Lack of clarity under the Companies Act, 2013 (2013 Act), which has overhauled the company law regime in India, continues to pose concerns to foreign investors. While the lawmakers were keen to redefine the existing regime, the lucidity required for underlining that it is easy to do business in India is not reflected in the 2013 Act. While numerous questions which created problems under the Companies Act, 1956 (1956 Act) remain unresolved, several new ones have arisen under the 2013 Act. One such issue, which has been heavily debated, is whether a private limited company owned by a foreign public company and having one or more Indian partners (Subject Company) is a ‘public limited company’ or a ‘private limited company’ for the purposes of the 2013 Act. This issue is of paramount importance for foreign companies having majority shareholding in Indian companies since classification as a ‘public limited company’ entails additional and stricter compliance requirements.

Through this article, we seek to provide a brief background of the legislative provisions and analyse this issue.

Background

Under Section 4(7) of the Companies Act, 1956 (1956 Act), following conditions were required to be fulfilled for a private company to be deemed to be a subsidiary of a public company:

  1. The company is a private company and has been incorporated in India (PvtCo);
  2. The holding company of PvtCo was a body corporate incorporated outside India (HoldCo);
  3. HoldCo, had it been incorporated in India, fell within the meaning of public company under the 1956 Act; and
  4. The entire share capital of PvtCo was not owned by HoldCo, whether alone or together with one or more bodies corporate incorporated outside India.

In every scenario where the HoldCo was a foreign body corporate, its status was crucial in determining the status of the PvtCo, unless, the PvtCo was wholly owned by one or more foreign body corporates.

Therefore, under the 1956 Act, a Subject Company was deemed to be a subsidiary of a public company, and therefore was required to comply with the provisions applicable to a public company under the 1956 Act.

Position under the 2013 Act

The 2013 Act removed the extant deeming provision under Section 4 (7) of the 1956 Act. However, under the slightly modified definition of a ‘public company’ under Section 2(71) of the 2013 Act, a company which is a subsidiary of a ‘company’ (not being a private limited company) is deemed to be a public company even if the subsidiary continues to be a private company in its articles.

Accordingly, though the earlier restriction under Section 4 (7) of the 1956 Act was removed, confusion arose because of the explanation in the definition of ‘subsidiary’ under Section 2 (87) of the 2013 Act which states that “for the purposes of this Clause, the expression “company” includes any body corporate”. “Body corporate” is widely defined in Section 2 (11) of the 2013 Act to include companies incorporated outside India. Reading the aforesaid provisions in conjunction, there is a possible interpretation that Indian subsidiaries of a foreign company would be deemed to be public companies for the purposes of the 2013 Act.

Analysis

Contrary to the aforesaid, a more logical interpretation would be that the expression ‘company’ as defined under Section 2 (87) of the 2013 Act (to include a ‘body corporate’ / foreign company) should not be read into Section 2 (71) of the 2013 Act since the reference in Section 2 (87) clearly states that the expression ‘company’ includes any body corporate only for the purposes of the definition of Section 2 (87). Accordingly, for the purposes of Section 2(71), the definition of ‘company’ should be read under Section 2 (20) of the 2013 Act  to mean a company incorporated under the 2013 Act or under any previous company law. This interpretation would lead to the conclusion that only subsidiaries of Indian companies would fall within the deeming provision under Section 2 (71) of the 2013 Act.  

Further, if the legislative intent behind the 2013 Act was to facilitate doing business in India more easily, we can conclude that a foreign body corporate can invest in a company in India and the status of such Indian company would not be dependent on the status of such foreign body corporate and if such subsidiary is incorporated as a private limited company, it would continue to be governed by the provisions applicable to a private company under the 2013 Act.

It was hoped that there would be some clarification which would be issued by the Ministry of Corporate Affairs to finally put to rest the aforesaid ambiguity. However, to add to the confusion, the Ministry of Corporate Affairs through its General Circular No 23/2014 dated 25th June, 2014 (Circular) stated the following:

  1. It is clarified that there is no bar under the 2013 Act for a company incorporated outside India to incorporate a subsidiary either as a public company or a private company; and
  2. An existing company, being a subsidiary of a company incorporated outside India, registered under the 1956 Act, either as a private company or a public company by virtue of Section 4 (7) of the 1956 Act, will continue as a private company or public company, as the case maybe, without any change in the incorporation status of such company.

Regardless of the ambiguous language of the Circular, we believe that it only clarifies that (i) if any company had changed its incorporation status because of the provisions of Section 4 (7) of the 1956 Act (i.e. from a private limited company to a public limited company), then such company shall continue to be a public limited company; and (ii) a private limited company registered as such under the 1956 Act will continue as a private limited company under the 2013 Act and the deeming provision relating to Section 4 (7) would not come into play for the purposes of the 2013 Act.

Though there are many welcome amendments proposed to the 2013 Act through the Companies (Amendment) Bill, 2014 (Bill), the vexed issue of Section 4(7) has not been addressed in the Bill. We can only hope that the Ministry of Corporate Affairs looks into this issue and issues an ‘unambiguous’ clarification to settle this issue once-in-for-all.