When an Indian Private Limited Company can be regarded as deemed public company if its shares are held by a foreign parent company ?- AN INTERPRETA​TION ON SECTION 4(7) OF COMPANIES ACT, 1956

When an Indian Private Limited Company can be regarded as deemed public company if its shares are held by a foreign parent company ?

INTERPRETA​TION ON SECTION 4(7) OF COMPANIES ACT, 1956

Section 4(7) in The Companies Act, 1956

(7) 1[ A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.

If we analyse the above section ,the following can be construed:

1. The Indian Company is a private limited company

2. The foreign parent company would have to fall within the definition of public company under Indian Companies Act if it is incorporated India

3. The entire capital of Indian private limited company should have been held by the foreign company either singly or together with other foreign companies.

On further analysis , we can come into the following conclusion:

1.An Indian subsidiary company (private company ) is held by a foreign private limited company , then it will not be considered as the subsidiary of the said foreign company.

2. If the foreign parent company if does not fall under the definition of a public company under Indian Companies Act, then it will not be construed as subsidiary of such foreign company.

3.If the share capital of Indian private company is held jointly by an Indian investors or companies and along with foreign parent company , then it will not fall under the above section.

4. Where the entire share capital of an Indian company is held by two or more foreign body corporate or by a foreign body corporate along with a nominee shareholder holding a single share, the provisions of section 4(7) will not get attracted.

5. Where a foreign body corporate does not hold more than 50% of the equity share capital of the Indian company nor does it control more than 50% of total voting power of such company, the Indian company would not qualify as “subsidiary” of a foreign company, in which case the provisions of section 4(7) will not get attracted.

6. The charter and bye laws of foreign body corporate should contain following restrictions as imposed on a private company in India so as to ensure that if such company were incorporated in India it would have been a private company:

a. restriction on transfer shares;

b. limiting the number of members to fifty;

c. prohibiting any invitations to the public to subscribe for any shares in, or debentures of, the company;

d. prohibiting any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

If such provisions are there in the foreign parent company, then the Indian private limited company will not fall under the provisions of section 4(7).