Section 81(ia)

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udit sharma (Querist)
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13 February 2012 A Private limited is a wholly owned subsidiary of B Ltd. Paid up share capital of A Private Limited comprises of 50,000 equity shares of Rs.10/- each fully paid up. Out of the 50,000 equity shares, 49,994 shares are held by B Ltd. and one share each is held by six nominees of B Ltd. to comply with the provisions of Section 12 of the Companies Act, 1956.

Now, B Ltd. had infused 50 Crs. by way of share application money towards equity shares of A Pvt. Ltd. which is pending allotment till date. A Pvt. Ltd. intends to allot shares against the share application money pending allotment. Whether this will be treated as Preferential allotment under Section 81(1A) of the Companies Act, 1956 and it has to comly with the provisions of said section and Unlisted Public Companies (Preferential Allotment) Rules, 2003 as amended till date?

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CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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13 February 2012 Sec 81 is not applicable to private companies including those which are subsidiaries of public companies unless Articles of Association otherwise provides.

udit sharma

udit sharma (Querist)
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13 February 2012 Dear Mitesh

Agreed that Section 81 of the Companies Act, 1956 is applicable to Public Limited Companies. But if you look at the definition of Public Limited Company provided under Section 3 (1)(iv), it includes a Private Limited which is a subsidiary of a Public Limited Company. If a subsidiary of a Public Limited Company is not to be treated at par with a Public Limited Company, then what was the purpose of amending the definition of Public Limited Company in 2000?

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CS Mitesh Mehta

CS Mitesh Mehta (Expert)
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13 February 2012 I agreed that Private companies which are subsidiary of public companies are treated at par with Public companies,but not for all the provisions under the Act.

For e.g. Take Sec 77 (2), it reads as under;
No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company;

In section 77, Act has clearly differentiated Public Company & Private Company which is a subsidiary of public company. If Both Public Company & private company subsidiary of public companies are placed at par, why the legislature has mentioned both phrase ? they might have just mentioned public companies only.

Similarly in Sec 316 also state that [No public company and no private company which is a subsidiary of a public company] shall, after the commencement of this Act, appoint or employ any person as managing director, if he is either the managing director or the manager of 2[any other company (including a private company which is not a subsidiary of a public company)], except as provided in sub-section (2).

Even in certain cases, provisions are applicable only to private companies which are subsidiary of public company. e.g Sec 372A

My view is that only for certain provisions of the act, private company subsidiary of public company is placed at par with Public companies.

udit sharma

udit sharma (Querist)
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13 February 2012 Dear Mitesh!

The Sections you quoted were made applicable prior to amendment of definition of Public Limited Company. Prior to amendment in 2000, there was no calrity as to whether a Private Limited Company which is a subsidiary of a Public Limited Company has to be treated at par with a Public Limited Company and has to comply all the provisions of Companies Act, 1956 as are applicable to a Public Limited Company or has to comply with only those sections wherein it has been specifically mentioned that the section shall be applicable to Private Companies which are subsidiaries of Public Limited Companies.

But in 2000, definition of Public Limited Company was amended so as to include Private Companies which are subsidiaries of Public Limited Companies within the scope of Public Limited Companies.