Application of section 379 of the companies act,2013
Guest
(Querist) 17 October 2016
This query is : Resolved
Suppose XYZ Ltd. have a step-down subsidiary (say Company B) outside India, which is wholly owned by their direct subsidiary outside India (say Company A). Company B has recently received RBI approval to set up a branch office in India.
Whether opening of Foreign Company B’s branch office in India will attract compliance under chapter XXII of the CA,2013? The point of contention here is that section 379 narrows the applicability of the chapter to only those Foreign Companies which have Indian equity holding of 50% or more. There is no reference of whether such holding should be “direct” or “indirect”. Therefore, in such a situation, since entire shares of Company B are held by another Foreign Company A, will the provisions of section 379 apply?
Kuummaar AS
(Expert) 20 October 2016
ARUN KUMAR MAITRA,
You have said, interalia,
"Suppose XYZ Ltd. have a step-down subsidiary (say Company B) outside India, which is wholly owned by their direct subsidiary outside India (say Company A)."
For proper advice in the matter, please answer:
1. Is it a hypothetical query as your query starts with "Suppose".
2. Explain the terms "Step-down subsidiary"
and "direct subsidiary"
kavksatyanarayana
(Expert) 20 October 2016
Hypothetical query. what are the terms and conditions as per the byelaws of the companay.
Kuummaar AS
(Expert) 21 October 2016
ARUN KUMAR MAITRA,
YOU WERE ASKED AS FOLLOWS:
QUOTE
ARUN KUMAR MAITRA,
You have said, interalia,
"Suppose XYZ Ltd. have a step-down subsidiary (say Company B) outside India, which is wholly owned by their direct subsidiary outside India (say Company A)."
For proper advice in the matter, please answer:
1. Is it a hypothetical query as your query starts with "Suppose".
2. Explain the terms "Step-down subsidiary"
and "direct subsidiary"
UNQUOTE
YOU HAVE NOT RESPONDED AND IT IS PRESUMED THAT IT IS A HYPOTHETICAL QUERY.
DOES NOT MATTER.
FOR OPINION IN THE MATTER, PLEASE CLARIFY SUBSIDIARY RELATIONSHIP AMONG COMPANY XYZ, COMPANY A AND COMPANY
.
DO YOU WANT TO SAY COMPANY XYZ IS HOLDING COMPANY AND COMPANY A IS ITS SUBSIDIARY. FURTHER, COMPANY B IS SUBSIDIARY OF COMPANY A?
Guest
(Querist) 21 October 2016
XYZ IS HOLDING COMPANY AND COMPANY A IS ITS SUBSIDIARY. FURTHER, COMPANY B IS SUBSIDIARY OF COMPANY A.
Kuummaar AS
(Expert) 21 October 2016
ARUN KUMAR MAITRA JI,
Section 2(87) of Companies Act, 2013 defines the term
"Subsidiary Company"
“subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company—
i. controls the composition of the Board of Directors; or
ii. exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation.—For the purposes of this clause,—
a. a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
b. the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
c. the expression “company” includes any body corporate;
d. “layer” in relation to a holding company means its subsidiary or subsidiaries;
The term “foreign Company” has been defined in section 2(42) of the Companies Act, 2013 as follows:
“foreign company” means any company or body corporate incorporated outside India which— (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
As per the definition, a company or body corporate incorporated outside India shall have place of business in India either in the form of having own office in India, or operating through agents in India.
And where a company or body corporate incorporated outside India, though not having any physical place of business in India, still it can be treated as ‘foreign company’ if it carries on any business in India through ‘electronic mode.
Section 379 of companies Act, 2013 provides as follows
Where not less than fifty per cent. of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more citizens of India or by one or more companies or bodies corporate incorporated in India, or by one or more citizens of India and one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India
Considering the above, as Company B (which is a separate legal entity distinct from its members), incorporated outside India, proposes to have a place of business in India, it will fall under Section 2(42). However, it does not satisfy conditions mentioned in Section 379. Thus, apparently, Company B, which is wholly owned by Company A (incorporated outside India ) is not required to comply with the provisions of the Chapter.
HOWEVER, with a view to EXAMINE it from “indirect” point of view, PLEASE PROVIDE SHAREHOLDING PATTERN OF COMPANY A AS WELL AS OF COMPANY B AND CITIZENSHIP OF INDIVIDUALS IN CASE THEY HOLD SHARES ON BEHALF OF COMPANY XYZ IN COMPANY A AND ON BEHALF OF COMPANY A IN COMPANY B.
ALSO INFORM
a) THE COUNTRY IN WHICH COMPANIES A AND B ARE INCORPORATED;
b) THE DEFINITION OF THE TERM "SUBSIDIARY" IN THE COMPANIES ACT APPLICABLE TO COMPANIES A AND B IN THE COUNTRY OF THEIR INCORPORATION and
c) THE LEGAL STATUS OF XYZ VIS-A-VIS COMPANY A AND COMPANY B IN COUNTRY WHERE COMPANY A AND COMPANY B ARE INCORPORATED.
H.M.Patnaik
(Expert) 22 October 2016
Mr. Maitra,
Pl. respond to queries raised by Expert above for further moderation of views.
Kuummaar AS
(Expert) 23 October 2016
Following is the position w.r.t. Wholly Owned Subsidiaries abroad UNDER THE CONTEXT and RBI Guidelines/Section 379 of Companies Act, 2013”
- “Wholly Owned Subsidiary (WOS)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment. Here, “THE INDIAN PARTY” includes a company incorporated in India
- Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a WOS abroad
- There are no restrictions on entities having WOSs abroad setting up second generation operating companies (step-down subsidiaries) within the overall limits applicable for investments under the Automatic Route. However, companies wishing to set up step-down operating subsidiaries to undertake financial sector activities will have to comply with the additional requirements for direct investment in the financial services sector.
- Under the Approval Route the Indian party is permitted, to issue corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries, provided the Indian Party indirectly holds 51 per cent or more stake in the overseas second level step down operating subsidiary for which such guarantee is intended to be issued.
- In the case of guarantees to be given on behalf of the first level step down operating subsidiary, these can be given directly by the Indian Party provided such exposures are within the permissible financial commitment of the Indian Party.
- An Indian Party ia required, inter alia, to report the details of the decisions taken by a WOS regarding diversification of its activities /setting up of step down subsidiaries/alteration in its share holding pattern within 30 days of the approval of those decisions by the competent authority concerned of such WOS in terms of the local laws of the host country. These are also to be included in the relevant Annual Performance Report; and
- An Indian Party, which has made an Overseas Direct Investment, has to submit an Annual Performance Report (APR) in Form ODI Part III to the Reserve Bank by 30th of June every year in respect of Wholly Owned Subsidiary (WOS) outside India set up by the Indian Party.
- The shares of a WOS can be pledged by an Indian Party as a security for availing fund based or non-fund based facility for itself or for the WOS, from an authorised dealer/ public financial institution in India or from an overseas lender, provided the overseas lender is regulated and supervised as a bank and the total financial commitments of the Indian party remains within the limit stipulated by the Reserve Bank for overseas investment from time to time.
Section 379 of companies Act, 2013 provides as follows
Where not less than fifty per cent. of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more citizens of India or by one or more companies or bodies corporate incorporated in India, or by one or more citizens of India and one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.
FROM THE ABOVE, IT CAN BE GATHERED THAT RBI GUIDELINES APPLY TO INDIAN PARTY (here Company XYZ) AND WHOLLY OWNED SUBSIDIARIES ( Here Companies A and B) AND EXPLICIT MENTION OF INDIRECT STAKE OF INDIAN PARTY IS THERE AT CERTAIN PLACES, EXAMPLES GIVEN BELOW
- “INDIAN PARTY HOLDS INDIRECT STAKE OF NOT LESS 51% IN THE STEP DOWN OPERATING SUBSIDIARY”
- “INDIAN PARTY INDIRECTLY HOLDS 51 PER CENT OR MORE STAKE IN THE OVERSEAS SECOND LEVEL STEP DOWN OPERATING SUBSIDIARY”
ON THE OTHER HAND SECTION 379 OF THE COMPANIES ACT, 2013 MENTIONS “ NOT LESS THAN 50% PAID-UP SHARE CAPITAL ….IS HELD BY ONE OR MORE CITIZENS OF INDIA OR BY ONE OR MORE COMPANIES OR BODIES CORPORATE INCORPORATED IN INDIA,…” AND DOES NOT SAY WHETHER THAT PAID-UP SHARE CAPITAL SHOULD BE “DIRECT” OR “INDIRECT”.. UNDER THE SITUATION, IT IS FELT THAT SUCH PAID-UP CAPITAL SHOULD BE TAKEN AS “DIRECT”.
Kumar Doab
(Expert) 23 October 2016
Expert Mr. Kumar AS has illustrated.
