Deemed public company - Subsidiary of Public Limited Companies

A. History:

The Companies Act, 1956 provides for two kinds of Companies: Private and Public. However, prior to amendment of the Act in the year 2000 by Companies (Amendment) Act, 2000 w.e.f. 13th December 2000, one more type of Companies prevailed, i.e., deemed public Companies. Section 43A of the Act, which has been repealed by the Amendment Act, provided the situations when a private company would be wearing the outfit of a public company and required registration as a deemed public company. How

B. Current Situation:

Definition of Public Company:

“public company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital [omitted]2, as may be prescribed:

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”;

Explanation:

However, except clause 71 of Section 2, the Act is silent on nature, characteristics and conversion of such private companies into deemed public Company being the subsidiaries of public companies. In this article, i have tried to ascertain the nature of such private companies and have expressed my views on whether such private companies require re-registration or conversion on becoming subsidiaries of public companies. By virtue of proviso of Section 2(71) of the Companies Act, 2013 a private company is, for the purposes of the Act, deemed to be a public company, if it is subsidiary of public Company.

C. Deemed Public? How to check?

“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”;

Check points:

• Subsidiary of a Public Company
• Continue with the restrictions mentioned in clause 68 of section 2

As per provision of ‘Deemed Public Company’ if a private Limited Company is subsidiary of Public Company will be considered as Deemed Public Company.

Date of becoming a deemed Limited Company

The private company becomes deemed limited immediately upon, became subsidiary of public Company.

In 2006, in case of Hillcrest Realty Sdn. Bhd v.Hotel Queen Road (P.) Ltd.2, the Company Law Board,Delhi Bench held at para. 36 that "all the provisions in the Articles to maintain the basic characteristics of a private company in terms of section 3(1)(iii) will continue to govern the affairs of the company even though it is a subsidiary of a public company". It was held by the Delhi CLB Bench that the basic characteristics of a private company in terms of section 3(1)(iii) do not get altered just because it is a subsidiary of a public company in view of fiction in terms of section 3(1)(iv)(c) that it is a public company. It was further held by the Bench that it may be a public company in terms of other provisions of the Act but not with reference to its basic characteristics.  

D. Restrictions! Deemed Public:-

All the provisions of Public Company applicable on deemed public Company except following below given restriction as mentioned in Article of Association of Company:

i. Restricts the right to Transfer its shares;

ii. Limits the number of its Members to Two Hundred:

iii. Prohibits any Invitation to The Public to subscribe for any securities of the company;

Along with provisions applicable on public Company it has to comply with the restriction mentioned above.

Note:

It is a well-accepted principle that 'what is not there in the law cannot be imported into the law'. Therefore, a private company which becomes a public company by virtue of being a subsidiary of a public company:

E. Effects of the Become Deemed Public Company:

As mentioned above, due to its nature, private companies enjoy several relaxations and several sections have exempted private companies from the regulatory regime of the Act unless such private companies are the subsidiaries of public companies. All the Provision applicable on public Company under the Act except mentioned above will be applicable on Deemed Public Company.

New Compliance requirements on Private Company once its became Public Company:

I. Elimination of Privileges:

Now Private Limited Company not allowed to avail the privileges given to it’s under the Act and under the exemption given by notification of Ministry dated 05th June, 2015. Exp:

II. Encumber Compliances:

This Private Limited Company required to Comply will the many new provisions which were not applicable on it’s up to the time it was purely private limited Company. Some examples are given below:

F. [1] Compliances required to be done by a Private Company immediately after become deemed Public Company:

I. Increase in No. of Directors:

As per Section 149(1)(a) Every Public company shall have a minimum number of three directors in the case of a public company. Therefore, as all the provision of public Company applicable on the deemed public Company.

Deemed public Company required to comply with the requirement of this section also and have to increase its member upto minimum 3.

II. Increase in No. of Members:

As per Section 3(1)(a) Every company shall have a minimum number of seven directors in the case of a public company. Therefore, as all the provision of public Company applicable on the deemed public Company.

There are two schools of thoughts:

A. Deemed public Company required to comply with the requirement of this section also and have to increase its member upto minimum 7.

B. Deemed Public Company not required increasing no. of Members upto 7. It can continue with 2 members.

III. Appointment of Independent/Women/Managing Director & KMP:

If Company fall under the limit of Section 149/203 then required to appoint Independent Director, Women Director and Key Managerial Personnel.

G. Disadvantages of Deemed Public Company:

In general on conversion of Private Company into Public Company or become deemed public Company, there are many advantages which such private Company loose. As we discussed above Private Company loose all it’s exemptions and many new provisions of the Act encumber on the Company.

Some Simple examples of disadvanges of become Deemed Public Company:

• Interested Directors can’t participate or vote in Board meeting.
• Related Parties are not allowed to vote in General Meeting.
• Appointment of Managerial Personnel subject to approval of Shareholder Meeting.
• Appointment of Director required candidature.
• Rotation of Auditor becomes mandatory irrespective of capital and turnover.
• Deposit from members is allowed only by complying of the provision of section 73.
• Offer for Right issue can’t be open before 3 days and can’t be close before 15 days.

H. Ways in which private company can become public Company:

Firstly by own desire, voluntarily under Section 14 of the Act. Under this method, private company passes general body resolution to convert itself into public Limited Company.

Secondly, by operation of law. Proviso of Section 2(71) contains provision relating to 'deemed' public company.

After conversion of a private company into public company, under any of the above stated methods, name of the private company gets changed to public company. For example, ABC (P.) Ltd. becomes ABC Ltd. whether private company has converted itself voluntarily or by operation of law.

There is no need to pass resolution for change of name, when private company becomes 'deemed limited'.

There are differences between the two methods under which a private company becomes a public company.

(1) Under the first method stated above, a private company, when it converts itself into a public company under section 14 of the Act, becomes public company and all the provisions relating to public companies under the Act become applicable to it.

(2) Under the second method, there are certain provisions of the Act, which do not apply to deemed public company.

Thus, all the provisions of public company apply to company, which converts itself under section 14 from private to public.

I. Status of foreign subsidiaries of Indian public companies

The Act is silent on nature of subsidiaries incorporated outside India by Indian companies. The laws of host country would govern the status of such subsidiary companies.

J. Status of Indian subsidiaries of foreign companies

The position of Indian companies which are subsidiaries of companies incorporated outside India is very clear by virtue of section 2(11) &2(71) of Companies Act, 2013. As per Section 2(71) A Body corporate can be Holding Company and as per 2(11) Body Corporate include Company incorporate outside India.

But Position under Companies Act, 2013 is different from Companies Act, 1956.

In Companies Act, 1956 If the foreign company is having such characteristics which makes it a public company in terms of the Act, its Indian subsidiary will also be regarded as a public company by virtue of section 4(7) of the Act if the entire share capital is not held by the foreign holding company itself or through its nominees.

In Companies Act, 2013 Its nowhere mentioned that Foreign Company will treat as public Company if such foreign company having characteristics which makes it a public Company in term of the Act. So its clear that if  a private Company is subsidiary of foreign Company it can’t be deemed public Company.

Clause (87) of Section 2 of the Companies Act, 2013, which corresponds to Section 4 of the Companies Act, 1956, has omitted sub-section (7) of Section 4 of the Companies Act, 1956. In view of such an omission, the question of a private company which is a subsidiary of a body corporate incorporated outside India being deemed to be a subsidiary of a public company does not arise.

K. Conclusion

When a private company becomes a subsidiary of public company, it comes under the definition of 'public companies' as provided in section 2(71) of the Act. Such change in the status of the company is by operation of law, and not based on discretion of the company. There is nothing in the law mandating the company to change its incorporeal status.  a private company shall cease to be entitled to the privileges and exemptions conferred on private companies by or under the Act, and the Act shall apply to the company as if it were not a private company.  The sections clarifies the legislative intent that such companies may retain their registered corporate shell of a private company but will be subjected to the discipline governing public companies.

Some general effects of conversion

(1) Where a private company becomes a public company by virtue of this section, any subsidiary of such company, if it was private company previously, will also become a public company,

(2) all the provisions such as those of sections 196,197 & 203 would have to be complied with.

Some Questions Arise in mind after reading of above provisions:

1. Whether OPC can be deemed Public Company?

2. Whether holding of Public will be considered as deemed public Company?

3. If a Company is subsidiary of LLP. Whether Considered as deemed public Company?

4. Can a deemed limited company convert itself into a private company?

5. Whether any time it can have more than 200 members.

6. Date of becoming a deemed limited Company.

7. Whether the company should amend the Memorandum and Articles of Association

8. Whether Foreign Company can be Public Company?

9. Whether Subsidiary of Deemed public Company will be treated as Deemed Public Company or Private Company?

10.  Whether provisions of Deemed Public Company Applicable on Government Companies.

[1] There are two schools of thoughts according to interpretation of some persons Deemed public Company not required to increase no. of members and directors because these are the basic characteristics of the Private Limited Company.