Friday, April 1, 2016

Private Companies Subsidiaries of Overseas Holding Companies -- Changes in Companies (Amendment) Bill, 2016

[The following guest post is contributed by Siddharth Raja, Founding Partner of Samvad Partners. Views are personal, and comments are welcome]

In an earlier blog post, I had examined in detail the issue whether Indian "private" companies that are subsidiaries of foreign or overseas bodies corporate retain their incorporation status for all purposes of the 2013 Companies Act; or, whether such "private" companies by virtue of their foreign holding companies, become "public companies" under the 2013 Companies Act.  On a holistic basis, I concluded favouring the former interpretation, that such Indian "private" companies do NOT become (NOR are they deemed to be) "public companies" for purposes of the 2013 Companies Act.

The Companies (Amendment) Bill, 2016 (the "2016 Proposed Amendment") changes that construct in material terms.  

On the basis of the analysis that follows, the position is proposed to be significantly (if not fully) reversed in that ALL Indian "private" companies that are subsidiaries of overseas bodies corporate that are NOT private companies [emphasis added] are deemed "public companies" under Indian law -- and that is a fundamental change.

I.    Changes Proposed:

The 2016 Proposed Amendment seeks to insert an explanation in Section 2(46) of the 2013 Companies Act, which defines a "holding company".  This explanation will specify that: "for the purposes of this clause, the expression "company" includes any body corporate".  Reading this proposed insertion with the main Section 2(46), the conclusion is inescapable that a "holding company" means a company, both India incorporated or an overseas incorporated entity, of which such companies are subsidiary companies.  

The February 2016 Report of the Companies Law Committee (in Para 1.11 of Part I) seeks to explain this proposed insertion as the correction of a "minor anomaly".  The Committee states that as Section 2(87), Explanation 'c', defining a "subsidiary company" has language clarifying that the expression 'company' includes an overseas incorporated body corporate, similar language needs to be inserted into the definition of a "holding company".  As a result, a company incorporated outside India could be considered to be the "holding company" of another company in India, for the purposes of the 2013 Companies Act.  This position is further strengthened by the view of the Committee (in Para 1.18 of Part I) that a private company subsidiary of a public company needs to be regulated in the same manner as a public company.

II.    Analysis:

On the face of the matter, such an explanation, and the correction of a purportedly small mistake, appear to be in order -- especially, if one considers that the Committee decided to propose such a similar explanation as Section 2(87), Expln. 'c' in Section 2(46), on the basis that, unless so corrected, the existing position "could lead to uncertainties in ascertaining the status of a company, in case of a foreign holding company; and also in determining the applicability of the Act to such a company'.  That is indeed the central issue which has been brought out in the previous blog post mentioned above.  

a.  Section 4(7) Brought Back?

In a manner of speaking, the above proposed amendment re-introduces the concept embodied in Section 4(7) of the 1956 Companies Act -- in that "private" Indian companies, which are subsidiaries of overseas bodies corporate would be akin to subsidiaries of Indian "public companies", if that overseas body corporate would be a public company if incorporated in India PLUS some of its share capital is held by entities or persons other than overseas bodies corporate.

There is, however, one important difference in the old Section 4(7) and the changes in this behalf suggested by the 2016 Proposed Amendment -- it will no longer be relevant whether the foreign body corporate holding in the Indian "private" company is 100% or less.  The only determinant is whether the foreign company is or can be regarded as a "public company" (or, as Section 2(71) of the 2013 Companies Act, defining a "public company" says, "not being a private company").  

b.  Section 4(7) Test

The advantage the old Section 4(7) had was that it expressly provided the test as to whether the foreign company could be regarded as a "public company" were it to be incorporated in India -- that clause will now be absent once the 2016 Proposed Amendment go through, leaving one to rely on the less than happily worded phrase 'subsidiary of a company, not being a private company' in Section 2(71) which stands unamended in this regard.  

In other words, since the definition of both "holding" and "subsidiary" companies under the 2013 Act will now include overseas bodies corporate, an Indian incorporated "private" company of an overseas body corporate holding company will be deemed to be a "public company" in India, if its foreign holding company is "not a private company".

III.    Conclusion; Change in Legal Position:

Consequently, from the position that an India incorporated "private" company subsidiary of an overseas body corporate is untouched by the deeming provision of "public companies", the situation is all set to change, to make the "public company" deeming provision apply to all overseas holding situations -- but only where the foreign body corporate is "not a private company".  

One only wishes the Committee had recommended what is, in effect, the reintroduction of Section 4(7), along with the benefit of the express clarity of that provision, as regards the status of the overseas holding company were it to be incorporated in India.  Written almost 60 years ago, the Companies Act Amendment Committee of 1957 brings the point home: "If an alteration in considered desirable, a provision should be inserted in section 4 to the effect that 'a private company, which is registered in India and which is a subsidiary of a foreign public company [emphasis added], shall be deemed to be a subsidiary of a public company for all purposes of [the 1956 Companies] Act.'"

- Siddharth Raja


vinodkothari said...

There are thousands of private companies in India, all of which are 100% subsidiaries of global MNCs, most of which might be widely-held listed companies overseas. The post above might cause worries of being reckoned as public companies, for all such companies. My submission is - there is no reason for any such worry. I had differed from the above author's views as expressed in his original write up, and I humbly differ now as well. The issue is not the extended meaning of company including a body corporate, either in sec. 2 (87) or in the definition of "holding company". The issue is, the proviso below sec 2 (71) continues to say, "subsidiary of a company, not being a private company". The word "company" is repeated twice. While the holding company may not satisfy the second one, but it is surely not a "company".

The MCA has also clarified this.

By the way, both the MCA clarification, and Mr Raja's comment above, seem to talk about change in "incorporation status". This is not correct understanding of the concept of a deemed public company. There is no change in incorporation status. In other words, what is private company remains private company even if it is deemed public. Just that the provisions of law will apply to it as it if were a public company.

Siddharth Raja said...

It is always nice to read and engage in a constructive and reasoned debate, especially on a matter of some significance I believe. Many thank are therefore due to Mr. Vinod Kothari as through these exchanges the legal position may be clearer: or, at least, both of us will be responsible in enabling a better understanding!

Two responses: I used the phrase "incorporation status" not to imply that any deeming provision will change that status, but merely to emphasize the determination of whether or not a "private" company retains that status of being "private" at all times, even with the "shadow" of any deeming provision cast upon it that might render it a "public" company.

Secondly, even assuming that Mr. Kothari is right as regards Sec. 2(71), if both definitions of "subsidiary" and "holding" company include overseas bodies corporate then the phrase he cites "...subsidiary of a company, not being a private company..." must include within its ambit overseas holding companies for two reasons -- (a) subsidiaries can clearly cover overseas bodies corporate in Sec. 2(87); and (b) one cannot rely on the literal meaning of "company" in the phrase cited in Sec. 2(71) especially since both the legislative intent + the express language as proposed, clearly indicates the "public" company rubric is to cover "holding" relationships.

In other words, the changes proposed will lead to the following conclusion, in my opinion, that is inescapable from the law as sought to be changed: Indian private companies that are subsidiaries (whether wholly owned or not) of overseas bodies corporate, will be deemed to be "public" companies if that holding company is not (or cannot be regarded as being) a "private company"; and that is where I say the proposals are not happily worded. To demonstrate what I believe to be a lacuna in the language as proposed, I would have added the following explanation in Sec. 2(71) that is a hark back to the old Sec. 4(7):

"A private company, being a subsidiary of a body corporate (which, if incorporated in India, would be a public company within the meaning of this Act), shall be deemed to be a public company for purposes of this Act."

That is exactly the language the 1957 Committee proposed if the legislature took the view that "an alteration in law [was] desirable". And clearly, the 2013 Act + the 2016 Amendment Bill embodies the legislative view to expand the ambit of the "public" company regulations to cover certain MNC subsidiaries in India, especially those of a "public" character in their overseas incorporation jurisdictions. The moot question then would be: does one go beyond any intermediary subsidiary entities to locate the ultimate, perhaps publicly-held, parent entity in order to affix the legal fiction of the deeming provision making that subsidiary a "public" company in India? I think the answer there is "no", but that's more food for thought. Thank you.