What are Section 42 companies and associations not for profit?

In Pakistan, NGOs and Associations not for profit are licenced and registered Companies Act 2017, Trust Acts (of Federal, Provinces, AJK, GB), Charities Acts of Provinces and Societies Act 1860. In this blog I will discuss only Section 42 companies. 

NGOs, charities and welfare organizations which  are licensed under the Section 42 of the Companies Act 2017 are commonly referred to as Sec 42 companies. The Companies Act 2017 allows NGOs to enjoy privileges of a company i.e. limited liability, perpetual succession etc. 

Restrictions imposed by the Companies Act 

Here, I have listed below some of the legal restrictions:

1. These companies will work for only charitable, welfare and useful purposes.
2. It uses its profits for fulfillment of its objects for which it is established.
3. And it will not make payment of any dividends or share in its profits to its owners (shareholders, members).
4. The licensed NGO will always be an unlisted public company (limited by guarantee).

What is the legal status of section 42 companies?

As per law, associations not for profit are public limited companies by virtue of licensing. They enjoy all features of companies i.e., borrowing powers, perpetual succession, limited liability etc.

Which objects are allowed to section 42 companies?

Section 42 allows following objects to such companies: 

• Promotion of commerce, art, science, religion, health, education, research & sports.
• Protection of the environment. 
• Social welfare.
• Charity.
• Or any other useful object.

Here is the complete list of approved objects for the Section 42 companies.

Regulator and licencing authority

SECP, the Securities and Exchange Commission of Pakistan, is the sole regulator of the capital market and corporate sector of Pakistan. Its licensing department issues licenses to non-profit organizations under section 42 of the Companies Act 2017. 

Conditions for issuance of license of section 42 companies!

1. Activities should not be against laws, public order, security, sovereignty & national interests of Pakistan.
2. Company will apply its profits and other income in promoting its objects.
3. Company will not pay dividends to the company’s members.
4. Association will follow conditions of Memorandum of Association.
5. There must be a minimum of three founders (members).
6. Minimum limit of liability of each of its members is one hundred thousand rupees.
7. Each promoter must donate two hundred thousand rupees as start-up donation.
8. The company must not, directly or indirectly, participate in political activities.
9. Directors, CEO and founding members must meet fit and proper criteria devised by SECP.
10. Company shall state with its name, the phrase “A company set up under section 42 of the Companies Act, 2017”, in all its letterheads, documents, signboards, and all other modes of communication.

Source links and references 

ConSerIC is sharing source links and references.

1. Section 42 of the Companies Act 2017
2. The Association Not for Profit and Charitable Organizations 2018