance 1984)where will the assets or property of the said company go?
In the case of winding up or dissolution of the company, any surplus assets or property, following the satisfaction of all debts and liabilities, are to be given or transferred to some other company established under section 42 of the Companies Ordinance, 1984. These companies must have similar or identical objects.
Are foreigners allowed to form non-profit association/company under Section 42 of the Companies Ordinance 1984)
There is no legal bar on foreigners becoming trustees of a non-profit company.
Can a licence granted to a Section 42 company under the Companies Act 2017 (previously Section 42 of the Companies Ordinance 1984) be revoked?
The licence granted under section 42 can be revoked by the Securities & Exchange Commission of Pakistan and upon revocation, the Registrar shall enter the word “Limited” or “Private Limited” at the end of the company name and that company will cease to enjoy the exemption granted under section 42 of the Companies Ordinance, 1984. Before the license is revoked the Securities & Exchange Commission of Pakistan shall give notice in writing of its intention and an opportunity will be given for the argument to be heard in opposition to the revocation.
Is a non-profit company wanting to register under section 42 required to have a minimum paid up capital as required by other companies registered under the Companies Act 2017/ Companies Ordinance, 1984?
No. A non-profit company registered under section 42 shall not be required to have minimum authorized paid up capital.
Can a non-profit company registered under section 42 of the Companies Laws of Pakistan have activities outside of the country?
Companies Ordinance, 1984 did not and the Companies Act 2017 does not prohibit activities outside Pakistan.
Can one person be the sole director and officer of a non-profit company in Pakistan?
No. The law under which non-profit companies are incorporated requires a non-profit company to have at least three trustees.
Can a non-profit company pay a salary to its directors, officers and employees?
A non-profit company may pay reasonable compensation for services rendered to the employees of the company but the trustees cannot draw any salary or remuneration.
Is a non-profit company a tax-exempt entity? If not, how do I become tax-exempt?
Charities are potentially exempt from tax on most forms of income provided that the funds are applied solely in furtherance of the charity’s objects. A non-profit company is not automatically exempt from income tax or other taxes. To become exempt the association must meet certain requirements and apply to the Commissioner of Income Tax for exemption.
Josh and Mak International have successfully dealt with the incorporation of numerous non-profit companies under section 42 of the Companies Act 2017/ Company Ordinance, 1984 including registration of nonprofit company for education; non-profit company for sports; non-profit companies for charity activities; non-profit companies for arts, sciences, and literature; non-profit company for culture and heritage activities; non-profit company for health services activities; non-profit company for social infrastructure and human resource development activities; non-profit company for rural support program activities; non-profit company for religious activities; non-profit company for professional Institutions activities; and non-profit company for special education activities.
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