• Sep
  • 24
  • 2013

Companies Act, 2013 – Effects on Wholly Owned Indian Subsidiary of A Public Limited Company Incorporated Outside India

With the enactment of Companies Act 2013 (CA, 2013) the existing Companies Act, 1956 (CA, 1956) will be replaced. Through the Ministry of Companies Affairs (MCA) notification dated 12.09.2013, 98 sections in CA, 2013 have been notified with immediate effect.

One of the important sections which are notified is:

CA, 1956 – section 4- “Meaning of Holding Company and subsidiary”-

Sub-section (7)- A Private Company, being a subsidiary of a body Corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of the Act, shall be deemed for the purposes of this Act to be subsidiary of a public company if the entire share capital in that company is not held by that body corporate whether along or together with one or more other bodies corporate incorporated outside India.

It implies that if the entire (100%) shareholding of a Indian private company is held by a public limited company incorporated outside India together with the other foreign company (ies), if any, then it will be treated as private company according to Indian companies laws.

HAS BEEN REPLACED WITH

CA, 2013 - section 2(71)- “Public Company” means a company which-

a)      Is not a private company.

b)      Has a minimum paid up share capital of 5 lakh rupees or such higher paid up capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of the Act even where such subsidiary company continues to be a private company in its articles.

Through section 4(7), if a company in India being 100% subsidiary of a Public Company incorporated outside, was availing privilege of being a Private company in context of Indian Companies Law, which has been lifted/ removed from CA, 2013. Thus Indian Company, now being deemed public company (refer section 2(71) above) will have to comply with additional sections in CA, 2013 in future which are already notified through notification dt 12.09.2013, as follows:

Further, there are few important sections which are applicable to every company and are used in day to day operations are as follows:

1. Section 180 – Restriction on Power of Board corresponding to section 293 in CA, 1956.

This sections implies that the Company (private & public both) will have to obtain the shareholders approval by passing a special resolution in its general meeting if the borrowing limit of the company exceeds the paid up share capital plus free reserves.

2. Section 185 – Loan to directors corresponding to section 295 in CA, 1956.

No company, whether public or private can give any loan or provide any security or guarantee in connection with a loan to a director or any other person in whom he is interested*, except as provided below.

Company can give loan to its Managing director/ Whole Time director without approval of shareholders where the loan is given as a part of the condition of service extended by the Company to all its employees or where loan is approved by way of passing the special resolution.

*interested director means-

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director.

(b)any firm in which any such director or relative is a partner.

(c) any private company of which any director is a director or member.

(d) any body corporate at a general meeting of which not less than 25% of the voting power is exercised or controlled by any such director, or by two or more such directors, togehter

(e)any body corporate, board of director, MD or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Consequence:Further, if any loan/ guarantee/ security provided in contravention to this section, the copany shall be punishable with fine which shall not be less than 5.00 lakhs to 25.00 lakhs and the director or other person to whom such loan/ guarantee/ security is provided, shall be punishable with imprisonment upto 6 months or with fine 5.00 to 25.00 lakhs.

3. Section 192 – Restriction on non- cash transactions involving Directors. New Provision

A company shall not enter into any arrangement by which a director of the company or of its Holding company or any person connected with him can acquire assets for the consideration other than cash.

Where the Director or connected person is a director of its holding company, then resolution from Holding Company will also be required.

The notice for approval in general meeting under this section in both the company and its Holding company shall include particulars of the arrangement alongwith the asset value calculated by the Registered valuer.

———–

Author- CS Prerna Jain

Csprernajain@gmail.com

Sandeep Kanoi

8 Responses to “Companies Act, 2013 – Effects on Wholly Owned Indian Subsidiary of A Public Limited Company Incorporated Outside India”

  1. Manoj says:

    Will Section 185 will be applicable for inter corporate loans between holding and subsidiary company.

  2. Vinod Venugopal says:

    Note that 2(71) applies to ‘company’ and not ‘Body Corporate’. Consequently the interpretation regarding applicability of the subsection to companies incorporated abroad is incorrect.

  3. Prerna Jain says:

    Thanks readers….

  4. Ravi Arora says:

    good discussions

  5. Prerna Jain says:

    Hello Sheetalji,
    Thanks for your comments. Please give your interpretation on such section. Perhaps I would too have some new to learn in this.

    Regards,
    Prerna Jain

  6. Ajith Menon says:

    The earstwhile section 4(7) says if the ENTIRE SHARECAPITAL in the Indian pvt ltd company is held by a foreign Incorporated public limited company or jointly with any other foreign companies ,the Indian Pvt ltd company will not be deemed to be subsidiary of foreign incorporated public company. if the share were partially held by a foreign incorporated public company, then the Indian pvt ltd company would have been treated as subsidiary of a foreign incorporated public company.

    the interpretation is correct

  7. sheetal says:

    I feel interpretation of section 4(7) is not correct

  8. Ajith Menon says:

    Aptly articulated. Bravo

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