Financial Management and Legal Affairs for Non-Profit Organisations In India

By CMA Rajesh Kumar Sinha, FCMA

This book briefly describes about Societies, Trusts & Section 8 Companies which are the primary forms of Non-Profit Organisations. It also explains the concepts of accounts management, framework of financial management guideline, applicable Income Tax and FCRA Acts, Rules and amendments thereon. The book demystifies financial management and legal aspects applicable to NPOs with practical insights, which will help finance professionals in non-profit sector to adequately adhere to the statutes as well as effective management of the organizational finances. The suggested guideline of Financial Management Manual will help the Non-Profit Organizations to prepare their own operational financial management manual taking guidance from this section.

• Language: English
• Publisher: Lulu.com
• Release date: Oct 13, 2014
• ISBN: 9781312596887

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Financial Management and Legal Affairs for Non-Profit Organisations In India

FINANCIAL MANAGEMENT AND LEGAL AFFAIRS FOR NON-PROFIT ORGANISATIONS IN INDIA

CMA Rajesh Kumar Sinha, FCMA

Copyright © 2014, CMA Rajesh Kumar Sinha

All rights reserved. No part of this book may be reproduced, stored, or transmitted by any means—whether auditory, graphic, mechanical, or electronic—without written permission of both publisher and author. Unauthorized reproduction of any part of this work is illegal and is punishable by law.

ISBN: 978-1-312-59688-7

About the book

This book contains brief description about Societies, Trusts & Section 8 Companies, concepts of accounts management, framework of Financial Management guideline, Income Tax Rules applicable and FCRA Rules and Management applicable to a Non-Profit Organisation with practical insights will prove to be extremely handy to any accounts professional from the Non-Profit Organisation sector. This book contains brief description about Societies, Trusts & Section 8 Companies, concepts of accounts management, framework of Financial Management guideline, Income Tax Rules applicable and FCRA Rules and Management applicable to a Non-Profit Organisation with practical insights will prove to be extremely handy to any accounts professional from the Non-Profit Organisation sector.

2014

CMA Rajesh Kumar Sinha FCMA

ABOUT AUTHOR

The author is a Fellow of The Institute of Cost Accountants of India (ICoAI). He is also a Doctoral Fellow in Finance and Accounts with Indian Institute of Management, Indore. He has worked with various national and international NGOs for the last 15 years and has provided his support for Financial Appraisal, Financial Review, Financial Monitoring and Evaluation, Training of Financial Management and Legal Affairs to various NGOs on behalf of different donor agencies.

PREFACE

It gives me a great pleasure to introduce this book on financial management which will serve as an aide memoire for the persons managing finances of Non Profit Organisations to manage their resources and funds transparently and within the ambit of legal provisions. Non-Profit Organisations (generally termed as Non-Governmental Organisations, Voluntary Organisations etc.) have been catalysts for change on a national scale. Voluntary sector has to be a vibrant and growing aspect of society and the economy. However, they can play this role better if they enjoy a high degree of public trust and provide a voice for the most marginalized and services for these communities. Application of the principles and practices detailed in the book can help these organizations to continue to earn that trust.

This book deals with the different aspects of Financial Management and legal affairs of Non- Profit Organisations (NPOs) in India. The idea of this book came from my experience of working with several non- profit organizations, which gave me an insight into the difficulties they face in routine financial management and accounting processes and their need for a quick reckoner that could guide them in their day to day work.

The book primarily aims at:

Deepening the understanding of managers about the accounting and financial management processes in non-profit organizations.

Highlighting various enactments and legal provisions that guide the accounting in such organizations, and understanding their implications and compliances.

I have tried to write this book in a very simple language, tried to demystify complex theories, and can be used by even non-finance persons or newcomer to understand operations in a non- profit organization.

My task would remain incomplete without due sincere acknowledgement to my parents and my wife and colleague Keya for the numerous proof readings and suggesting changes and new ideas, which has given the book a new shape. My loving acknowledgement also to my little son Ryan for bearing through the long periods of my engagement with the book, when he actually would have wanted to play hop-n-jump.

I am sure that the users of this book will find it useful.

Kindly give your feedback and inputs on [e-mail].

CMA Rajesh Kumar Sinha, FCMA

IMPORTANT DEFINITIONS

Non-Profit Organisation: A Non-Profit Organisation is an organization which is initiated and governed by its own members, for pursuit of some common objectives. The primary objective of a Non-Profit Organisation is to work for the benefit of the society at large and not to generate profit from its activities. In this book, the organizations referred to are generally those engaged in social welfare and development works.

Non-Profit Organisations (NPOs) are called by different names like Non-Government Organisations (NGOs), Civil Society Organisations (CSOs), Development Organisations, Voluntary Organisations (VO), etc. To make these organizations a formal body, one has to get registration under certain Acts. Most of the non-profit organizations are registered either under Societies Registration Act, 1860 or Indian Registration Act, 1908 or Section 8 Companies of The Companies Act, 2013.

Company: A Company is a legal body which is registered under the Companies Act 2013 and has a separate legal identity independent from its members. There are different types of companies like public limited company or private limited company where liability of the members are limited to the amounts paid, or due to be paid, for shares or debts etc. and there are also unlimited companies where liability of the members are unlimited. However, these companies are formed with a sole objective of making profits and dividends are distributed among the members or shareholders.

Companies formed under Section 8 of the Companies Act 2013 are known as ‘Non Profit Companies’ with charitable objectives as per the provisions of the Act, like promotion of commerce, art, science, religion, charity, sports, education, research, social welfare, protection of environment or any other useful object. There are stringent provisions for the non-profit companies in the case of non-compliance. Unlike public or private companies registered under the same Act, non-profit companies registered under section 8 of the said Act are not allowed to distribute dividends to their members. There are certain exemptions or benefits being enjoyed by the non-profit companies, like they are not required to have any minimum paid capital unlike public and private limited companies. Also, a charitable company can be amalgamated with another company registered under the same section and having similar objectives.

Trust: A Trust is an entity which enables its property to be held by the person or persons (called trustees) in the trust of the beneficiaries. The trustees are the legal owners of the trust properties but the property should not be used for the benefit of their own but for the purpose of its intended beneficiaries.

Trust Deed is a document which states the objectives of the body, intended beneficiaries, names and addresses of its trustees, their powers and duties, and other rules governing its operation. For registering a Trust, one has to register its Trust Deed.

Society: It is a form of an organization established for a specific charitable purpose or activity by a group of people. They can register themselves under the Societies Registration Act, 1860 which stipulates that the group should have at least 7 members and there should be a clearly laid down Memorandum of Association specifying the objectives, scope of work, roles and responsibilities of its members and bylaws governing the Society.

Memorandum of Association or Trust Deed: These are the documents which are filed at the time of registration to the appropriate authority. These documents generally have Name of the organization, objectives and internal affairs of the organization, name, address and occupation of the founders/trustees, name, address etc. of the Board members, registered address of the organization, clause of distribution of assets at the time of dissolution of the organization. Trust Deed normally gets registered if the organization is being registered under the Indian Trust Act and Memorandum of Association is registered if the organization is being registered under the Societies Registration Act, 1860 or Section 8 of the Companies Act, 2013.

Articles of Association or Bye Laws: These are other documents which are filed along with the Memorandum of Association or Bye Laws at the time of registration with the appropriate authority. These documents basically explain the rules and regulations of organization which enables its governance. These documents explain the rules related to General Body and Governing Body meeting, size and authority of the Board and General Body; rights, duties and responsibilities of members, termination of membership, code of conduct, voting norms, norms related to resolutions, bank account operations, scope and authority of the Chief Functionary, mechanisms of formulating financial and other policies, audit etc.

Chief Functionary/ Secretary/ Managing Trustee: Chief Functionary is a person who is appointed by the Governing Body of the organization in the Annual General Meeting with the responsibility to ensure that the organization is functioning efficiently and effectively. Generally, a person from within the same Governing Body is appointed as Chief Functionary of the organization. S/he also ensures that the organization is functioning within the legal framework applicable to the orgnaisation in which it is registered. Governing Body of the organization generally gives him/her operational powers that are needed to run the organization on day to day basis. However, for important policy decisions or such decisions that affect the organization in a major way Chief Functionary should involve the entire Board which needs to take collective decision.

As Chief Functionary of the organization is working on behalf of the Board he is accountable to the Board. It is expected that if there is any conflict of interest, then s/he should disclose it to the Board and refrain from participating in the decision making process and ask the Board to take decision.

Chief Functionary can become one of the position holders in any project, if s/he is competent to give his/her services. Fees or remuneration can be paid from the project or the organization in lieu of his/her services and time, which should be fixed by the Board. However, the remuneration should not be more than what is reasonable and fair; otherwise it will be disallowed as per the Income Tax Act, 1961 of India. If the Chief Functionary is also a member of the Governing Body of the organization then the remuneration paid to him/her should be disclosed in Form 10B of Income Tax Department with the Income Tax return.

Chief Functionary is generally known as Secretary, Managing Trustee, Executive Director, Chief Executive Officer etc. in this sector.

SOCIETIES REGISTRATION ACT, 1860

REGISTRATION UNDER SRA, 1860

A group of 7 or more persons can register an organization under Societies Registration Act, 1860. They have to prepare a Memorandum of Association and the Bye laws of the organization and file with the Registrar of Societies of the state in which it is located.

Various states of India have framed their respective Society Registration Acts and Rules with some modifications in the original Act, and the organisation has to comply with these Acts and the rules of the state in which they are registered.

DOCUMENTS TO BE FURNISHED FOR REGISTRATION UNDER THE ACT:

The following documents are required to be furnished for registration under the Act:

Certified copy of Memorandum of Association signed by all members.

Certified copy of the Bye Laws or the Rules and Regulations duly signed by all the subscribers.

Affidavit on non-judicial stamp paper sworn by the President/ Secretary of the organisation. It should be attested by an Executive Magistrate or Notary Public.

Address proof of the premises of the registered office. A ‘No Objection Certificate’ from the landlord