DEEMED PUBLIC COMPANY
DEEMED PUBLIC COMPANY
Subsidiary of Public Limited Companies
Index of Article:
I.
History
II.
Current Situation
III.
Deemed Public Company! How to Check?
IV. Restriction of Deemed Public Company: (Provisions
of the act which do not apply to a public Company)
V.
Effects of the Become Deemed
VI. Compliances required to be done by a Private
Company immediately after become deemed Public Company
VII.
Disadvantages of Deemed Public Company
VIII.
Ways in which private company can become public
company
IX.
Status of Foreign Subsidiaries of Indian Public
Company.
X.
Status of Indian Subsidiaries of Foreign Company
XI.
Conclusion
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of the Act, which has been repealed by the Amendment Act, provided the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.
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:
i.
Subsidiary of a Public Company
ii.
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:
ü
|
May retain the restrictions in its articles
as applicable to a private company and therefore, constitutionally, be a
private company;
|
ü
|
May retain its name as a private company;
|
ü
|
Since, due to its parentage, the company
acquires a public interest status, such company cannot be entitled to the
privileges of a private company.
|
ü
|
Maximum No. of member can’t be exceed 200.
|
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:
|
|
Section 185:
|
Deemed
Public Company are not allowed to give loan, guarantee, investment,
securities to directors and person interested in directors even after
fulfilling all the condition given in exemption notification.
|
Section 101-107
|
Provision
of Section 101-107 will apply on the deemed public company instead of the relaxation
mentioned in its Article of Association.
|
Section 197
|
For
payment of remuneration to directors Company required to follow the
provisions and limits given under Section 197
|
Section 73(2)
|
For acceptance of deposit from members private
company not required to comply with the conditions of clause (a)-(e) of
Section 73(2). But in case of deemed public Company its required to comply
with the conditions of clause (a)-(e) of Section 73(2).
|
Acceptance of deposit from relative of Director
|
Deemed
Public Company can’t accept deposits from the relative of directors until
unless its comply with the provision of Section 73
|
Section 160,
162, 180, 188(1), 67,
|
Company required to comply with the provision
of these section also.
|
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:
|
|
Section 203
|
Key Managerial Personnel’s provisions will be applicable on the
Private Limited Company i.e. if Company have turnover more than 10 crore
required to appoint KMP’s.
|
Section 149
|
If Company fall into the limits given under section 149 then company
required to appoint Independent Director, Women Director
|
Section 177/178
|
If Company fall into the limits given under section 149 then Company
required to constitute the Audit Committee and Nomination & Remuneration
Committee
|
Section 139(2)
|
Rotation of auditor will also applicable on Deemed Public Company.
|
Section 204
|
Secretarial Audit will also applicable on Deemed Public Company if
its fall under the limits of Section 204.
|
All other sections of the Companies Act with are applicable on Public
Limited Company became applicable on Private Limited Company.
|
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.
good article and good explanation.
ReplyDeleteVery helpful
ReplyDeleteNice Article.
ReplyDeleteCan you please provide the format of reconstitution of partnership deed in case when one partner is retiring and at the same time a new partner is admitting in the firm...
(divishagill@gmail.com)
Very Nicely Explained.
ReplyDeletevery helpful article
ReplyDeleteThank you all.
ReplyDeleteHi Mr. Divesh. Thank you for the Informative Article. Could you please provide your view on applicability of Section 152 (6) i.e., Appointment of Directors retiring by rotation. ??
ReplyDeleteI meant applicability of Section 152 (6) to deemed public company in my previous comment
ReplyDeleteIf my pvt company became deemed public company then does the pvt company require to change its name compulsorily or company can still use PVT LTD as suffix to its name ?
ReplyDeletecan u plz tell the maximum number of members in the case of deemed public limited company
ReplyDeleteHi...Nice Article...Just correct 7 members instead of 7 Directors in Sr. No. F (ii)
ReplyDeleteis it mandatory for deemed public company to comply with rule 9a of the Companies (Prospectus and allotment of securities) Rules, 2014?
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