Status of a Private Company which is a Subsidiary of a Public Company

March 23rd, 20129:51 am @    


Introduction:

Public company is defined under Section 3 (iv) of the Companies Act, 1956 (“Act”) as a company which is “not a private company; has a minimum paid-up capital of five lakh rupees or higher paid-up capital, as may be prescribed; is a private company which is a subsidiary of a company which is not a private company.” So, primarily a public company is defined vis-à-vis a private company. A private company is defined under Section 3 (1) (iii) means a company having “minimum paid –up capital of one lakh rupees or such  higher paid- up capital as may be prescribed,” and a private company can restrict the right to transfer shares by its articles of association, prohibit invitation to public for subscription of shares or debentures of the company, limit the number of its members, and prohibit any invitation or acceptance of deposits.

Subsidiary of Public Company:

According to Section 3(1) (iv) (c), “Public Company” means a company which-“is a private company which is a subsidiary of a company which is not a private company.” Thus, a private company, which is a subsidiary of a public company, is placed on the same footing as that of a public company for the purposes of the provisions of the Companies Act. Such a status of a public company is bestowed on a private company which was initially incorporated as a private company. So, “a private company which is subsidiary of a public company is also a public company”.[1]

But even when such a status of a public company is bestowed on a private subsidiary, even then the basic structure of such a subsidiary remains the same, hence it is neither required to increase the number of members to seven from two, as in case of private company; nor it is required to alter conditions included in articles of association so as to meet requirements under Section 3 (1)(iii). In the case of Hillcrest Realty Sdn. Bhd. v Hotel Queen Road Pvt. Ltd. and Ors.[2], it was opined that

the basic characteristics of a private company in terms of Section 3(iii) of the Act do not get altered just because it is a subsidiary of a public company in view of the fiction in terms of Section 3(3)(iv)(c) of the Act that it is a public company. May be it is a public company in relation to other provisions of the Act but not with reference to its basic characteristics.

So, majorly besides the concept of basic structure, for all other purposes under the Act, the private subsidiary will be treated as a public company, even when the status remains that such private turned public company or subsidiary, remains a private company in its core and does not become a public company; whereas under Section 44, a public company gets converted to a private company upon voluntary conversion. Besides this, there remains yet another side of the coin, that certain Sections in the Act expressly provides specifically ‘or a private company which is a subsidiary of a public company,’ so, by implication it means that “all sections that apply to public companies may not apply to their subsidiary private companies ipso facto.”[3]

Deemed Public Company:

Though prior to Companies (Amendment) Act, 2000, pursuant to Section 43 A, their remained a third category of company namely, ‘deemed public company’, besides public company and private company.[4] Though a company would not have been incorporated as a deemed public company, but only ‘became subject to provisions applicable to a public company when conditions under Section 43A were satisfied.’[5] The Companies (Amendment) Act, 2000, rendered Section 43A inoperative but provided for a saving clause under Section 43 (2A) which provides that such deemed public companies formed under the existing Section rendered inoperative; could revert back to their status of a private company and inform the Registrar regarding the same, if they have the restrictions mentioned in the Articles and upto fifty member.  But if the restrictions in the Articles were deleted, then such company has to comply with Sections 31

(1) and 21 to convert itself into a private company.

Conclusion:

After the Companies (Amendment) Act, 2000, the concept of deemed public company has come to a stand still and majorly their remains the broader classification of private company and public company, and hence depending on this, the status and privileges enjoyed by these companies. Further, Section 3(1) (iv) (c) which itself was inserted in 2000, analogically equates private company which is a subsidiary to a public company, as a public company.

Article by-

Saumya Sharma,

Student, National Law Institute University, Bhopal


[1] http://www.mca.gov.in/Ministry/primers.html

[2]  MANU/CL/0002/2006, [2006]71SCL41(CLB)

[3] D.S.R. Krishnamurti, Company Law, p. 112, Taxmann Allied Services (P.) Ltd.

[4] A. Ramaiya; Guide to the Companies Act, edn. 16, Wadhwa and Company , Nagpur(2006).

[5] Needle Industries (India) Ltd. v Needle Industries Newey (India) Holding Ltd., AIR 1981 SC 1298.

Article by

Saumya is a 5th year student pursuing BA.LLB (Hons) from National Law Institute University, Bhopal. She is a good photographer and loves to paint.

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