Meaning of “GOVERNMENT COMPANY” – some vital defects which need rectification.

[CA DEV KUMAR KOTHARI]

Control of company by government:

On the basis of controlling stake, a company can be controlled if one holds more than 50% voting rights.

In case of government company such stake can be held  by the Central government and / or by any one of more state governments.

 Therefore, what is required is more than 50% and not necessarily not less than 51% as prescribed in the meaning of ‘government company’ under the Companies Act, 2013. Similar meaning was also found in the Companies Act, 1956.

 It is surprising that the Companies Act, 2013 is considered to be an overhaul of old company law and has been passed after long deliberations and discussions over fairly long period of time. However, still it contains certain meanings on old lines and disregard ground realities.

Meanings of ‘Government company’  and related phrase "paid-up share capital":

Though heading of  S. 2 of the Companies Act,2013 is definition, and it is subject to contextual requirements, however, clauses (45) and (64) provides meaning of these two phrases. The same read as follows (with highlights added by author):

Definitions

     2. In this Act, unless the context otherwise requires,—

          (45) "Government company" means 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;

          (64) "paid-up share capital" or "share capital paid-up" means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called;

Discussion:

As per these meanings a company will be a government company, only if not less than 51% 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 also includes a company which is a subsidiary company of such a Government company.

As per meaning of "paid-up share capital" or "share capital paid-up", it will include all classes of share capital like equity shares, preferential shares, special class of shares etc. irrespective of differential and restricted voting rights.

As per existing meaning shares held by a government company in another company is considered only if first company is holding company. Suppose governments hold 45% stake and another 100% government company holds more than 5% stake, than total stake held by government along with 100% government company is more than 50%. However, as per existing meaning it will not be a government company. In view of author shares held by a government company in another company should also be regarded.

Defects in the meaning:

Author feels that there are some fundamental defects in the meaning of Government Company. Some of which are discussed below:

1. Holding of more than 50% of voting rights must be enough to make a company government company. There is no logic for requirement of not less than 51%.
2. The use of expression ‘of the paid-up capital’ is also not proper. A company may have several classes of share capital. Some of classes of shares may not confer voting rights for control of company. Therefore, shares carrying more than 50% of voting rights must be regarded for this purpose.

Conclusion:

Holding of equity shares conferring more than 50% of voting rights 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,  can be regarded as proper criteria for the meaning of ‘government company’.

Shares held by another government company should also be considered for the purpose of control of  more than 50% stake of government. 

Author requests to readers to inform him if he has missed some points about importance of words used ‘ not less than 51%’ in the meaning of government company.