Do hybrid companies still exist?

By Anushri Uttarwar and Umang Pathak 
0
955
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

Private entities that are legally deemed to be public, yet permitted to retain private characteristics such as restrictions on share transferability, are called hybrid companies. In the Tata-Mistry dispute, the National Company Law Appellate Tribunal (NCLAT) denied the existence of hybrid companies post the Companies (Amendment) Act 53 of 2000. However, it failed to contemplate numerous other considerations.

Recently, the Supreme Court reversed the NCLAT decision and held that the concept existed even after the above-mentioned 2000 amendment, but only until the Companies Act, 2013, came into force, and there are instances in law that support the existence of hybrid companies.

Anushri Utttarwar
Anushri Utttarwar

Status before 2013 act

Introduced in 1960, section 43A of the Companies Act, 1956, brought the concept of “deemed to be public companies” into existence and postulated four categories of private entities that came within its ambit:

(1) at least 25% of its paid-up share capital held by a body corporate;

(2) annual turnover of not less than INR10 million (USD134,000);

(3) held at least 25% share capital of a public company; and

(4) accepted deposits from the public.

In the 2000 amendment, two important changes were implemented in the act:

(1) all the four above-mentioned categories under section 43A were left out except the procedure to re-convert from public to private company under sub-section 2A; and

(2) the insertion of sub-clause (d) under section 3(1)(iii), which prohibited invitation or acceptance of public deposits for a private company.

However, it omitted amending section 27(3) of the 1956 act, which mentioned only three requirements under the articles of association for a private company. Due to this omission, only those section 43A companies that wished to re-convert back to private companies had to follow the rigours of section 3(1)(iii). Thus, as settled by the Supreme Court in the Tata-Mistry case, the concept of hybrid companies was not abolished, even after the 2000 amendment.

Umang Pathak
Umang Pathak

Status after 2013 act

In the first and penultimate legs of the Tata-Mistry litigation, the NCLT and the Supreme Court concurred that the very concept of “deemed public companies” was absent within the said legislation.

However, the deeming proviso under section 2(71) of the 2013 act seems to suggest their continuing existence within the 2013 act. The proviso stipulates that a subsidiary company of a company that is not a private company would be deemed to be a public company although “such subsidiary company continues to be a private company in its articles”.

Evidence

First, the statutory language of the definition of a “public company” under section 2(71) of the 2013 act is different from that of section 3(1)(iv) of the 1956 act. Both legislations carve out a legal fiction that transforms subsidiaries of public companies into deemed public companies.

Second, the legislative background leading up to the 2013 act had a different language to the above-mentioned deeming provision when compared to the language under the 2013 act. The 2004 concept paper of the draft Companies Bill proposed that a subsidiary of a public company must be a public company only. The language adopted under the 2013 act suggests an intention to step away from the concept paper’s proposal.

Third, the 2016 Companies Law Committee Report states that the legislative intent behind the deeming provision was clear, namely although subsidiaries of companies other than private companies have private company features, they ought to be subjected to additional restrictions applicable to public companies.

Conclusion

Hybrid companies may be lingering still today, about 20 years later. If the concept of hybrid companies was obliterated post the 2013 act, those entities would be regulated as private, and not public, companies provided they satisfy the requirements under section 2(68) of the 2013 act. The Supreme Court in the Tata-Mistry case settled this position.

Anushri Uttarwar and Umang Pathak
OP Jindal Global University

Haryana

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link