Types of Companies by Control and Purpose
Chapter Six
Syllabus topic 1.1, label: "Types of Companies"
Pages 29 to 34 of 830
In one line
The second way of sorting companies asks who controls them and what they exist for: whether another company controls them, whether the Government does, whether they trade at all, and whether they were set up for a special purpose the Act singles out.
In exam wording: besides the classification by liability and membership, the Companies Act 2013 recognises holding, subsidiary and associate companies under sections 2(46), 2(87) and 2(6); Government companies under section 2(45); foreign companies under section 2(42); dormant companies under section 455; Nidhi companies under section 406; producer companies under Chapter XXIA; and companies with charitable objects under section 8.
Why the law has this at all
Once companies can own shares in other companies, a single business can be spread across twenty legal persons. If the law looked only at each company on its own, a group could hide its debts in one subsidiary, its profits in another and its risks in a third, and no shareholder or creditor could see the whole.
So the Act defines the relationships between companies, and then uses those definitions to require consolidated accounts, to restrict loans and investments inside a group, and to stop the circular shareholding that would let a group own itself. The definitions in this chapter are the plumbing for a good deal of Modules II and III.
The other companies here exist for a different reason: they are ordinary companies doing something the Act wants to treat specially, either because the Government owns them, or because they do not trade, or because they are doing a job the law wants to encourage.
Some words this chapter uses
Control, for these purposes, is defined in each clause and is not left to ordinary language. Total voting power means the total number of votes that may be cast at a general meeting. A layer of subsidiaries means one step down the ownership chain. A joint venture is defined in the Explanation to section 2(6). An intellectual property is a right such as a patent or a trade mark. Beneficial interest means the real ownership behind a registered name.
The group relationships
Subsidiary, section 2(87)
A 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 voting power either at its own or together with one or more of its subsidiary companies.
The "or" is the point. There are two independent tests, and satisfying either one is enough. A company that holds only thirty per cent of the shares but can appoint or remove a majority of the board is a holding company just as surely as one that holds fifty-one per cent.
Types of Companies by Control and Purpose
Test (i), control of composition, means the power to appoint or remove all or a majority of the directors. Test (ii), more than one-half of the total voting power, is a bare arithmetic test, and the words "either at its own or together with one or more of its subsidiary companies" make it a group test: A holds thirty per cent of C directly and owns B, which holds twenty-five per cent of C. Together that is fifty-five per cent, so C is A's subsidiary.
The proviso limits layers. Such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed. The mischief is a chain of companies so long that nobody can trace who really owns the business at the bottom.
Holding company, section 2(46)
A company of which such companies are subsidiary companies. It is purely the mirror of section 2(87), so all the work is done there. The Explanation adds that for this clause "company" includes any body corporate, which matters because it brings in bodies that are not companies registered under this Act.
Associate company, section 2(6)
A company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence, and includes a joint venture company.
The Explanation defines both key terms:
- "significant influence" means control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement;
- "joint venture" means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
So the ladder is: twenty per cent or more but not control equals associate; control equals subsidiary. And note that significant influence has a second route that has nothing to do with shares at all: control of or participation in business decisions under an agreement. A company with no shareholding whatever can be an associate if there is such an agreement.
Section 19: a subsidiary may not hold shares in its holding company
This section exists to stop a group owning itself, which would let the same money be counted as capital twice.
Section 19(1) provides that no company shall, either by itself or through its nominees, hold any shares in its holding company, and no holding company shall allot or transfer its shares to any of its subsidiary companies, and any such allotment or transfer shall be void.
Types of Companies by Control and Purpose
Three exceptions in the first proviso, where the subsidiary holds the shares:
- (a) as the legal representative of a deceased member of the holding company;
- (b) as a trustee; or
- (c) where the subsidiary was a shareholder even before it became a subsidiary.
The second proviso restricts voting: a subsidiary within the exceptions may vote at a meeting of the holding company only in respect of the shares it holds as a legal representative or as a trustee, that is, under (a) or (b). So the (c) shareholding is tolerated but silent.
Section 19(2) deals with a holding company that has no share capital, being limited by guarantee or unlimited: the reference to shares is read as a reference to the interest of its members, whatever be the form of interest.
Government company, section 2(45)
Any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.
Three points. The threshold is not less than fifty-one per cent, so exactly fifty-one qualifies. The holding may be aggregated across the Centre and one or more States. And a subsidiary of a Government company is itself a Government company, which extends the definition a long way down a group.
A Government company is an ordinary company in all other respects. It is registered under this Act, it has shareholders and directors, and it can be sued. Being a Government company is not the same as being the Government, and the separate personality in section 9 applies to it exactly as to any other company.
Dormant company, section 455
Section 455(1) lets a company apply to the Registrar for the status of a dormant company where it is formed and registered for a future project or to hold an asset or intellectual property and has no significant accounting transaction, or where it is an inactive company.
The Explanation defines both terms and they are examinable:
- "inactive company" means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years.
- "significant accounting transaction" means any transaction other than: (a) payment of fees to the Registrar; (b) payments made to fulfil the requirements of this Act or any other law; (c) allotment of shares to fulfil the requirements of this Act; and (d) payments for maintenance of its office and records.
Types of Companies by Control and Purpose
Read (a) to (d) again. They are the four things a company must do simply to stay alive. Excluding them means a company can keep itself lawfully in existence without losing dormant status.
The rest of the section is machinery. The Registrar allows the status and issues a certificate, section 455(2), and maintains a register of dormant companies, section 455(3). Where a company has not filed financial statements or annual returns for two consecutive financial years, the Registrar shall issue a notice and enter its name in that register, section 455(4), so dormancy can be imposed as well as applied for. A dormant company must keep a minimum number of directors, file documents and pay an annual fee to retain the status, and may become active again on application, section 455(5). If it fails to comply, the Registrar shall strike off its name from the register of dormant companies, section 455(6).
Nidhi and producer companies, in one line each
A Nidhi, section 406, is a company incorporated with the object of cultivating the habit of thrift and savings among its members, receiving deposits from and lending to its members only, for their mutual benefit. It is a recognised class with its own rules and it appears again in [Government Companies, Registration Offices, Statistics and Nidhis].
A producer company is a company of primary producers, formed under Chapter XXIA, sections 378A to 378ZU, which was put into this Act in 2020. It has its own chapter, [Producer Companies].
A worked example
Anvi Holdings Limited owns forty per cent of Kesar Foods Private Limited and, under a shareholders' agreement, has the right to appoint four of Kesar's seven directors.
Is Kesar a subsidiary? Yes. Anvi does not have more than half the voting power, so test (ii) of section 2(87) fails. But it controls the composition of the Board, because it can appoint a majority of the directors, so test (i) is satisfied. Either test is enough.
What does that make Anvi? A holding company, by section 2(46).
What is Kesar's status as a private company? By the proviso to section 2(71), a private company that is a subsidiary of a company which is not a private company is deemed to be a public company. So if Anvi is public, Kesar is deemed public.
Kesar owns some shares in Anvi, bought last year. That is caught by section 19(1) and is void, unless it falls in one of the three exceptions. It does not: Kesar is not a legal representative or a trustee, and it bought the shares after becoming a subsidiary, so exception (c) does not apply either.
Types of Companies by Control and Purpose
Anvi also owns twenty-two per cent of Rangoli Spices Limited and cannot control it. Twenty-two per cent is at least twenty per cent of total voting power, so Anvi has significant influence and Rangoli is an associate company under section 2(6), not a subsidiary.
Distinctions that carry marks
| Subsidiary | Associate | |
|---|---|---|
| Section | 2(87) | 2(6) |
| Test | Control of Board composition, or more than one-half of total voting power | Significant influence: at least twenty per cent of total voting power, or participation in business decisions under an agreement |
| Relationship | Controlled | Influenced, but expressly not a subsidiary |
| Includes | Group holdings through other subsidiaries | A joint venture company |
| Dormant company | Inactive company | |
|---|---|---|
| Where defined | Section 455(1) and (2), a status granted by the Registrar | Explanation (i) to section 455, a factual description |
| How it arises | On application, or imposed under section 455(4) | Simply by not trading or not filing |
| Effect | Reduced compliance while the status lasts | None by itself; it is a qualifying condition |
What this does NOT mean
It does not mean fifty-one per cent is needed for a subsidiary. Control of Board composition is enough, at any shareholding.
It does not mean an associate is a small subsidiary. Section 2(6) expressly excludes a subsidiary. The two categories cannot overlap.
It does not mean a Government company is part of the Government. It is a company under section 9 with its own personality, and it sues and is sued in its own name.
It does not mean a dormant company is a dead one. It exists, it keeps directors, it files and it pays a fee, and it can be made active again under section 455(5).
Quick revision
- 2(87) subsidiary: control of Board composition or more than one-half of total voting power, alone or with other subsidiaries. Proviso: prescribed classes may not exceed prescribed layers.
- 2(46) holding: the mirror; "company" includes any body corporate.
- 2(6) associate: significant influence, not a subsidiary, includes a joint venture. Significant influence is at least twenty per cent of total voting power or participation in business decisions under an agreement.
- Section 19: a subsidiary may not hold shares in its holding company; any such allotment or transfer is void. Exceptions: legal representative, trustee, or a shareholder before becoming a subsidiary. Only the first two may vote.
- 2(45) Government company: not less than fifty-one per cent held by the Centre, a State, or both together; includes a subsidiary of such a company.
- Section 455 dormant: future project, holding an asset or intellectual property, no significant accounting transaction, or inactive. Four excluded transactions. Registrar may impose it after two years of non-filing.
- 2(42) foreign; section 406 Nidhi; Chapter XXIA producer companies; section 8 charitable.
Types of Companies by Control and Purpose
Test yourself
1. State the two tests for a subsidiary company. Section 2(87): the holding company either controls the composition of the Board of Directors, or exercises or controls more than one-half of the total voting power, alone or together with one or more of its subsidiaries. Either test alone suffices.
2. What is significant influence? Under the Explanation to section 2(6), control of at least twenty per cent of total voting power, or control of or participation in business decisions under an agreement.
3. A subsidiary buys shares in its holding company on the stock exchange. Is the purchase good? No. Section 19(1) makes any such holding, and any allotment or transfer to a subsidiary, void. None of the three exceptions in the first proviso applies to a purchase made after the company became a subsidiary.
4. Is a company in which the Central Government holds thirty per cent and the State of Maharashtra holds twenty-five per cent a Government company? Yes. Section 2(45) allows the holding to be partly by the Central Government and partly by one or more State Governments, and the aggregate here is fifty-five per cent, which is not less than fifty-one per cent.
5. What is a significant accounting transaction? Any transaction other than the four in Explanation (ii) to section 455: payment of fees to the Registrar, payments to fulfil the requirements of this or any other law, allotment of shares to fulfil the requirements of this Act, and payments for maintenance of the office and records.
6. Can the Registrar make a company dormant without an application? Yes. Under section 455(4), where a company has not filed financial statements or annual returns for two consecutive financial years, the Registrar shall issue a notice and enter its name in the register of dormant companies.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.