Applicability of Companies Act, 2013 on Indian Subsidiary of Companies Incorporated Outside India
The much awaited Companies Act, 2013 ('New Act') and Rules thereunder have finally been notified by the Ministry of Corporate Affairs, Government of India, to replace major parts of the Companies Act, 1956 ('Old Act'). With the enactment of the New Act, the corporate legal environment in India has acquired a more stringent face. It demands few cumbersome compliances and creates ambiguity in certain areas but its virtues outweigh the problems it brings. As for foreign investors, the New Act has brought immense relief.
If a company incorporated outside India intends to carry on its business in India by incorporating a subsidiary company in the country, then naturally its subsidiary company will have to comply with the Indian company law in addition to other local laws. As per the Old as well as New Act, a private subsidiary of a public company is deemed as a public company and is therefore required to comply with all the provisions applicable to public companies under the Indian company law. It implies that practically, an Indian public company is not allowed to do business through a private subsidiary and the very inclination of doing business in form of a private company originates from the fact that the Indian company law grants various exemptions and privileges to private companies pertaining to disclosure requirements and other compliances. Ordinarily, the Indian company law is applicable only on the companies incorporated in India, including companies incorporated as foreign companies i.e. the companies having a place of business in India.
However, under the Old Act, Indian subsidiaries of the foreign companies were also deemed to be public companies if their holding companies would satisfy the criteria of being a public company in India under the Old Act. The New Act seeks to change that position by giving discretion to the foreign companies as to the form and type of subsidiary they want to incorporate in India. Therefore, the foreign companies, even if compliant with the public company criteria under the Indian laws, are free to incorporate their Indian subsidiaries in the form of a private company.
Under the Old Act:
Section 3(1)(iv) specifically provided that a private subsidiary of a public company will be deemed as a public company for all purposes of company law. It is indisputable that the Indian company law is applicable to the companies formed and registered under the Old Act and any previous act and will therefore not apply to a company incorporated outside India. However, Section 4(7) of the Old Act was the enabling provision in this respect that defines how and when a foreign company may be considered to be a public company for its subsidiary in India. It provides that an Indian subsidiary of a foreign company will be deemed to be a public company only if such foreign holding company would be a public company if incorporated in India. The test is to ascertain whether such foreign company, as per its charter documents or AoA, will be a public company in India under the companies act for the time being in force i.e. whether or not its charter contains the restrictions imposed by the law regarding right to transfer shares, restrictions on number of shares, invitation to public to subscribe to share, debentures, deposits, as provided under law.
Therefore, if the foreign company had the forenamed restrictions in its AoA, it was implied that such company if had been incorporated in India with the same charter documents, will have the status of a public company and hence, so will its subsidiary in India.
Under the New Act:
Like Section 3(1)(iv) of the Old Act, Section 2(71) of the New Act also provides that a private subsidiary of a public company will be deemed as a public company. Interestingly, unlike Section 4(7) the Old Act, the New Act does not lay down any test or criteria to determine the status (public/private) of a company incorporated outside India. Therefore, in the absence of any corresponding provision of Section 4(7) of the Old Act, applicability of Section 2(71) could not be extended to the companies incorporated outside India and thus, such companies cannot be considered as a public company in India, which implies that now a subsidiary of a company incorporated outside India will not be deemed as a public company for the purpose of the New Act.
Going into the history of the New Act, it started with the Concept Paper notified by the Ministry of Company Affairs in 2004, as well as the J. J. Irani Committee Report that also made a reference to this question. Concept Paper had provided a draft bill which provided for the definition of 'public company' which was in line with the definition under the Old Act. The definition provided that any company which is a subsidiary of a public company or a body corporate incorporated outside India, if incorporated in India, to be a public company within the meaning of this Act, shall be a public company. However, the draft bills did not include any reference to the definition as discussed above.