Clarifying cloudy status of public, private subsidiaries

Under the Companies Act 1956, section 43A provided conditions where a private company was “deemed” to be a public company. The term “deemed” implies that a private company is treated as a public company by operation of law, with additional obligations and restrictions applicable on a public company, while retaining the essential features of a private company.

But the Companies Act, 2013, does not have such a deeming provision, creating uncertainties around the status of a private company that is a subsidiary to a public company, and is therefore deemed to be a public company.

Section 3(1)(iv)(c) of the 1956 act provided that a private company being a subsidiary of a public company would be deemed as a public company. Section 4(5) of the 1956 act clarified that the term “company” included any body corporate. The term “body corporate” was wide enough to include private as well as public companies, either domestic or foreign. However, the ambit of section 3 was curtailed by section 4(7), which provided that a private company that was a foreign company subsidiary would be deemed to be a subsidiary of a public company if:

1. It was incorporated in India; and
2. The entire share capital of the subsidiary is not held by the foreign company alone, or the foreign company together with other overseas bodies corporate.

Hence, under the 1956 act, a private company being a subsidiary of a foreign company could retain its private company status if its entire share capital were held by foreign bodies corporate.