#Wake up MCA – Circular on Indian Private Subsidiaries of Companies Incorporated Outside India Stokes Confusion

Ministry of Corporate Affairs (MCA) is expected to clear confusion and not compound it much less through a clarification. The clarification issued by MCA on 25th June (here is the link : http://www.mca.gov.in/Ministry/pdf/General_Circular_23_2014.pdf) about the status of Indian Subsidiaries of Foreign Companies has been lapped up by media as a major celebratory news without examining the legal status and interpretation of the words used.

Let us understand the position of Indian subsidiaries of companies incorporated outside India under Companies Act, 1956 (‘Old Act’). A private company being a subsidiary of a company incorporated outside India was deemed as subsidiary of a public company in India under Section 4(7) of Old Act. The only exception was if 100% of the shareholding of Indian private company was held by companies incorporated outside India.

After notification of Section 2(11), 2(46), 2(68), 2(71) and 2(87) of Companies Act 2013 (‘New Act’), the provisions of Section 4 of Old Act are not in operation (well, this is another story for another time but let us presume this for a moment). This means no reference to Section 4(7) is necessary while interpreting the New Act and determining status of such companies. With fangs of Section 4(7) of Old Act gone, the Indian private subsidiaries can no longer be deemed to be a subsidiary of a public company unless the New Act again brings them to such a category.

Section 2(87) makes a company or body corporate a subsidiary of another company or body corporate (i.e. holding company), if the holding company controls more than 50% of the total share capital. A holding company can be a company (which means company registered under Indian laws) or a body corporate ( which includes a company incorporated outside India). This means if a company incorporated outside India holds more than 50% shares in Indian company, then such Indian Company becomes a subsidiary of company incorporated outside India. 

So far so good. Now the big question: Whether Indian private company, a subsidiary of company incorporated outside India, retains its status as a private company or becomes a ‘deemed subsidiary of a public company’? Provision similar to 4(7) is no longer in place. This question needs interpretation of definition of a public company.

Moving over to public company under 2(71), its proviso makes interesting reading. It needs reproduction here for proper understanding:

“Provided 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.”

The language is plain and clear. The  interesting part is that the proviso uses the term ‘company’ and not body corporate. It does not have an explanation similar to Section 2(87) which says – “the expression company includes body corporate”. The question thus arises is, whether the Indian private company, which became a subsidiary of a company incorporated outside India by virtue of explanation in 2(87) and inclusion of ‘company incorporated outside India’ in definition of ‘body corporate’ in Section 2(11),  will be deemed to be a public company in India under proviso to Section 2(71)?”

The proviso uses the term ‘company’. It is difficult to import explanation attached to 2(87) in interpreting the term ‘company’ used in 2(71). Indian private company became subsidiary of a company incorporated outside India due to deeming provision in Section 2(87) read with 2(11). Becoming a subsidiary has its own consequences and it does not mean that it becomes a public company under 2(71) unless there is a clear cut deeming provision in 2(71).

Section 2(71) is clear in its terms and is similar to Section 3(1)(iv)(c) of Old Act. Under the Old Act, an Indian private company became a deemed subsidiary of public company by virtue of Section 4(7) and not because of Section 3(1)(iv)(c). In New Act, a provision similar to Section 4(7) does not exist. Hence, Indian private company, albeit a subsidiary of a company incorporated outside India (whether private or not private as per laws of that country), is not deemed to be a subsidiary of a public company. This view gains strength from the fact that Section 2(71) has used the term ‘company’ and this does not include body corporate. Legislature, having used different terms in different provisions, obviously meant differently.

We attain clarity to this extent. Let us examine the need of clarification by MCA. The relevant part extracted below makes interesting reading:

“An existing company, being a subsidiary of a company incorporated outside India, registered under the Companies Act, 1956, either as private company or a public company by virtue of section 4(7) of that Act, will continue as a private company or public company as the case may be, without any change in the incorporation status of such company.”

MCA clarification stokes confusion. Let me have the liberty of pointing it out:

1. Where was the need to refer to Section 4(7) though it is no longer in operation?

2. If MCA had to clarify the questions asked on 4(7), a simple clarification that since 4(7) is no longer there, the Indian private companies hitherto deemed as subsidiaries of public companies will retain their original status as private companies.

3. The use of words “registered under …..by virtue of Section 4(7)….” were unnecessary. No company was ever ‘registered’ …. ‘by virtue of Section 4(7)’  under the Old Act. Section 4(7) was a deeming provision and not a provision dealing with registration of companies.

4. The reading of the clarification leads to conclusion that the status of the company continues. What does this mean? This leads us to believe that if a company, though incorporated as private company, but was deemed as a public company ‘by virtue of Section 4(7)’  will continue to be deemed as a public company irrespective of incorporation status.

Unfortunately, Indian pink press and media is interpreting differently.  They are spreading the message that companies incorporated outside India can happily treat their India private arms as private companies. The clarification says otherwise.

Wake up MCA!

Clarifications must be issued after proper legal scrutiny. The impromptu clarifications with poor language cause more inconvenience to the stakeholders. I am sure MCA still has bench strength of persons having deep knowledge of Company Law.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

 

 

 

 

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