Investment in Equity - NGO's
sachin sathyavrathan
Whether NGOs (Trust / Societies) are eligible to invest in the equity of the companies? Are there any restrictions under companies act / Income tax act?
Thanks in advance
CS Sachin Sathyavrathan,
Sushant Shukla
NGO Equity Investment in India — Legal Analysis
Executive Summary
NGOs (Trusts and Societies) can legally hold equity shares in companies under corporate law — there is no restriction in the Companies Act 2013 or the Societies Registration Act 1860 on who may be a shareholder. However, charitable trusts and societies claiming tax exemption under Section 11 of the Income Tax Act 1961 face a near-absolute prohibition on equity investment in private companies, with violation triggering loss of tax exemption on the entire income at the maximum marginal rate (~42.2%). The answer therefore depends critically on the type of NGO and whether it claims tax exemption.
I. Companies Act 2013 — No Restriction
The Companies Act 2013 defines a "member" broadly under Section 2(55) as any person holding shares in a company. There is no restriction based on the legal form of the investor — individuals, companies, trusts, and societies are all eligible to hold equity shares. A trust or society can:
- Hold equity shares in listed or unlisted companies
- Exercise voting rights as shareholders
- Receive dividends and participate in corporate actions
- Be named in the Register of Members
Conclusion: The Companies Act imposes no restriction on NGOs investing in equity.
II. Societies Registration Act 1860 — No Restriction
Section 5 of the Societies Registration Act 1860 provides that property (movable and immovable) belonging to a registered society vests in its governing body. Equity shares are movable property. There is no statutory restriction on societies holding equity shares.
Conclusion: The Societies Registration Act imposes no restriction on equity investment.
III. Income Tax Act 1961 — Critical Restrictions for Charitable NGOs
This is where the real restriction lies. The analysis differs sharply based on whether the NGO claims tax exemption.
A. Charitable Trusts / Societies Claiming Exemption (Section 11/12A/12AB)
Section 11(5) — Permissible Modes of Investment (Exhaustive List)
Charitable trusts and societies registered under Section 12A/12AB must invest their funds only in the modes prescribed under Section 11(5). This list is exhaustive and includes:
- Government securities and savings certificates
- Scheduled bank / post office deposits
- Units of UTI / SEBI-registered mutual funds
- Immovable property
- Public sector company (PSC) shares (with a 3-year holding limit)
- Bonds/debentures guaranteed by Central/State Government
- Deposits with approved financial corporations / IDBI
Permitted equity investments (narrow exceptions):
| Category | Provision |
|---|---|
| Shares of Public Sector Companies | Section 11(5)(h) — but must be divested within 3 years |
| Shares of a Depository (NSDL/CDSL) | Section 11(5)(m) |
| Equity shares of an incubatee (by an incubator) | Section 11(5)(o) |
| Shares of National Skill Development Corporation | Section 11(5)(p) |
| Equity of RBI-approved retail payments/digital payments companies (with 25%+ NPCI stake) | Section 11(5)(s) |
| Equity/bonds of Open Network for Digital Commerce Ltd (ONDC) | Section 11(5)(t) |
Equity shares of private companies are NOT in this list. Investment in any private company's equity is a prohibited mode.
Section 13(1)(d) — Consequence of Violation
Section 13(1)(d) is the enforcement mechanism. If a charitable trust invests in equity shares of any company other than a public sector company or a specifically prescribed company, the trust loses its tax exemption for that year. The income becomes taxable at the maximum marginal rate (currently ~42.2% including surcharge and cess).
Key points:
- The violation applies to funds invested after 28 February 1983
- Non-compliant investments must be divested within one year from the end of the previous year of investment
- Failure to divest within this window triggers permanent loss of exemption for that year
Recent Judicial Confirmation:
The Chennai ITAT in M/S J Sikile Foundation v DCIT (October 2024) reaffirmed that advancing money to a private limited company violates Section 11(5) and results in denial of exemption. The Bombay High Court (Sheth Mafatlal Gagalbai Foundation Trust, 249 ITR 533) and Karnataka High Court (Fr. Mullers Charitable Institutions, 363 ITR 230) have consistently upheld this position.
B. Private Trusts (Not Claiming Charitable Exemption)
Private trusts (e.g., family trusts) governed by the Indian Trusts Act 1882 are not subject to Section 11(5) restrictions. They may invest in equity shares of companies, provided:
- The trust deed authorises such investment (express or implied)
- The trustee exercises reasonable care and prudence (Section 15, Indian Trusts Act)
- The investment is in securities notified by the Central Government (post-2016 amendment to Section 20)
Speculative or highly concentrated equity positions could expose trustees to breach of trust liability under Section 23.
C. Non-Charitable Societies (Not Claiming Exemption)
Societies not claiming tax exemption under Section 11 are not subject to Section 11(5) restrictions. They may invest in equity shares if the Memorandum of Association and Rules permit such investment.
IV. SEBI Regulations — No Direct Restriction
SEBI does not restrict trusts or societies from holding equity shares in listed companies. However, compliance obligations arise if:
- Shareholding exceeds 1% in a listed company (beneficial ownership disclosure)
- Shareholding reaches 25% or more (SEBI Takeover Code — SAST Regulations 2011 triggered)
- The trust/society is a related party to the investee company (related party transaction rules apply)
V. FCRA — Additional Layer for Foreign-Funded NGOs
NGOs receiving foreign contributions under the Foreign Contribution (Regulation) Act 2010 face additional constraints:
- Foreign funds must be received in a designated FCRA account at SBI (Parliament Street Branch)
- Administrative expenses from foreign funds are capped at 20%
- Re-granting to other NGOs is prohibited
- Using foreign funds for equity investment may be challenged as an impermissible use
Recommendation: Use only domestic funds for equity investment if the NGO is FCRA-registered.
VI. Summary Matrix
| Type of NGO | Companies Act | Income Tax Act | Practical Position |
|---|---|---|---|
| Charitable Trust (Section 12A/12AB) | No restriction | Section 11(5) + 13(1)(d) — equity in private companies PROHIBITED | Cannot invest in private company equity; limited exceptions only |
| Private Trust | No restriction | Not subject to Section 11(5) | Can invest if trust deed permits and investment is prudent |
| Charitable Society (Section 12A/12AB) | No restriction | Same as charitable trust | Cannot invest in private company equity |
| Non-Charitable Society | No restriction | Not subject to Section 11(5) | Can invest if MoA/Rules permit |
VII. Key Recommendations
For charitable trusts/societies claiming exemption: Do not invest in equity shares of private companies. If such investments are currently held, divest within one year to avoid loss of exemption.
If equity investment is essential for a charitable trust: Limit to the narrow permitted categories — PSC shares (with 3-year exit), depository shares, incubatee shares (if the trust is an incubator), NSDC shares, or specified fintech entities.
For private trusts: Ensure the trust deed expressly authorises equity investment; document the investment rationale and risk assessment to demonstrate prudent trustee conduct.
For societies: Verify whether the society claims Section 11 exemption. If yes, apply the same restrictions as charitable trusts. If no, ensure the MoA/Rules permit equity investment.
For FCRA-registered NGOs: Use only domestic funds for equity investment; avoid using foreign contributions for this purpose.
Annual compliance review: Verify all investments against Section 11(5) modes annually; auditors should specifically certify compliance.
Sources: Indian Trusts Act 1882 (Section 20); Income Tax Act 1961 (Sections 11(5), 13(1)(d)); Companies Act 2013 (Section 2(55)); Societies Registration Act 1860 (Section 5); FCRA 2010 (as amended 2020); ITAT Chennai — M/S J Sikile Foundation v DCIT (October 2024); Bombay HC — Sheth Mafatlal Gagalbai Foundation Trust (249 ITR 533); Karnataka HC — Fr. Mullers Charitable Institutions (363 ITR 230); CBDT Circular No. 387 (6 July 1984); Maharashtra Charity Commissioner Circular No. 619 (21 July 2025).
Sushant Shukla
Founder - LITT
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sachin sathyavrathan
CS Sachin Sathyavrathan,
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Sushant Shukla
LEGAL MEMORANDUM — NGO EQUITY INVESTMENT ELIGIBILITY IN INDIA
1. EXECUTIVE SUMMARY
NGOs constituted as trusts or societies can legally hold equity shares in companies — there is no restriction in the Companies Act 2013 or the Societies Registration Act 1860 on who may be a shareholder. However, charitable trusts and societies claiming tax exemption under Section 11 of the Income Tax Act 1961 face strict restrictions: only specific categories of equity investment prescribed under Section 11(5) read with Rule 17C of the Income Tax Rules 1962 are permitted. Investment in equity shares of private companies or general listed companies is prohibited for such entities. Violation results in loss of exemption on the income attributable to the non-compliant investment, taxable at the maximum marginal rate.
2. COMPANIES ACT 2013 — NO RESTRICTION
Section 2(55) of the Companies Act 2013 defines "member" (verbatim from indiacode.nic.in):
"(55) 'member', in relation to a company, means— (i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members; (ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; (iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;"
No restriction based on legal form of investor. Trusts and societies can hold shares and be entered as beneficial owners under clause (iii).
Source: India Code — Companies Act 2013, s 2(55)
3. SOCIETIES REGISTRATION ACT 1860 — NO RESTRICTION
Section 5 (verbatim from indiacode.nic.in):
"5. Property of society how vested.— The property, movable and immovable, belonging to a society registered under this Act, if not vested in trustees, shall be deemed to be vested, for the time being, in the governing body of such society, and in all proceedings, civil and criminal, may be described as the property of the governing body of such society by their proper title."
Equity shares are movable property. No statutory restriction on societies holding equity.
Source: India Code — Societies Registration Act 1860
4. INDIAN TRUSTS ACT 1882 — CONDITIONAL PERMISSION
Section 20 (as substituted by Act 34 of 2016, w.e.f. 17 April 2017; verbatim from indiacode.nic.in):
"20. Investment of trust-money.— Where the trust-property consists of money and cannot be applied immediately or at an early date to the purposes of the trust, the trustee shall, subject to any direction contained in the instrument of trust, invest the money in any of the securities or class of securities expressly authorised by the instrument of trust or as specified by the Central Government, by notification in the Official Gazette:
Provided that where there is a person competent to contract and entitled in possession to receive the income of the trust-property for his life, or for any greater estate, no investment in any of the securities or class of securities mentioned above shall be made without his consent in writing.
Explanation.— For the purposes of this section, the expression 'securities' shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)."
"Securities" under the SCRA 1956 includes equity shares. But the power is not automatic — the trust deed must expressly authorise it, or the Central Government must have notified it.
Source: India Code — Indian Trusts Act 1882, s 20
5. INCOME TAX ACT 1961 — THE CRITICAL RESTRICTION
5.1 Section 11(5) — Permissible Modes (Exhaustive)
The verbatim text from incometaxindia.gov.in lists clauses (i) through (xii). The key provisions are:
- (i) Government savings certificates and small savings schemes
- (ii) Post Office Savings Bank deposits
- (iii) Scheduled bank / co-operative bank deposits
- (iv) Units of UTI
- (v) Central/State Government securities
- (vi) Government-guaranteed debentures
- (vii) Investment or deposit in any public sector company — with the proviso that if the PSC ceases to be a PSC, shares are deemed valid for 3 years only
- (viii) Bonds of financial corporations (eligible under s 36(1)(viii))
- (ix) Bonds of public housing finance companies (eligible under s 36(1)(viii))
- (ixa) Bonds of public companies for urban infrastructure finance
- (x) Immovable property
- (xi) Deposits with IDBI
- (xii) Any other form or mode as may be prescribed (i.e., Rule 17C)
Source: incometaxindia.gov.in — Section 11 (last reviewed 17 July 2026)
5.2 Rule 17C — Prescribed Modes Under Section 11(5)(xii)
The verbatim text from incometaxindia.gov.in prescribes:
- (i) Mutual fund units (under s 10(23D))
- (ii) Transfers to Public Account of India
- (iii) Deposits with housing/planning authorities
- (iv) Equity shares of a depository (under Depositories Act 1996)
- (v) Investment by a recognised stock exchange in equity of a securities-market company (51%+ held by the exchange)
- (va) Investment by a Payment Systems Act authorised person in equity/bonds of a company engaged in retail/digital payments, approved by RBI, with 51%+ equity held by NPCI
- (vb) Investment by a Payment Systems Act authorised person in equity/bonds of Open Network for Digital Commerce Ltd (ONDC)
- (vi) Equity shares of an incubatee by a notified incubator (Ministry of Science and Technology)
- (vii) Shares of National Skill Development Corporation
- (viii) Debt instruments of RBI-registered infrastructure finance companies
- (ix) Sovereign Gold Bond stock certificates
- (x) Units of POWERGRID Infrastructure Investment Trust
Source: incometaxindia.gov.in — Rule 17C (last updated 18 July 2026)
5.3 Consolidated Table — Permitted Equity Investments
| Permitted Equity Mode | Source | Key Conditions |
|---|---|---|
| Shares of a public sector company | s 11(5)(vii) | If PSC ceases to be PSC, shares deemed valid for 3 years only |
| Equity shares of a depository (NSDL/CDSL) | Rule 17C(iv) | Must be a depository under Depositories Act 1996 |
| Equity of a recognised stock exchange's investee company | Rule 17C(v) | Securities-market related; 51%+ held by the exchange |
| Equity/bonds of a RBI-approved retail/digital payments company | Rule 17C(va) | 51%+ equity held by NPCI |
| Equity/bonds of ONDC Ltd | Rule 17C(vb) | Section 8 company for digital commerce |
| Equity shares of an incubatee by an incubator | Rule 17C(vi) | Both must be notified by Ministry of Science and Technology |
| Shares of NSDC | Rule 17C(vii) | Specific entity only |
| Units of POWERGRID InvIT | Rule 17C(x) | Specific entity only |
All other equity investments — including shares of any private company, unlisted company, or general listed company — are prohibited.
6. SECTION 13(1)(d) — CONSEQUENCE OF VIOLATION
6.1 Statutory Text (verbatim from incometaxindia.gov.in, Year 2026):
"(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year— (i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or (iii) any shares in a company, other than— (A) shares in a public sector company; (B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November, 1983, to the extent of such deposits or investments referred to in sub-clauses (i), (ii) and (iii)"
Source: incometaxindia.gov.in — Section 13
6.2 Scope of Denial — Proportionate, Not Total
The phrase "to the extent of such deposits or investments" means the exemption denial is proportionate. The Income Tax Department's own guidance confirms:
"If funds are deposited or invested in impermissible mode, then only income to the extent of such deposit or investment shall not be considered for the exemption. The exemption for the balance income shall not be withdrawn just because funds are deposited or invested in an impermissible mode."
Source: incometaxindia.gov.in — Taxability of Charitable Trusts (last reviewed 18 July 2026)
6.3 Tax Rate
The non-exempt income is taxable at the maximum marginal rate under Section 164(2). Under Section 115BBI (from AY 2023-24), specified income including income from impermissible investments is charged at 30% plus surcharge and cess.
6.4 Divestment Window
Non-compliant assets must be divested within one year from the end of the previous year in which the asset was acquired (Section 13(1)(d) proviso (iia)). If divested within this window, exemption is not denied.
7. SUMMARY MATRIX
| Type of NGO | Companies Act | Income Tax Act | Practical Position |
|---|
| Charitable Trust (s 12AB registered) | No restriction | s 11(5) + s 13(1)(d) — only prescribed equity modes |
| Cannot invest in private company equity; limited exceptions only |
| Private Trust | No restriction | Not subject to s 11(5) | Can invest if trust deed authorises and investment is prudent |
| Charitable Society (s 12AB registered) |
| No restriction | Same as charitable trust | Cannot invest in private company equity |
| Non-Charitable Society | No restriction | Not subject to s 11(5) |
| Can invest if MoA/Rules permit |
8. RECOMMENDATIONS
For Charitable Trusts/Societies Claiming Exemption:
- Do not invest in equity shares of private companies or general listed companies
- If equity investment is essential, limit to the specific categories in Section 5.3 above
- If non-compliant investments are currently held, divest within one year from the end of the previous year of acquisition
- Ensure annual audit specifically verifies investment compliance with Section 11(5)
For Private Trusts:
- Ensure the trust deed expressly authorises equity investment
- Exercise reasonable care and prudence; document investment rationale
For FCRA-Registered NGOs:
- Use only domestic funds for equity investment
- If foreign funds must be used, obtain written approval from the Ministry of Home Affairs
9. GOVERNMENT SOURCES CITED
| Provision | Source | URL |
|---|---|---|
| Companies Act 2013, s 2(55) | India Code (Ministry of Law and Justice) | indiacode.nic.in |
| Societies Registration Act 1860, s 5 | India Code (Ministry of Law and Justice) | indiacode.nic.in |
| Indian Trusts Act 1882, s 20 | India Code (Ministry of Law and Justice) | indiacode.nic.in |
| Income Tax Act 1961, s 11(5) | Income Tax Department (Ministry of Finance) | incometaxindia.gov.in |
| Income Tax Act 1961, s 13(1)(d) | Income Tax Department (Ministry of Finance) | incometaxindia.gov.in |
| Income Tax Rules 1962, r 17C | Income Tax Department (Ministry of Finance) | incometaxindia.gov.in |
| Taxability of Charitable Trusts (Guidance) | Income Tax Department (Ministry of Finance) | incometaxindia.gov.in |
Sushant Shukla
Founder - LITT
Confidentiality Notice: The information contained in this email and any attachments is intended solely for the use of the named recipient(s) and may contain confidential and/or privileged information. Unauthorized review, use, disclosure, or distribution of this email or its contents is prohibited. If you are not the intended recipient, please contact the sender by reply email and destroy all copies of the original message. Thank you for respecting the confidentiality of this communication.
Thank You very much
CS Sachin Sathyavrathan,
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