CS Adnan Ginwala
Introduction: It is important to check the status of Private Limited Company, if the shareholder of such Private Limited is Body Corporate incorporated outside India. It is also important from the audit point of view since if the status of such Private Limited Company is established as Subsidiary of Public u/s 4(7) of Companies Act, 1956 then all the Compliances under Companies Act, 1956 has to be been taken care as it is a Public Company. This section becomes operative only when a Private Limited is having one shareholder as Body Corporate Incorporated outside India.
Extract of Bare 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 this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.
Understanding:
1) This section is operative when the subscriber(s) / Shareholder(s) of a Private Limited Company is Body Corporate incorporated outside India.
2) This section establish the fact that such Private Limited Company should be considered as Subsidiary of Public Limited Company.
3) If it is established then the Private Limited Company needs to take care of all the provisions of Companies Act, 1956 as it is being taken care by normal Public Limited Company.
Interpretation
“A private company, being a subsidiary of a body corporate incorporated outside India”
Under 4 (7) a private Company is a subsidiary of a Body Corporate incorporated outside India, if that Body Corporate holds more than 50% of equity capital in the Company.
“if incorporated in India, would be a public company within the meaning of this Act”
Then, if such Body Corporate is incorporated in India becomes a public company within the meaning of section 3 (1)(iv) of India Companies Act, 1956.
Litmus test for this:
1) Definition under section 3 (1) (iv) with respect to the definition given in the law of the country in which it is registered.
2) Articles of Association or any other constitution document of Body Corporate .
“shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India”
Then, this particular points decides the status of such Private Company, whether it becomes subsidiary of Public Company or not. Below is the holding pattern which will clarify the same:
| Shareholder 1 | Shareholder 2 | Status |
| Foreign Body Corporate (Public Company) – 99% | Non-resident Individual – 1% | Subsidiary of Public |
| Foreign Body Corporate (Public Company) – 99% | Foreign Individual – 1% | Subsidiary of Public |
| Foreign Body Corporate (Public Company) – 99% | Indian Company – 1% | Subsidiary of Public |
| Foreign Body Corporate (Public Company) – 99% | Resident Individual – 1% | Subsidiary of Public |
| Foreign Body Corporate (Public Company) – 99% | Foreign Body Corporate (Public or Private)- 1% | Private Company |
| Foreign Body Corporate (Public Company) – 99% | Foreign Body Corporate (Public or Private)- 1% | Private Company |
Conclusion:
This section becomes operative only when the Foreign Body corporate is a Public Company under Section 3(1)(iv) of Indian Companies Act, 1956 with respect to the definition given in the law of country where it is registered. Further such Body Corporate should be the alone shareholder of the Private Company, if such Body Corporate holds shares in Private Company along with any other Body
Corporate then the Private Company can retain its status of “Private”.
Though the section was made inapplicable by the Department’s clarification, it still remains in the Companies act, 1956. Untill the legislature removes the same from the act, it is applicable to the Indian Private Subsidiaries.
Section 4(7) of the Act was an exemption available to Indian private companies when foreign body corporates were holding 100% share in them to retain their “private” status when Section 43(A) was in operation. After amendment of Section 43A, such exemption is not required. The legal position in the above circumstance would be that a private company would be the subsidiary of another private limited company even if the holding company happens to be a foreign body corporate, if it would be a private company, if incorporated in India and these companies do not need the exemption provided in Section 4(7) of the Act.
mca.gov.in/Ministry/pdf/press_release/press_joshi.html
It is not possible for foreign body corporate to hold shares alone: Minimum share will be held by nominees which is allowed under cos act.. The above table require reconsideration. It is applicable only when foreign co hold shares (other than nominees) less than 100% of shares of indian co.