Deemed Public Companies under Companies Act, 2013

The term “Deemed Public Company” finds no specific definition in the Companies Act, 2013 or its Rules. However, a comprehensive analysis of Section 2(71) sheds light on its indirect definition. This article delves into the hybrid nature of deemed public companies, combining elements of both public and private limited entities.

Deemed Public Company

Deemed Public Company’ is nowhere specifically defined under Companies Act, 2013 or its Rules. So, it is only after analysis of Sub-Section 71 of Section 2 can one get an indirect definition of deemed public company. Section 71 reads as under:

“public company” means a company which- (a) is not a private company and; (b) has a minimum paid-up share capital (omitted), 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 a public company for the purpose of this Act even where such subsidiary continues to be a private company in its articles;

(a) A subsidiary of a public limited company shall be deemed to be a public company

(b) A deemed public company continues to be private in its Articles which means it has to keep complying with all the restrictions of a private limited company.

Hence, it is a hybrid of public and private limited company with continuing restrictions just like in private and at the same time need to do few more compliances as applicable to public limited. So obviously, the restriction on free transferability of shares and limit on maximum number of members would still continue.

Now, it is important to discuss applicability of various other provisions of the Act on such type of companies and the necessary steps that should be taken once a private company acquires the status of deemed public company. A brief mention of the same is being made hereunder:

1. Section 67: It is specified in this section that ‘no public company shall give, whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company’. Few other provisions are also mentioned wherein the restriction would not be applicable. It can therefore be included that no public company here includes deemed public company also and that the same restriction on providing financial assistance for purchasing shares would also be applicable on deemed public company.

2. Section 73: This section title ‘Prohibition on acceptance of deposits from public’. O, conditions for taking deposits from public are also given along with few exceptions/modifications for private limited companies. So, first a private company becomes deemed public company it would lose all the benefits of exceptions and it would also require to follow the whole section in letter and spirit if any deposit is being accepted from public. Therefore, it can no more accept money from its members up to 100% of net worth without complying with all sub-section 1 to 5. If any such money is outstanding in the books, then that should be returned to members immediately.

3. Section 101-107: These sections allow private limited companies to carry on certain acts as per the terms mentioned in their Articles of Association. Hence, they have the leverage to be little bit flexible in those matters. The provisions are notice of meeting (Sec. 101), Statement be annexed to notice of meeting (Sec. 102), Quorum for meetings (Sec. 103), Chairman of meetings (Sec. 104), Proxies (Sec. 105), Restrictions on Voting Rights (Sec. 106) and Voting by show of hands (Sec. 107). So, once a private company acquires the status of deemed public company, it can no longer enjoy these advantages of following their Articles more than the Act.

4. Section 138-139: As per Section 138, all listed companies and such classes of companies as may be prescribed are required to appoint internal auditor. As per the rules, the definition of class of companies as may be prescribedis:

(b) every unlisted public company having- (i) paid up share capital of fifty crore rupees or more during the preceding financial year; or (ii) turnover of two hundred crore rupees or more during the preceding financial year; or (iii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or (iv) outstanding deposits of twenty-five crore rupees or more at any point of time during the preceding financial year; and

(c) every private company having- (i) turnover of two hundred crore rupees or more during the preceding financial year; or (ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year:

After becoming subsidiary of a public limited company, it would also have to follow sub-section b of the said provision instead of sub-section c. So, now the applicability criteria would be paid-up share capital or turnover or outstanding loans or outstanding deposits would be applicable.

On the other hand, Section 139 specifies provisions for appointment of auditors and their rotation. It specified “no listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint— (a) an individual as auditor for more than one term of five consecutive years; and (b) an audit firm as auditor for more than two terms of five consecutive years:”

Further as per the rules, such class of companies are prescribed as

(a) all unlisted public companies having paid up share capital of rupees ten crore or more;

(b) all private limited companies having paid up share capital of rupees [fifty] crore or more;

(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.

One person company and small company are exempt.

It can therefore be concluded that a deemed public company will have to follow limits of sub-clause a rather than b.

5. Section 149: Appointment of Independent Director is mandatory if public company’s paid-up share capital reaches ten crore rupees or more or; turnover reaches one hundred crore rupees or more or outstanding loans exceed fifty crore rupees. However, there is an exception in this section for Wholly Owned Subsidiaries. Therefore, deemed public company being a WOS need not comply with the said provision after reaching threshold level.

6. Section 160, 162: Section 160 with respect to ‘right of persons other than retiring directors to stand for directorship’ does not apply to private companies. However, once a private company becomes subsidiary of public company, it has to comply with this section also. Therefore, while appointing any director other than retiring director, proposal for his candidature from a member along with deposit of one lakh rupeesis must. Also, the deposit may be refunded if his election gets more than 25% of total valid votes.

On the other hand, Section 162 also do not apply to private limited companies but once it gains the status of DPC, it has to comply. So, the restrictions on appointment of two or more persons as director by a single resolution will be applied.

7. Section 177, 178: Sec. 177 mandates formation of Audit Committee while Sec. 178 mandates formation of Nomination & Remuneration Committee by every listed public company and a company covered under Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014. Hence, all public companies having paid-up capital ten crore rupees or more or; turnover of one hundred crore rupees or more or; outstanding loans exceeding fifty crore rupees need to have an Audit Committee and a Nomination & Remuneration Committee. Rule 4 also specifies non-applicability to wholly owned subsidiary. Therefore, it can be concluded that a subsidiary (not WOS) of public company needs to form such committees.

8. Section 180: This section also does not apply to private company but once it becomes DPC, the provisions have to be complied. Therefore, if Board wishes

(a) to sell, lease or otherwise dispose of whole or substantially whole of the undertaking or

(b) to invest otherwise in trust securities the amount received after merger/amalgamation or

(c) to borrow money exceeding (paid up share capital + free reserves + securities premium) apart from temporary loans obtained in ordinary course of business or

(d) to remit or give time for repayment of any debt due from a director

Then it requires to pass Special Resolution and consequently e-form MGT-14 would be filed with Registrar of Companies.

9. Section 185: In this section, few terms and conditions are given for advancement of any loan or for providing guarantee to any director, his relative, any firm in which such director or relative is a partner. It also specifies that in case if special resolution is passed in general meeting and the loan is utilized by the borrowing company for its principal business activities, then the loan can be given/security can be provided/guarantee can be given to

“any person in whom any of the director is interested”. Also, as per sub-section 3, sub-sections (1) and (2) do not apply in certain cases. Although this section is applicable on both private and public limited companies alike. However, clause c of sub-section 3 is pertinent to note here which says that the section is not applicable on any loan/guarantee/security provided by a holding company to its wholly owned subsidiary.

10. Section 188: As per the notification dated 5thJune, 2015, second proviso to sub-section (1) of Section 188 do not apply to private companies. Hence, once the company is converted into subsidiary of public company, it will have to comply with all the provisions with respect to Related Party Transactions. It also provides that for all transactions held between holding company and its wholly owned subsidiary, requirement of passing of the resolution is dispensed with. Hence, this provision will not be applicable on WOS of public or private company, but all other provisions have to be complied. On the other hand, for a subsidiary which is not WOS, every provision has to be complied.

11. Section 197: This section is also applicable on public companies. It specifies the limits for ‘overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits’. So, once the private company attains status of deemed public company, it will also have to follow the same criteria while paying managerial remuneration. Again, under sub-section 14, if a managing or whole-time director receives commission from holding or subsidiary company subject to disclosure in Board’s Report, then the director does not gets disqualified.

12. Section 203: Appointment of Key Managerial Personnel (Managing Director or CEO or Manager or WTD, Company Secretary and CFO) is mandatory for every listed company and every public company having paid-up share capital of ten crore rupees or more (Rule 8). Also, as per Rule 8 A, every company which has apaid-up share capital of ten crore rupees or more shall have a whole-time company secretary. Hence, it can be concluded that once a company becomes deemed public company, it has to appoint not only a CS but also other whole-time KMPs if its paid-up capital reaches ten crore rupees.

13. Section 204: Secretarial Audit is mandatory for every listed company and public company having paid-up share capital of fifty crore rupees or more; or turnover of two hundred fifty crore rupees or more; or outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more. Hence, a DMC will also have to comply with this provision just like any other public company.

14. E-form MGT-14 filing: Every company “other than private limited company” is required to file some Board resolutions with ROC through e-form MGT-14. Hence, the same would apply to DMC also. They are also required to file MGT-14 for Board Resolutions passed to issue securities, borrow monies, invest funds of company, grant loans/provide security or guarantee as per Section 186, approve financial statements and Board’s Report, appoint internal auditors, appoint secretarial auditors, appoint or remove KMP, make calls on shares, make political contributions, authorize buy-back, diversify business, approve amalgamation/merger and take over another company/acquisition of substantial stake. Rest, all special resolutions should also be filed.

15. ISIN Generation: As per Rule 9A of Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, every unlisted public company was mandated to get itself registered with any Depository and gets its shares dematerialized before giving effect to transfer of shares or any new issue. However, exception has been provided to a Nidhi company, Government company or a wholly-owned subsidiary. It can therefore be safely concluded that while a wholly owned subsidiary of a public limited company need not get International Securities Identification Number, the subsidiary which is not WOS will have to comply with the Rule. Accordingly, e-form PAS-6 is also required to be filed once ISIN gets allotted.

16. Increasing the number of members and directors: There are different views adopted on the question of number of members. Few professionals adopt the view that a deemed public company need not increase number of its members to seven while others believe that it needs to increase. Anyway, one thing can be concluded that if it is a wholly owned subsidiary then obviously there is no requirement to increase the number as actually there exists only one member. On the topic of increasing the number of directors to three, common view expressed by most professionals is that a deemed public company should increase its number of directors from two to three.

Conclusion: Majorly, there are four types in which exemptions can be provided. Firstly, a provision may not cover the topic altogether from the very beginning like Rule 9A is applicable only on unlisted public companies. Secondly, a provision itself specifies exceptions/modifications like Nidhi companies and wholly-owned subsidiary is specifically exempted from application of Rule 9A. Thirdly, few relaxations provided but with certain limitations like a private company taking loan from its members up to 100% of net worth need not comply with few provisions of Section 73.

Fourthly, a separate Rule or provision is formed for exemptions like various types of advances/receipts/loans are mentioned in Companies (Acceptance of Deposits) Rules, 2014 are not considered as deposit, so accordingly radio button of e-form DPT-3 is required to be selected.

All four types of exemptions have to be checked separately if conclusions on any matter of the Act needs to be drawn. Major provisions of the Act with respect to Deemed Public Company (indirect definition- not being a private company) are hereby mentioned considering all four types of exceptions that is Exemption, Modification and two types of non-applicability.

All wholly owned subsidiaries enjoy few relaxations, no matter whether they are subsidiary of a public or private company. So, firstly categorization of subsidiary should be looked and then new additions to company’s compliance calendar be made. It can be said that a deemed public company is private in its character but public in compliance.

Companies often diversify their business by forming subsidiaries. Hence view of the Ministry on various compliances for such a hybrid form of business has become necessary so that uniform code of conduct can be adopted.