Deemed Public Company

Dear Learned Professionals,

Let me ask you a question, do you know what a deemed public company exactly is? If yes, then let us see whether your understanding about the concept of a deemed public company matches with mine. There are many schools of thought on the concept of a deemed public company and through this article I am trying to clear the misconceptions about this concept. Let us begin and try clarifying the cloudy status of the concept of a deemed public company.

To understand the concept of a deemed public company, first of all we need to know the history of the concept of a deemed public company and how it came into existence and what was the rationale behind the introduction of this concept.

The concept was first introduced in the Companies Act, 1956, by the Companies Amendment Act, 1960 (65 of 1960). Before the advent of this concept only two categories of companies existed i.e., private company and public company. Section 43A of the Companies Act, 1956, listed down certain cases in which a private company becomes a public company, and stated that even after a private company has so become a public company by virtue of this section, it would continue to enjoy certain basic features of a private company.

Now to understand this better let us look at the definition of a private company given in the Companies Act, 1956:

Section 3(iii) of the Companies Act, 1956, defines a private company as “private company” means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles of association-

(a) restricts the right to transfer its shares, if any;

(b) limits the number of its members to fifty; and

(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company.

A private company which has become a public company by virtue of section 43A of the Companies Act, 1956, would continue to enjoy the basic features of a private company (as listed above). A private company which became a public company by virtue of section 43A came to be called as a hybrid company, as being a public company it could also enjoy certain basic features of a private company.

I believe the intent behind introducing this section 43A in the Companies Act, 1956, was that even when a status of a public company is bestowed on a private company by virtue of this section, the basic structure of such a company shall remain the same, therefore it is neither required to increase the minimum number of members nor it is required to alter conditions included in its articles of association so as to meet requirements under section 3 of the Companies Act, 1956. So, majorly besides the concept of basic structure, for all other purposes under this Act, such a private company will be treated as a public company, even when the status remains that such a private turned public company, remains a private company in core.

Since the inception of this concept, it has underwent through several amendments brought in the Companies Act, 1956, but this concept of hybrid category of a deemed public company came to end when the Companies Amendment Act, 2000, came into existence w.e.f. the 13^th day of December 2000. After this amendment only two categories of company exist, i.e., private company and public company. Let us understand in detail the relevant amendments brought by the Companies Amendment Act, 2000. The concept of minimum paid-up capital of one lakh rupees and five lakh rupees for a private company and a public company respectively was introduced for the very first time in the Companies Act. In addition, the definition of a private company was amended so as to prohibit a private company from accepting or inviting deposits from persons other than its members, directors or their relatives. In addition, the definition of a public company was substituted as follows: “public company” means a company which- (a) is not a private company; (b) has a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed; and (c) is a private company which is a subsidiary of a company which is not a private company. In addition, the whole section 43A except sub-section (2A) will be inapplicable and ineffective w.e.f. the commencement of the Companies Amendment Act, 2000, i.e., the 13^th day of December 2000. Sub-section (2A) of section 43A as inserted by the Companies Amendment Act, 2000, states that where a public company becomes a private company on or after the 13^th day of December 2000, such company shall inform the Registrar that it has become a private company and thereupon the Registrar shall substitute the words “private company” for the words “public company” and shall also make the necessary changes in the certificate of incorporation issued to the company and in its memorandum of association.

If all this is read together and seen as a whole, it becomes at once clear that the Legislature did not desire to continue any concept of a deemed public company which was in force on account of the amendment made in the Companies Act, 1956, by the Companies Amendment Act, 1960 (65 of 1960). The effect and implication of 1960 amendment is to be wiped out completely and that has been done by the Companies Amendment Act, 2000, to the extent it made the whole of section 43A except sub-section (2A) inapplicable and ineffective from the 13^th day of December 2000. From the perusal of the above, it is evident that if a private company which had become a public company by virtue of section 43(A), doesn’t seek to revert its status to that of a private company by applying to the Registrar under sub-section (2A) within the time limit prescribed thereunder, it will be treated as a public company only.

The Hon’ble Bombay High Court in its judgement in the Company Appeal No. 24 of 2010 in the Company Petition No. 132 of 2010 (JER RUTTON KAVASMANEK V. GHARDA CHEMICALS LTD. & ORS.), has held that the third “hybrid” category of a deemed public company under section 43A, which was in force on account of the amendment made in the Companies Act, 1956, by the Companies Amendment Act, 1960 (65 of 1960), ceased to exist on and after the 13^th day of December 2000. The Companies Amendment Act, 2000, was introduced for an obvious purpose. If a private company is to become a public company in certain cases, then, all attributes and characteristics of a public company get attached to it.

Since the Companies Act, 1956, was repealed by the Companies Act, 2013, let us also look at the definitions of a private company and a public company as given in the Companies Act, 2013. Section 2(68) of the Companies Act, 2013, defines a private company as “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles-

(i) restricts the right to transfer its shares;

(ii) except in case of one person company, limits the number of its members to two hundred; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company.

In the Companies Act, 2013, no specific definition has been given for a deemed public company. However, section 2(71) defines a public company as “public company” means a company which-

(i) is not a private company and;

(ii) has a minimum paid-up share 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 a public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles of association.

From the perusal of above, it is evident that even in the Companies Act, 2013, there is no concept of third “hybrid” category of a deemed public company. In simple terms, if a private company which is subsidiary of a public company will be treated as a public company only and all attributes and characteristics of a public company get attached to it even if continues to be a private company in its articles of association.

Conclusion

After the Companies (Amendment) Act, 2000, the concept of a deemed public company has come to a standstill 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.

I’d love to hear your valuable inputs, if any, on this article. You may share your valuable inputs or ask your queries if any by writing me at [email protected].

FAQs

Q.1 What if a public company is a subsidiary of a private company, will such a private company be treated as a public company?

Ans. No; If we go with the language of Section 2(71) of the Companies Act, 2013, it states 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 this Act even where such subsidiary company continues to be a private company in its articles of association.

Q.2 Can a private company which has been treated as a public company by virtue of section 2(71) of the Companies Act, 2013, regain its status that of a private company in the future?

Ans. Yes, if such a private company is no longer a subsidiary of a public company, it will regain the status of a private company again.

Q.3 Should a private company which has been treated as a public company by virtue of section 2(71) of the Companies Act, 2013, apply to the Registrar for getting the status of a deemed public company?

Ans. No.

Q. 4 Whether a private company which has been treated as a public company by virtue of section 2(71) of the Companies Act, 2013, can enjoy all the exemptions available to it before being treated as a deemed public company?

Ans. No, such a private company can no longer enjoy all the exemptions available to it after being treated as a deemed public company by virtue of section 2(71) of the Companies Act, 2013.

Sources

1. https://www.mca.gov.in/

2. https://www.aironline.in/

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Disclaimer: The views and opinions expressed in this article are those of the author only. Please seek expert advice before relying on the information published in this article. The author shall not be liable or accept any liability for any loss or damage caused by relying on the information published in this article.