But the term is not
defined under any of the statutes viz., Income Tax Act, Companies Act, 1956 and
2013 and the Income Tax Rules (Rule 10TA to Rule 10TG read with Section 92CB
dealing with Safe Harbour Rules.)
But, in the case of
Vodafone International Holdings B.V. vs Union of India & Another [2012] 17
Taxmann.com 202, the Supreme Court has defined Wholly owned subsidiary as
under:
"When a holding company owns all of the voting stock of the another company, the company is said
to be WOS of the parent company".
The word used by
the Apex Court is "all of the voting stock". In other words, no
other person holds any of the shares upon which voting rights are conferred, in
the subsidiary company. The Apex Court did not used the words “voting power” or
“voting rights”. It has used the words “voting stock”. As per
section 47(1)(a) and 47(1)(b), voting rights are associated with the share
capital. The intention of the Apex Court is thus the entire shareholding shall
be held by the holding company only.
Can we interpret
the words “voting stock” as it means
to “voting power” or “voting rights” ?
Even, if we
interpret the definition of “voting stock” as “voting power”, the following
issues arise:
1 Section 43(a)
prescribes two kinds of equity capital viz., with voting rights and with with
differential rights as to dividend, voting or otherwise in accordance with such
rules as may be prescribed; The words used are “with differential
rights”. Thus the rights can be differentiated or varied. It cannot
be seized altogether.
2) Again
Section 47(1)(a) mandates that every member of company limited by shares and
holding an equity capital shall have a right to vote on every resolution placed
before the company;
3) Section
47(1)(b) prescribes that his voting right on a poll shall be in proportion to
his share in the paid-up equity share capital of the company.
Hence, public companies cannot
be a 100% subsidiary of any company.
What about Private Company ?
As per Notification dated June
15, 2015 Section 43 and Section 47 are not applicable to a private limited
company.
But proviso to
Section 2(71) read as under:
“Provided that a
company which is a subsidiary of a company, not being a private company, shall
be deemed to be public company for the purposes of this Act even where such
subsidiary company continues to be a private company in its articles.”
By virtue of the
above proviso, a private company loses its status of a private company as and
when it becomes a subsidiary of a public company. In the eyes of Act, it is a public company
though it may retain the words “private” in its name and Memorandum and Articles
of Association. This is akin to Section
43A companies under the erstwhile Companies Act, 1956.
In other words,
exemption notification dated June 15, 2015 is not applicable to a private
limited company if it is a subsidiary of a public company and hence the Section
47 becomes operational.
In a nut shell, it is
inferred that the “Wholly owned subsidiary” concept seems practical and legally
sustainable, if and only if both the parent company and the subsidiary company
are private companies.
If such a case, the
subsidiary company can then issue shares with voting rights to the parent
company and shares without voting rights in a smaller value to other
shareholder, just to ensure compliance of the provisions regarding the minimum
number of members in a private company. Additionally, both the parent company
and the subsidiary company must not come within the purview of proviso to
Section 2(71).
Company Secretary GAURAV SHARMA+919990694230 Connect on Watts App with Gaurav Email us [email protected] Submit your guest articles for our website click here we will publish it Subscribe our Email updates like other 21,000 Members, Free/Easy/Comfortableway
