Thursday, June 26, 2014

MCA Clarifies on Status of Private Subsidiary of a Foreign Company

Earlier this year, we had raised and discussed a vexed issue under the Companies Act, 2013 (the 2013 Act) regarding “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”. In that earlier post, we had discussed the legislative history of the relevant provisions of the 2013 Act and set out two possible options (and supporting arguments for each) without venturing to proffer a solution. The two options were as follows:

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.

This issue has captured the attention of the Ministry of Corporate Affairs (MCA), which has now published its clarification as follows:

The matter has been examined in the Ministry in the light of sections 2(68), 2(71) and 2(87) of the New Act and it is clarified that there is no bar in the new Act for a company incorporated outside India to incorporate a subsidiary either as a public company or a private company. An existing company, being a subsidiary of a company incorporated outside India, registered under the Companies Act, 1956, either as a private company or a public company by virtue of section 4(7) of that Act, will continue as a private company or public company, as the case may be, without any change in the incorporation status of such company.

By this, the MCA has clarified in favour of Option 1 above, which introduces a lot of flexibility for foreign companies to establish subsidiaries in India without burdening themselves with additional obligations relating to the status of the Indian subsidiaries.

While the clarification from the MCA is helpful in expressing MCA’s own view as a corporate regulator (which would then preclude it or other corporate regulatory authorities from adducing an alternate view), the legal position could still be open to scrutiny and interpretation by a court of law in case of private disputes between parties not involving the regulator. In that case, the court will have to interpret the statutory provisions of the 2013 Act, wherein the position of the MCA will certainly have at least persuasive value.

1 comment:

vswami said...

Tentative (subject to further study) :
On a reading of the discussion herein , one feels that the tax case in re. Daimler Chrysler India (P) Ltd. v Dy. CIT, ITAT (Pune) may make for a useful comparative study. For a discussion /critique of the ITAT (Pune) Order, may be looked up 181 Taxman Pg 10 (Mag). In that case the issue raised under Section 79 of IT Act turned on the relationship of a foreign company and its Indian subsidiary wprt the definition section 2 (18) of IT Act read with the company law definition.
Tentative reaction is, the discussed MCA clarification under the new company law is prima facie not readily compatible with the view of the ITAT taken after considering the Indo-German DTAA. Further developments in that case , so also the judicial view in like later cases , need to be looked into, for having one's own thoughts clarified or enriched.