[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.
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 law...is 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