Clarifying cloudy status of public, private subsidiaries

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Under the Companies Act 1956, section 43A provided conditions where a private company was “deemed” to be a public company. The term “deemed” implies that a private company is treated as a public company by operation of law, with additional obligations and restrictions applicable on a public company, while retaining the essential features of a private company.

But the Companies Act, 2013, does not have such a deeming provision, creating uncertainties around the status of a private company that is a subsidiary to a public company, and is therefore deemed to be a public company.

Section 3(1)(iv)(c) of the 1956 act provided that a private company being a subsidiary of a public company would be deemed as a public company. Section 4(5) of the 1956 act clarified that the term “company” included any body corporate. The term “body corporate” was wide enough to include private as well as public companies, either domestic or foreign. However, the ambit of section 3 was curtailed by section 4(7), which provided that a private company that was a foreign company subsidiary would be deemed to be a subsidiary of a public company if:

  1. It was incorporated in India; and
  2. The entire share capital of the subsidiary is not held by the foreign company alone, or the foreign company together with other overseas bodies corporate.

Hence, under the 1956 act, a private company being a subsidiary of a foreign company could retain its private company status if its entire share capital were held by foreign bodies corporate.

The 2013 act lacks any provision that corresponds to the deeming provision under section 4(7) of the 1956 act. The proviso to section 2(71) of the 2013 act provides only that a subsidiary of a company not being a private company will be deemed to be a public company even if its articles of association provide otherwise.

The explanation of a subsidiary company under section 2(87) of the 2013 act states that a company is a body corporate. Thus, the holding and the subsidiary company in this provision can either be incorporated in India or outside.

Interpreting section 2(87) with the proviso to section 2(71), it appears to mean that since a body corporate does not extend to a public company, a private company being a subsidiary of a foreign company will not be deemed to be a public company, and may continue with status as a private company.

The clarification from the Ministry of Corporate Affairs (MCA) on the status of deemed public companies supports the proposition that Indian private companies that are subsidiaries of foreign companies do not become public companies under 2013 act.

The Companies (Amendment) Act, 2017, changes the above-mentioned position by reversing the proposition, stating that all Indian private companies that are subsidiaries of bodies corporate, which would not be private companies under the act, are deemed public companies.

The 2017 amendment inserted an explanation to the definition of “holding company” under section 2(46) to specify that: “For the purposes of this clause, the expression ‘company’ includes any ‘body corporate’.” Reading this insertion with the main provision of section 2(46), it essentially concludes that a holding company would include both India incorporated and foreign incorporated companies.

The position that an Indian private subsidiary of an overseas body corporate is untouched by the deeming provision of public companies has changed post the 2017 amendment. Now, the public company deeming provision applies to all overseas holding companies where the foreign body corporate is “not a private company”.

The MCA’s Companies Law Committee Report also emphasizes that private subsidiaries of public companies must be regulated as public companies. Hence, an Indian subsidiary of a foreign company is also a deemed public company, and subject to the liabilities of a public company, if the foreign holding company would be a public company under the act.

Lokesh Mewara and Neha Sinha
National University of Study and Research in Law
Ranchi

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