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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Although it appears to be a somewhat technical issue, it can have a substantial impact on structuring of Indian subsidiaries by multinational companies.
Update: This issue has been clarified by the Ministry of Corporate Affairs by a Circular issued on June 25, 2014, as discussed here.