Section 3(1)(iv) clarification

udit sharma (Company Secretary) (2303 Points)
Replied 17 November 2010

Hi Ankit......

Agreed with your interpretation of section 3(1)(iv) of the Companies Act, 1956. I also had the same query and searched a lot about any MCA Circular or clarification in the matter but could not find any.

However, as per my understanding..... In case a Private Company becomes a subsidiary of a Public Limited Company, it can retain the basic characterstics of a Private Company as under section3(1)(iii) of the Companies Act, 1956. Hence. no need to increase the paid up capital of the Company from Rs.1,00,000/- to Rs.5,00,000/-

The reason being in case you increase the paid up capital, no. of members, no. of Directors and alter the provisions contained in the Articles of Association of the Company so as to remove the basic characterstics of a Private Company and it will become a Public Limited Company and will not be covered by clause(c) of section 3(1)(iv) of the Companies Act, 1956.

Clause(c) of section 3(1)(iv) of the Companies Act, 1956 provides"any private Company which is a subsidiary of a Company which is not a Private Company"

Hence, a Private Company (it means u can retain the basic characterstics of a Private Company as prescribed under section3(1)(iii) of the Companies Act, 1956) which is a subsidiary of a Public Company will be covered under the definition of a Public Company

Hence, in my opinion if a Private Company has become a subsidiary of a Public Company:

1. It need not increase the paid up capital of the Company from Rs.1,00,000 to Rs.5,00,000/- as the paid up capital is one of the basic characterstics covered under section 3(1)(iii) of the Companies Act,1956.

2. However, you will have to increase the number of members to 7 as provided under section 12 of the Companies Act, 1956 and the number of directors from 2 to 3 as provided under section 252 of the Companies Act, 1956 and will be required to comply with all the provisions of the Companies Act, 1956 as are applicable to a Public Limited Company.

However, this is my opinion based on my interpretation of the provisions of the Companies Act, 1956 and views of other eminent experts are welcome:-)

Ankur Garg (Company Secretary and Compliance Officer) (114778 Points)
Replied 17 November 2010

If a private company becomes the subsidiary company of a public company then this private company would be treated as public company for a few sections of Companies Act, 1956.

However this private company would be considered as a private company as far as basic features of a private company are concerned. So it can continue with 2 directors, 2 members, paid up capital of Rs. 1 lacs.

Regards

1 Like

udit sharma (Company Secretary) (2303 Points)
Replied 17 November 2010

Ankur Sir.....

But the basic characterstics of a Private Company are as defined under section 3(1)(iii) of the Companies Act,1956 and it covers only the paid up capital of the Company. So, in my opinion no need to increase the paidp capital of the Company but u will have to increase the number of members and number of Directors accordingly.......

Ankur Garg (Company Secretary and Compliance Officer) (114778 Points)
Replied 17 November 2010

Originally posted by : udit sharma
	Ankur Sir..... But the basic characterstics of a Private Company are as defined under section 3(1)(iii) of the Companies Act,1956 and it covers only the paid up capital of the Company. So, in my opinion no need to increase the paidp capital of the Company but u will have to increase the number of members and number of Directors accordingly.......

No Bro there is no need to increase number of members or directors just bcoz a private company becomes subsidiary of a public company, for sure. However for your satisfaction wait for other opinions.

Best Regards

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 17 November 2010

Just because the Private Company becomes the subsidiary of a Public Company, the Basic characteristics of a private company in terms of section 3(1)(iii) of the Act do not get altered.

It would be considered as Public Company in relation to other provisions of the Act but not with reference to its basic charactheistics. In terms of that section, a Copmpany is a Private Company having paid up capital of100000 or such higher paidup capital as may as be prescribed and when its articles;

restict the right to transfer of shares;

Limit its membership to 50; and

prohibits invitation to public to subscribe to it shares or debentures.

prohibits any invitation to accept deposits except its members, directors or their relatives.

Therefore, 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.

CA Sandeep Kumar (Audit Assistant) (804 Points)
Replied 17 November 2010

Private Limited companies are exempted from compliance from so many provisions of the companies act as public in general are not substantially involved in such companies, the government need not worry about those companies, hence such closely held companies enjoy a lot of Privileges, therefore only few basic features of company form of an organisation are embedded into such companies. Taking this advanatge many public limited companies floated subsidiaries which were private ltd companies and continued enjoy the benefits indirectly. Hence wherever there is a provision relating to public ltd companies, such provisions are applicable to private companies which is subsidiary of public companies, they are deemed public companies. However features of private company will contiue to exist in them.

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 17 November 2010

Regarding number of Directors: before the commencement of Companies (Amendment) Act, 1960 it was required to increase the number to 3. However, this requirement has been ommitted by the Companies (Amendment) Act, 1960.

Now, there is no need to increase the number of directors to 3.

Now as per section 252 Every public ompany shall have at least 3 directors

under section 252(2) EVERY OTHER COMPANY SHALL HAVE ATLEAST 2 DIRECTOR.

1 Like

CS Ankur Srivastava (Company Secretary & Compliance Officer) (17853 Points)
Replied 17 November 2010

Regarding Capital no need to increase as it is its basic characteristics... defined under section 3(1)(iii)..

udit sharma (Company Secretary) (2303 Points)
Replied 17 November 2010

Originally posted by : CS Ankur Srivastava

Regarding number of Directors: before the commencement of Companies (Amendment) Act, 1960 it was required to increase the number to 3. However, this requirement has been ommitted by the Companies (Amendment) Act, 1960.

Now, there is no need to increase the number of directors to 3.

Now as per section 252 Every public ompany shall have at least 3 directors

under section 252(2) EVERY OTHER COMPANY SHALL HAVE ATLEAST 2 DIRECTOR.

Hi Ankur Sir!

As you rightly said in your quote that a Public Company shall have at least 3 Directors. But my question is as per definition of Public Company given in section 3(1)(iv), Public Company includes a Private Company which is a subsidiary of a Company which is not a Private Company. So a Private Company which is a subsidiary of a Public Company is also required to have at least 3Directors!!!!!!!

CA Sandeep Kumar (Audit Assistant) (804 Points)
Replied 17 November 2010

According to CLB decision in Hillcrest Realty Sdn.Bhd Vs Hotel Queen Road Pvt Ltd., (2006) 71 SCL 41 (CLB Delhi), the basic characteristic of a pvt ltd company in terms of section 3(1)(iii) do not get altered just because it is a subsidiary of public company in view of the fiction that it is a public company in terms of section 3(1)(iv)(c) of the act.

PLease go through the decision in detail if you can get access to the same.

udit sharma (Company Secretary) (2303 Points)
Replied 17 November 2010

Hi sunny!

Can u please explain me what do you mean by the basic characterstics of a Private Company???? In my opinion the basic characterstics of a Private Company are as provided under section3(1)(iii) and these do not cover minimum number of Directors and members. The same is required to be increased in case of Private Company becoming a subsidiary of a Public Company!!!!!! This is my personal opinion based on the practice i have followed in my Company!!!!!

Ankur Garg (Company Secretary and Compliance Officer) (114778 Points)
Replied 17 November 2010

Originally posted by : udit sharma
	Hi sunny! This is my personal opinion based on the practice i have followed in my Company!!!!!

Bro before my surrender i'd like to say something:

Let me tell your practice and opinion both ~~are incorrect~~ need revision and analysis. So would request to go for some professional and paid advise as you are not ready to accept any point of view and mentioning the same thing again and again. Section 3(1)(iii) is not defining the basic features. In fact they are to be decided collectively and no. of member and no. of director are those part of a pvt. company which need not to be altered just bcoz this pvt. co. is subsi of a public company. Basic feature is a subjective term.

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 17 November 2010

One more doubt in continuation of the above discussion will CARO be applicable to such a company as the same is included in the defination of public company to which CARO applies say A Pvt. Ltd. So will it apply to such a company? If the same was not a subsidiary of a public company then CARO would not apply to A Pvt. Ltd.

Also I have seen some susidiaries of listed companies having paid up capital of Rs. 1 lakh and not following CARO reporting but to be on the safer side i gave details as required in annexure to the report though the paid up capital was Rs. 1 lakh only.

Ankur Garg (Company Secretary and Compliance Officer) (114778 Points)
Replied 18 November 2010

Adi Bhai,

Only those things and sections will apply to such private company, which is subsidiary of a public company, specifically mentioned by law. For example section 269 of Companies Act, 1956.

So in my opinion CARO is not applicable to such private company, which is subsidiary of a public company.

Wait for other sound opinions.

Thanks