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Muralidharan (Self Employed)     01 January 2009

Section 4(7) - Subsidiary of Public Company

My query to the forum is quite elaborative and could also be interesting.


XYZ Private Limited was incorporated under the provisions of the Companies Act, 1956 in the month of December 2007. The authorised share capital is Rs.25.00 lacs divided into 2,50,000 equity shares of Rs.10/- each. The paid-up capital is Rs.1.00 lac divided into 10,000 equity shares of Rs.10/- each. The subscribers to memorandum are holding these paid up shares.


A foreign public limited company is supposed to be the promoter of above said XYZ Private Limited. Due to some practical difficulties they could not involve themselves in the incorporation and hence two persons were identified to incorporate the above private company in India. They were named as the “first directors” and also the “subscribers to memorandum”. Each of them holds 5,000 shares of Rs.10/- each.


After incorporation the promoters (foreign public company) nominated and brought in their own persons as Directors on the board of XYZ Private Limited. The two persons appointed by the foreign company was appointed as “Additional Directors” and they shall hold office until the First Annual General Meeting held on 30th September 2008 pursuant to the provisions of Section 260 of the Act. The first directors had resigned from the board. Requisite Form 32 was filed with ROC for both appointment and resignation.


The shares held by the subscribers / first directors are yet to be transferred in favour of the promoter (foreign public limited company). The said transfer of shares in favour of foreign company requires approval of RBI (necessary application is to submitted through authorised dealers to RBI – procedure has been prescribed by RBI under FEMA guidelines)


The overseas promoter (foreign public limited company) also brought in Rs.24.00 lacs as share application money.


At the Board meeting held on 21st July 2008 one of the Additional Directors (nominee of foreign company) was also appointed as “Whole Time Director” of XYZ Private Limited with effect from 1st August 2008. The Board also approved suitable remuneration payable to the whole time director. Requisite Form 32 was filed with ROC. However Form 23 not filed with ROC as there is no requirement for the same. The appointment of whole time director and payment of remuneration was made / approved keeping in mind that XYZ is a private limited company.


At the same Board meeting held on 21st July 2008, 2,40,000 equity shares of Rs.10/- each was allotted to the overseas promoters (foreign public company) and necessary forms / declarations have been filed with ROC / RBI.


Consequent to the allotment of shares to its promoters, XYZ Private Limited has attracted the provisions of Section 4(7) of the Companies Act, 1956 and has now lost its status as a “Private Limited Company”. This is because the entire shareholding of XYZ Private Limited is not held by the foreign public limited company. This status shall continue until the 10,000 shares held by the subscribers are transferred in favour of the foreign company.


In this connection I request the forum to kindly clarify:


1.            Whether XYZ has to follow the provisions of Section 257 of the Act in respect of appointment of Directors at the first AGM. (Additional Directors will be appointed as Directors at the said AGM).


2.            Whether XYZ has to file Form 23 with ROC along with copy of Board Resolution since both the appointment of whole time director and allotment of shares to foreign company took place on the same date (21.07.2008). (Note : As said above only Form 32 was filed)


3.            Whether the Company has to follow the rules and regulations as stipulated under Section 198, 269, 309, 310 read with Schedule XIII to the Act, in respect of appointment of Whole Time Director and payment of remuneration.


4.            Whether approval of Members has to be obtained at the First AGM in respect of appointment of “Whole Time Director” and payment of remuneration.


5.            Whether the company has to increase its strength of the Board to Three. (At present there are only two directors who were appointed by the foreign company)


6.            Whether the company has to increase its number of members to seven.


7.            Whether 9,999 shares (held by the subscribers) alone can be transferred in favour of the foreign company, leaving behind one share in the name of an Indian member. (As per Companies Act, there should be minimum two members in a private limited company). If done so will this satisfy Section 4(7), which stipulates that entire holding should be held by the foreign public company?


8.            Suppose if Point No.7 is not possible and if we decide to transfer the entire 10,000 shares in favour of foreign company. Can the same be registered in joint names (First Name will the “Foreign Public Company” and the Second Name will be “one of the Directors” of the Company). Will this satisfy the two member / quorum requirement for a private limited company.


9.            Suppose if Point No.7 and Point No.8 is not possible, please clarify whether the following will be in order:


10,000 shares held by the subscribers shall be transferred in favour of one of the director. The company will obtain declaration in Form I and Form II pursuant to the provisions of Section 187(C) from the “Director” as well as from the “Foreign Public Company”. The company will file Form III with ROC declaring that the “Beneficial Interest” in respect of these shares is with the foreign company. If done so will this satisfy Section 4(7) of the Act?


Please suggest a good solution to get out of this mess.


With regards






 4 Replies

Manish Singh (Advocate)     02 January 2009

Dear Mr Dharan,

according to sec 4(7) of the companies act, if in any private company incorporated in india, any amount of its share capital is held by any individual worldwide or any body corporate in india, that company shall be deemed to be a pv co being subsidiary of a public co so liable to follow all the procedures applicable for the same.

but in your case since you have appointed a nominee as an individual, it wont come under the purview of this definition.

the nominee must be a body corporate. 

Lalitha (Company secretary)     04 January 2009

Mr. Murlidharan,
It is really amazing to see your knowledge in Companies Act. It is great!
Well, as far as Section 4(7) is concerned, I would suggest to keep the XYZ co. as private company by selecting option given by you in clause 9. Allot all most all shares to foreign company and one share to the nominee director and file form III with ROC along with Form I and II. This will provide the status of Wholly Owned Subsidiary to XYZ co. It will also take care of minimum membership in pvt. co. All other requirements such as filing form 23, compliance of Sch XIII, Section 198, 269 do not arise. Basically point no.3,4,5 and 6 do not arise. Hope, after allotment of shares to foreign co., form 2 is filed with ROC. Appointmnet of additional directos need to be ratified in the AGM and form 32 to be filed by changing designation of directors (i.e. from 'additional directors' to 'directors').

Arbind Kumar (Job)     19 February 2009

thanx with murlidharan Sir, for good knowledge

I also agree with Lalitha Sir/Mame


ar (L O)     26 September 2009

Hi Lalitha ji,

liked your depth of practical knowledge.  i have a querry too. (all readers are welcome to contribute too...:)  :-

Facts :

ABC pvt ltd. is an indian pvt ltd company incorporated under the automatic route ( ITES) with 99% shareholding held by a foreign body corporate and 1% also held by another foreign body corporate.  Total authorised capital of 10 lacs has been fully paid by SUBSCRIPTION to memorandum of association by both the bodies corporates .

Q.1: What forms are required to be filed with R B I / ROC after incorporation; if any. If the same have not been filed can they be filed now ( the company was incorproated in March 2005.)

Q.2. ABC pvt ltd ( company ) being a subsidiary of the foreign company..can it allot further shares to (after increase of share capital from 10 lacs to 3 crores) to an NRI (owner of the body corporate having 99% sharecapital) . If yes can the shars be alloted against the properties in india owned by the said NRI - as consideration other than cash. If yes what are the various forms/filing requirements with rbi/roc.

Q3. Can the shares so alloted TO  NRI against proeprties brought in ( through legal stamp duty payments and due registrations route) be nominated in favour of the body corporate since he is 100% percent of the said body corporate in  U S.  Or Can such shares be directly allotted to the said body corporate against the properties brought in by the NRI.

Pl. inform.  Hope it made an interesting case study for all.

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