Can an HUF Be a Shareholder in a Company at the Time of Incorporation?

Brief: Business families may wish to invest HUF funds in a company from the date of incorporation. Although an HUF is recognised as a separate person under income-tax law, shares are ordinarily subscribed to and registered in the name of its Karta, acting in that capacity. The HUF’s interest and the source of the investment should be documented. This article explains the distinction between the registered holder and the HUF’s beneficial interest, the disclosures that may arise under Section 89 of the Companies Act, 2013, and the separate significant beneficial ownership test under Section 90.

Short Answer

An HUF should not be named as a subscriber to the memorandum of association (MOA) or entered in the register of members in its own name. The Karta, being an individual, may subscribe and hold shares in a representative capacity for the HUF. The subscription documents and register should identify the individual Karta clearly; describing the capacity as “Karta of … HUF” does not make the HUF itself the registered member. The investment and any applicable beneficial interest disclosures should be supported by consistent records.

Applicable Legal Provisions

• Sections 3, 4 and 7, Companies Act, 2013: Deal with formation of a company, its MOA and incorporation documents.
• Section 2(55): A subscriber becomes a member on registration of the company and is entered in its register of members. The definition also covers a person whose name is entered as a beneficial owner in depository records.
• Section 8(3): Expressly permits a firm to be a member of a Section 8 company; it does not mention an HUF.
• Sections 88 and 89, Companies Act, 2013, read with Rule 9 of the Companies (Management and Administration) Rules, 2014: Govern the register of members and declarations of beneficial interest in shares.
• Section 90 and the Companies (Significant Beneficial Owners) Rules, 2018: Provide a separate framework for identifying and reporting significant beneficial owners. The Rules expressly address an HUF acting through its Karta.
• Rule 3 of the Companies (Incorporation) Rules, 2014: Restricts eligibility to incorporate an OPC and act as its nominee to a natural person who is an Indian citizen.

Legal Position

Registered membership: the Karta is identified

An HUF is recognised separately for income-tax purposes, but that status does not by itself give it a separate juristic personality under company law. The established approach is for the individual Karta to subscribe to and hold shares acquired with HUF funds. The incorporation documents and register of members should identify the Karta by name, with the representative capacity recorded where applicable.

HUF investment and beneficial interest

When HUF funds are used, the funding records and family records should establish that the investment belongs to the HUF. The Karta exercises membership rights as the registered holder in that representative capacity. The precise application of Section 89 declarations should be assessed against how the shares and the underlying interest are recorded. Merely adding “Karta of … HUF” to the register should not be assumed to dispense with a declaration that Section 89 otherwise requires.

OPCs and Section 8 companies

An HUF cannot itself incorporate or be the sole member of an OPC: Rule 3 requires a natural person who is an Indian citizen. A person acting as Karta should not assume that an OPC shareholding can be treated as an HUF holding without examining that restriction and the proposed ownership arrangement. For a Section 8 company, the express permission in Section 8(3) applies to a firm; it cannot simply be extended to an HUF.

Case Laws / Judicial View

CIT v. C.P. Sarathy Mudaliar (Supreme Court, 1972)

In a deemed-dividend dispute, the Supreme Court observed that an HUF could not be a shareholder of a company and distinguished the HUF from the individuals in whose names the shares stood. The observation arose in an income-tax case under the earlier law; it should be read in that setting rather than presented as a ruling on an incorporation filing under the Companies Act, 2013.

Gopal and Sons (HUF) v. CIT (Supreme Court, 4 January 2017)

The shares stood in the Karta’s name and had been purchased with HUF funds. The Supreme Court upheld the deemed-dividend treatment of a payment to the HUF on the facts and under Section 2(22)(e) of the Income-tax Act, 1961. It did not need to settle the broader question whether an HUF could itself be a registered or beneficial shareholder. The decision illustrates why a company’s loans or advances involving the HUF require a separate tax review.

Practical Interpretation

• Name the individual Karta as subscriber in the incorporation documents. If shares are acquired for the HUF, record the representative capacity consistently in the subscription and company records.
• Document the Karta’s decision to invest HUF funds and preserve the banking trail, HUF accounts and share records.
• Assess whether the separation between the registered holder and the person holding beneficial interest triggers MGT-4, MGT-5 and MGT-6 filings under Section 89. Where applicable, observe the prescribed declaration and company filing timelines.
• Separately test whether the Karta is a significant beneficial owner under Section 90. The HUF-through-Karta provision in the SBO Rules calls for attention, but an SBO filing is not automatic in every case.
• If the Karta changes, review the company’s register, depository records where relevant, supporting HUF documents and any declarations that need updating. Do not assume that every change requires a share transfer: the procedure depends on how the holding is recorded and the applicable succession facts.
• Before the company makes a loan or advance to the HUF, examine the deemed-dividend provision applicable to the relevant tax year and the facts of the proposed payment.

Example

Ramesh Gupta is the Karta of Ramesh Gupta & Sons HUF. The HUF proposes to fund 20,000 shares of Gupta Infra Private Limited at incorporation. Ramesh Gupta is named individually as the MOA subscriber, with his capacity as Karta recorded in the supporting documents. The subscription is paid from the HUF’s bank account and reflected in its accounts. The company then assesses the Section 89 and Section 90 disclosure requirements on the documented ownership arrangement. Ramesh Gupta is the registered member; the HUF’s interest is supported by the investment records.

Conclusion

An HUF’s separate status under income-tax law does not make it a separate subscriber or registered member under company law. At incorporation, the workable route is to name the individual Karta as subscriber and document that the shares are acquired for the HUF where that is the intended arrangement. The parties should then examine the beneficial interest declarations under Section 89 and, separately, the significant beneficial ownership rules under Section 90. The same distinction matters when the company later deals financially with the HUF.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES, Company Secretary in Practice, Delhi. Contact: [email protected].