The Hindu Business Line : When does private turn public?

The Companies (Amendment) Act 2000 had amended Section 3 of the 1956 Act to provide that a private corporate which is a subsidiary of public company will be public outfit.

The Amendment Act had specifically removed the category of `deemed public companies' under Section 43A of the Act. A deemed public company basically refers to a private company which is deemed to have become public under certain circumstances. However, such deemed public companies were permitted by Section 43A to retain the three restrictive conditions which are mandatorily required to be present in the Articles of a private company. These conditions, inter alia, restrict the free transferability of shares, and prohibit inviting the public to subscribe to the shares of the company.

The Amendment Act had also provided a summary procedure for conversion of a deemed public company into a private company. Thus, in effect, the legal position is that the law permits only two categories of companies — public and private.

However, notwithstanding this clear position, one basic issue still remains un-resolved: Can a private company which is a subsidiary of a public company continue to retain the three restrictive conditions in its Articles?

CLB vs High Court ruling

This confusion is further compounded by a recent decision of the Company Law Board (CLB) in Hillcrest Realty Sdn.Bhd vs Hotel Queenroad (P) Ltd [(2006) 72 CLA 245 CLB]. In this case, the CLB held that the basic characteristics of a private company do not get altered by the mere fact that such a company is a subsidiary of a public company.

The CLB further held that such a company may be a public company for the other provisions of the Act, but the three restrictive conditions contained in its Articles will continue to be operative.

This decision will only re-establish the position of a third category of companies, whereas the Amendment Act had categorically removed the same.

Incidentally, the Delhi High Court, in the Hotel Queenroad (P) Ltd vs Hillcrest Realty Sdn.Bhd [(2006) 68 SCL 197] case, held that "unless a private company is a subsidiary of a public company it cannot be treated as a public company."

The court, on this basis, denied voting rights of preference shareholders of a private company on the ground that it was not the subsidiary of a public company. The court's views are certainly in line with the spirit of the Amendment Act and should prevail.

However, the Government must clear the iota of confusion by further amending the Act so as to replace the words "nothing in this section will apply to a private company unless it is a subsidiary of a public company" by the words "nothing in this section shall apply to a private company."

(The author is Counsel — Company Affairs and Legal — of L&T Ltd, Mumbai.)

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