Since the enactment
of the Companies Act, 2013 (the “2013 Act”), several issues relating to its
interpretation have been coming up for consideration. One such issue relates to
the status of a private company in India that is the subsidiary of a foreign
company (being a public company). The specific question relates to whether the
Indian private company can continue with its status or whether that would
become a public company by virtue of becoming a subsidiary of another public
company.
of the Companies Act, 2013 (the “2013 Act”), several issues relating to its
interpretation have been coming up for consideration. One such issue relates to
the status of a private company in India that is the subsidiary of a foreign
company (being a public company). The specific question relates to whether the
Indian private company can continue with its status or whether that would
become a public company by virtue of becoming a subsidiary of another public
company.
Under the Companies
Act, 1956, by virtue of section 3 any private subsidiary of a public company
becomes a public company. A subsidiary is defined in section 4 of that Act. For
the purposes of that section, the expression “company” includes a body
corporate thereby encompassing a subsidiary of a foreign company as well.
However, the considerably wide scope of this provision was mitigated to a large
extent by specific provisions (sub-sections (5), (6) and (7) of that section) that
dealt with cross-border parent-subsidiary relationships. More specifically, by
virtue of section 4(7), an Indian private company could continue to maintain
its private status if it was held entirely by two or more bodies corporate.
Using the benefit of this dispensation, many foreign companies established
private subsidiaries in India by ensuring that the shares in the Indian company
were held by two or more foreign companies (and not individuals) so as to
ensure that the Indian subsidiary maintained its private status. This market
practice was well established and did not pose much practical difficulty in
structuring group holdings.
Act, 1956, by virtue of section 3 any private subsidiary of a public company
becomes a public company. A subsidiary is defined in section 4 of that Act. For
the purposes of that section, the expression “company” includes a body
corporate thereby encompassing a subsidiary of a foreign company as well.
However, the considerably wide scope of this provision was mitigated to a large
extent by specific provisions (sub-sections (5), (6) and (7) of that section) that
dealt with cross-border parent-subsidiary relationships. More specifically, by
virtue of section 4(7), an Indian private company could continue to maintain
its private status if it was held entirely by two or more bodies corporate.
Using the benefit of this dispensation, many foreign companies established
private subsidiaries in India by ensuring that the shares in the Indian company
were held by two or more foreign companies (and not individuals) so as to
ensure that the Indian subsidiary maintained its private status. This market
practice was well established and did not pose much practical difficulty in
structuring group holdings.
Moving to the 2013
Act, there seems to be some amount of ambiguity on whether the Indian private
subsidiary can continue its status even if its shares are held by one or more
foreign companies with the parent being a public company. While the substantive
provisions (that I will discuss shortly) are somewhat straightforward, the
ambiguity arises because there are no specific provisions in the 2013 Act
similar to sub-sections (5), (6) and (7) of section 4 of the 1956 Act that
elucidate the legal treatment in case of cross-border parent-subsidiary
relationships. The legislative intent is unclear as well.
Act, there seems to be some amount of ambiguity on whether the Indian private
subsidiary can continue its status even if its shares are held by one or more
foreign companies with the parent being a public company. While the substantive
provisions (that I will discuss shortly) are somewhat straightforward, the
ambiguity arises because there are no specific provisions in the 2013 Act
similar to sub-sections (5), (6) and (7) of section 4 of the 1956 Act that
elucidate the legal treatment in case of cross-border parent-subsidiary
relationships. The legislative intent is unclear as well.
The proviso to
section 2(71) of the 2013 Act provides that a subsidiary of a public company
will be deemed to be a public company even if its articles of association
provide otherwise. In order to determine what is a subsidiary it is necessary
to refer to section 2(87) where the reference to a “company” includes a body
corporate, which reference is however limited to that clause (i.e. definition
of a subsidiary). Taking these two sections together, since the reference to a
body corporate is limited to the definition of a subsidiary and not extended to
the definition of a public company, by taking a technical interpretation it may
be possible to conclude that a private subsidiary of a foreign company may
continue with its status without being deemed a public company.
section 2(71) of the 2013 Act provides that a subsidiary of a public company
will be deemed to be a public company even if its articles of association
provide otherwise. In order to determine what is a subsidiary it is necessary
to refer to section 2(87) where the reference to a “company” includes a body
corporate, which reference is however limited to that clause (i.e. definition
of a subsidiary). Taking these two sections together, since the reference to a
body corporate is limited to the definition of a subsidiary and not extended to
the definition of a public company, by taking a technical interpretation it may
be possible to conclude that a private subsidiary of a foreign company may
continue with its status without being deemed a public company.
In terms of legislative history, the Concept Paper notified
by the erstwhile Ministry of Company Affairs in 2004, as well as the J. J.
Irani Committee Report make a reference to this question. The Concept Paper had
a draft bill for consideration, which defined ‘public company’ in line with the
definition under the 1956 Act. Further, Explanation 1 to the definition of
‘public company’ provides that any company which is a subsidiary of a
public company or a body corporate incorporated outside India, if
incorporated in India, to be a public company within the meaning of this
Act, shall be a public company.
by the erstwhile Ministry of Company Affairs in 2004, as well as the J. J.
Irani Committee Report make a reference to this question. The Concept Paper had
a draft bill for consideration, which defined ‘public company’ in line with the
definition under the 1956 Act. Further, Explanation 1 to the definition of
‘public company’ provides that any company which is a subsidiary of a
public company or a body corporate incorporated outside India, if
incorporated in India, to be a public company within the meaning of this
Act, shall be a public company.
Though the Concept Paper had partially incorporated the
language of section 4(7) of 1956 Act, the draft Companies Bills of 2008, 2009,
2011 and 2012 have all excluded any reference to the same. Further, the 21st and
the 57th reports of the Parliamentary Standing Committee on
Finance are also silent on the aspect.
language of section 4(7) of 1956 Act, the draft Companies Bills of 2008, 2009,
2011 and 2012 have all excluded any reference to the same. Further, the 21st and
the 57th reports of the Parliamentary Standing Committee on
Finance are also silent on the aspect.
A literal and technical interpretation would lead to the
conclusion as above. While that is a compelling one, the legislative intent on
this behalf is not altogether clear. An opposing argument may be adopted that
in the absence of provisions similar to sub-sections
(5), (6) and (7) of section 4 of the 1956 Act, the intention appears to be
through an overall reading of the provisions that all private subsidiaries of
public companies (whether Indian or foreign) will be deemed to be public
companies.
conclusion as above. While that is a compelling one, the legislative intent on
this behalf is not altogether clear. An opposing argument may be adopted that
in the absence of provisions similar to sub-sections
(5), (6) and (7) of section 4 of the 1956 Act, the intention appears to be
through an overall reading of the provisions that all private subsidiaries of
public companies (whether Indian or foreign) will be deemed to be public
companies.
Given this ambiguity, there are two possible views:
Option
1: A literal and technical interpretation of the 2013 Act would suggest
that a subsidiary of a foreign company will not fall within the purview of the
definition of a public company in section 2(87) and hence it will continue its
status as a private company.
1: A literal and technical interpretation of the 2013 Act would suggest
that a subsidiary of a foreign company will not fall within the purview of the
definition of a public company in section 2(87) and hence it will continue its
status as a private company.
Option
2: A broader interpretation of the 2013 Act would suggest that a private
subsidiary of a public company (whether Indian or foreign) would be deemed to
be a public company.
2: A broader interpretation of the 2013 Act would suggest that a private
subsidiary of a public company (whether Indian or foreign) would be deemed to
be a public company.
Rather than to state any preferences, I would like to
solicit the views of our readers by way of comments. I would welcome readers to
leave their comments on this issue and also share any views that may have been
adopted by the Government/ regulators that they may be aware of.
solicit the views of our readers by way of comments. I would welcome readers to
leave their comments on this issue and also share any views that may have been
adopted by the Government/ regulators that they may be aware of.
Although it appears to be a somewhat technical issue, it can have a substantial impact on
structuring of Indian subsidiaries by multinational companies.
structuring of Indian subsidiaries by multinational companies.
(I
would like to acknowledge my discussions with one of our readers Prateek
Mohapatra that were very helpful in refining the issues and positions contained
herein)
Update: This issue has been
clarified by the Ministry of Corporate Affairs by a Circular
issued on June 25, 2014, as discussed here.