1. Multinational corporations have been carrying on business in India through private limited companies (‘Indian Companies’) set up by them under the Companies Act, 1956 (‘the Act’). Often, such private limited companies are not subsidiaries of the principal holding company (which has public shareholding), but are step-down subsidiaries of subsidiary companies of such principal holding companies. Also, the subsidiaries which hold the shares of the Indian Companies are themselves private companies under the laws of the relevant jurisdictions in which they are incorporated. In such cases, a question often arises as to whether such Indian Companies, being step-down subsidiaries of public companies outside India, are deemed to be public companies within the meaning of Ss.(7) of S. 4 of the Act. This aspect gains significance where the Indian Company desires to issue different classes of shares. While the issue of shares with differential rights can easily be provided for in the Articles of Association of private limited companies, the Act prescribes a number of restrictions in relation thereto in case of public companies. In the above circumstances, this article discusses the provisions of S. 4 of the Act as applicable to Indian Companies which are subsidiaries of foreign companies.

2. S. 4 of the Act explains in detail the meaning of the terms ‘holding company’ and ‘subsidiary company’ used in the Act. Ss.(1) of S. 4, inter alia, provides that a company is a subsidiary of another if such other company (a) controls the composition of its Board of Directors; or (b) holds more than half of the nominal value of its equity shares; or (c) if it is a subsidiary of any company which is the sub-sidiary of the other company (i.e., a step-down subsidiary). Ss.(5) of S. 4 of the Act, inter alia, provides that for the purpose of S. 4 of the Act, the expression ‘company’ includes any body corporate, thereby implying that even companies incorporated outside India would be regarded as holding and subsidiary companies of Indian companies, and that the relationship would not be restricted to companies incorporated under the provisions of the Act. Ss.(6) of S. 4 recognises that since a relationship of a holding and a subsidiary company would exist between a foreign company (i.e., a company incorporated under the laws of a foreign country) and an Indian company, the laws under which a foreign company has been incorporated would also have to be considered for the purpose of determining the relationship of a holding company and a subsidiary company. Ss.(7) of S. 4 of the Act provides that a private company which is a subsidiary of a body corporate incorporated outside India (which body corporate would be regarded as a public company if incorporated in India) would be deemed for the purposes of the Act to be a subsidiary of a public company if the entire share capital of that private company (incorporated in India) is not held by that body corporate whether alone or together with one or more bodies corporate incorporated outside India.

3. Therefore, by virtue of the provisions of Ss.(1) of S. 4 of the Act, the Indian Company would be regarded as a subsidiary of not only its immediate holding company but also a (step-down) subsidiary of the principal holding company (which has public shareholding). As stated above, Ss.(5) clarifies that the term ‘company’ used in S. 4 would refer to not only a company incorporated under the Act, but also to any body corporate incorporated outside India and therefore for the purposes of the Act, the principal holding company (which has public shareholding) would be a holding company of the Indian Company. With the aforesaid background, we now discuss the manner in which the provisions of Ss.(7) of S. 4 of the Act would apply to such Indian Company.

4.1 Ss.(7) of the said S. 4 is divided into two parts. The first part states that a private company incorporated in India would be deemed to be a public company if it is the subsidiary of a public company incorporated outside India. The second part of the said Ss.(7) exempts from the provisions of this sub-section those private companies whose entire share capital is held by a public company outside India whether alone or together with other bodies corporate incorporated outside India.

4.2 The first part of the said Ss.(7) of S. 4 is very wide and refers to any and every holding company of an Indian company and therefore on a plain reading thereof, all step-up holding companies of the Indian Company would be governed by the provisions of the first part of Ss.(7). As a consequence thereof, even if a step-up holding company abroad is a public company, the Indian step-down subsidiary would in terms of the said Ss.(7) be regarded as a public company, unless exempted in terms of the second part thereof.

4.3 The second part of Ss.(7) on the other hand is restricted in its scope. The said second part refers only to that particular body corporate incorporated outside India (being the holding company), which (i) is the public company, and (ii) which holds shares of the Indian company and does not refer to any other step-up holding company. As a consequence thereof, the second part refers only to the immediate holding company of the Indian subsidiary.

4.4 It is imperative that the two parts of Ss.(7) of S. 4 must be read harmoniously as a whole and not disjoint from one another. In order to give such a harmonious interpretation it is imperative that the restricted meaning given to the term ‘body corporate’ in the second part of Ss.(7) should necessarily be read into the first part thereof. Therefore, for the purposes of Ss.(7), the term ‘body corporate’ in both parts should be read to mean only that body corporate, which directly holds shares in the private limited company incorporated in India.

4.5 Therefore, briefly stated, for the purposes of Ss.(7) of S. 4 of the Act, it is only the status of that company which holds shares of the Indian subsidiary company, which is to be considered for determining as to whether the Indian subsidiary is a subsidiary of a foreign public company.

4.6 Support in favour of the aforesaid argument is taken form the following paragraphs contained on pages 450 and 451 of “Principles of Statutory Interpretation” by Guru Prasanna Singh, Tenth Edition 2006 :

“The rule of construction noscitur a sociis as explained by Lord Macmillan means : “The meaning of a word is to be judged by the company it keeps”. As stated by the Privy Council : “It is a legitimate rule of construction to construe words in an Act of Parliament with reference to words found in immediate connection with them”. It is a rule wider than the rule of ejusdem generis; rather the latter rule is only an application of the former. The rule has been lucidly explained by Gajendragadkar, J. in the following words : “This rule, according to Maxwell, means that when two or more words which are susceptible of analogous meaning are coupled together, they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general. The same rule is thus interpreted in Words and Phrases. Associated words take their meaning from one another under the doctrine of noscitur a sociis, the philosophy of which is that the meaning of the doubtful word may be ascertained by reference to the meaning of words associated with it;

. . . .

. . . .

. . . .

In S. 232 of the Indian Companies Act, 1913, which enacted that “where any company is being wound up by or subject to the supervision of the Court, any attachment, distress or execution put into force without leave of the court against the estate or effects or any sale held without leave of the court of any of the properties of the company after the commencement of the winding up shall be void, the words ‘any sale held without leave of the court’ were construed in the light of the associated words, ‘any attachment, distress, or execution put into force’ and thereby restricted to a sale held through the intervention of the court thus excluding sale effected by a secured creditor outside the winding up and without intervention of the court.” (See M. K. Ranganathan v. Government of Madras, AIR 1955 SC 1323.)

4.7 Therefore, the provisions of Ss.(7) of S. 4 of the Act must be read as a whole and the second part of Ss.(7) which is more specific should necessarily be read into the first part thereof, which is general in nature.

5.1 We now consider the implications of giving a wider interpretation to the term ‘body corporate’ in the first part of Ss.(7) of S. 4 of the Act, so as to include within its ambit all step-up holding companies, while restricting the exemption in the second part to select Indian companies whose shares are held by bodies corporate abroad. Such an interpretation would lead to some anomalies which can be explained by the following example :

If A were a public limited company incorporated outside India and B a private limited company incorporated in India of which the entire share capital was held by A, then by virtue of the provisions of the second part of Ss.(7), B would not be deemed under the said Ss.(7) to be a subsidiary of a public company. However, if B in turn were to have a wholly-owned subsidiary say C, then strictly speaking, while C would be a step-down subsidiary of A (being the public company incorporated outside India), the shares of C would not be held by A. Therefore, C would not enjoy the exemption given under Ss.(7) of S. 4 of the Act. This would lead to an absurd interpretation whereby B, being the wholly-owned subsidiary of A, would not be deemed to be a public company, but C being a wholly-owned subsidiary of B and the step-down subsidiary of A would be deemed to be a public company under Ss.(7) of S. 4 of the Act.

5.2 Therefore, the provisions of Ss.(7) of S. 4 of the Act should be interpreted harmoniously to prevent such an anomalous construction thereof. Ss.(7) of S. 4 must necessarily be construed as applying only to those private limited companies whose shares are directly held by public limited companies incorporated abroad. It is evident that the provisions of Ss.(7) of S. 4 would not and cannot apply to step-up holding companies or step-down subsidiary companies, as it would otherwise create an anomalous situation which does not appear to be intended by the provisions of the Act.

6. It is interesting to note that the provisions of Ss.(7) of S. 4 of the Act seem to have been done away with under the Companies Bill, 2008 (‘the Bill’), presently pending sanction of the Parliament. The implication of omission of the present Ss.(7) of S. 4 of the Act, in the Bill, would prima facie appear to be that the exemption available to Indian subsidiaries of foreign public companies has been withdrawn and that such subsidiary companies would also be regarded as public companies under the Act. However, the actual implication is exactly the opposite, since the other provisions of S. 4 have also been omitted in the Bill.

7. To recapitulate, for the purposes of S. 4 of the Act, the term ‘company’ includes a ‘body corporate’ and therefore Indian subsidiaries of foreign holding companies are also regarded as subsidiary companies under the Act. Such subsidiaries are regarded as ‘public companies’ under the Act if the conditions specified in Ss.(7) of S. 4 of the Act are satisfied. However, under the Bill, the terms ‘holding company’ and ‘subsidiary company’ have both been defined as follows so as to bring within their scope only ‘companies’ i.e., companies incorporated under Indian laws :

‘holding company’, “in relation to one or more other companies, means a company of which such companies are subsidiary companies”

‘subsidiary company’ or ‘subsidiary’ in relation to any other company (hereinafter referred to as the holding company), means a company in which the holding company :

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total voting power.

Explanation : For the purposes of this clause, a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company.”

8. Under the Bill, an Indian subsidiary company, being a wholly-owned subsidiary of a company registered outside India, would not be regarded as a ‘subsidiary company’ of such foreign company. The relationship of the Indian subsidiary company with the foreign holding company not being recognised under the Bill, there can be no question of the Indian company being regarded as a public company or otherwise, under the Bill merely by virtue of it being a subsidiary of a foreign public company.

9. In effect, if the Bill is passed, while Indian subsidiaries of Indian public companies would be regarded as public companies, Indian subsidiaries of foreign public companies would continue to be regarded as private companies, if so incorporated, though such an effect may never have been intended. In light of the aforesaid, provisions such as those contained in S. 4 of the Act should be incorporated in the Bill.

Author/s : Dhaval Vussonji , Advocate and Solicitor

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Category : Income Tax (28050)
Type : Articles (17781)
Tags : Companies Act (2508)

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