Applicability of other provisions of the Companies Act on deemed conversion by virtue of the section - Companies Law - Letter No. 48(50)‑CL-IV/61,

Circular : Letter No. 48(50) ‑ CL-IV/61, dated 12 ‑ 2 ‑ 1962. Subjects:- Applicability of other provisions of the Companies Act on deemed conversion by virtue of the section 1. By virtue of new section 43A, a number of private companies became public companies with effect from 28‑3‑1961. A company, which was a private company before the enactment of section 43A, will, however, continue to remain so, if it fulfils immediately before 28‑3‑1961 either of the conditions laid down under sub‑section (6) thereof. 2. All the provisions of the Act which are applicable to a public company will, after 28‑3‑1961, generally apply to a company which has become a public company by virtue of section 43A. However, the provisions of sections 12(1) and 45 which require a public company to have at least seven members will not apply to a deemed public company. The articles of association of such a company may continue to contain a provision similar to that in section 3(1)(iii) which is applicable to private companies. Section 44 also is not applicable to a private company, when it becomes a public company by virtue of section 43A and consequently such a company will not be required to file with the Registrar a statement in lieu of prospectus under section 44(1)(b). When it intends to raise subscriptions from the public, the company must comply with the requirements of section 70. 3. The provisions of sections 198, 269, 309, 310, 311, 387 and 388, etc. which govern, inter alia, the appointment and re‑appointment and the payment of remuneration to managing and whole‑time directors or managers apply to deemed public companies. The provisions of section 269(1) will not, however, apply to a person holding the office of managing or whole‑time director or manager of such a company for a period not exceeding 5 years from 28‑3‑1961, provided he was holding the office immediately before it became a public company, but the restrictions contained in sections 198, 309, 310, 311 etc., would automatically be applicable to such companies from the date they became public companies, i.e., 28‑3‑1961. Some companies are under the impression that the amended provisions contained in sections 198 and 309 would not apply in cases where the terms of appointment were settled or approved before the Amendment Act was passed. This is not correct. It further appears that on the basis of the provisions contained in sub‑section (8) of section 309 some companies have taken the view that these sections are applicable to them only from the next financial year. Apparently, the words this Act occurring in the said sub‑section have been taken to refer to the Companies (Amendment) Act, 1960 which came into force on 28‑12‑1960. This is not correct and it is pointed out for the information of all concerned that section 309 with all its existing sub‑sections has been in force since 1‑4‑1956, when the Companies Act was promulgated. The Companies (Amendment) Act, 1960 has brought about certain changes in the existing sub‑sections. The words this Act occurring in sub‑section (8) of section 309 , therefore, refer to the Companies Act which came into force on 1‑4‑1956, and not to the Companies (Amendment) Act, 1960. The provisions of sections 309 and 198 would, therefore, be applicable to public companies of the type referred to above with effect from 28‑3-1961. Since the restrictive provisions of the Act relating to payment of remuneration to managerial personnel did not apply to private companies, the remuneration had, in most cases, been fixed by the companies without reference to the modes of payment authorised under the Act or the ceilings prescribed thereunder. It would, therefore, be necessary for many of these companies to change the mode of payment of managerial remuneration and also seek the Central Government s approval, wherever necessary, under sections 309, 310 and 198, as the case may be. Some companies have already sought the Central Government s approval in this behalf. Other companies, which for some reason or other have not sought Government s approval so far, should do so immediately in their own interest as otherwise they will be violating the law with its attendant consequences. 4. For purposes of calculating the total number of shareholders in terms of section 43A(6)(b)(iii), common shareholders of the private company and of the shareholding company should be counted separately. 5. The word held used in sub‑section (1) and elsewhere in section 43A does not mean beneficially held since companies are not permitted under section 153 to recognise trust or nominee holdings. Nominee holdings, however, are permissible to the extent they are provided for in sub‑sections (2) and (3) of section 49 and companies, which seek exemption from the provisions of section 43A under sub‑section (6)(a) thereof, would not be entitled to such exemption unless holdings by nominees of the parent company are restricted to what is permitted to under sections 49(2) and 49(3). For this limited purpose, the Department has construed the word company appearing in these two sub‑sections to include a body corporate . 6. In respect of the various representations made to the Central Government to the effect that a large number of private companies which had technically become public companies on 28‑3‑1961 under the provisions of section 43A(1) could not, for one reason or the other, reorganise their shareholdings before 28‑3‑1961 so as to enable them to continue as private companies, Government has taken an administrative decision that no proceedings would be launched against such of those companies as were able to reorganise their shareholdings before 31‑12‑1961 at the latest. All those companies which were able to avail of this administrative concession would be deemed to have continued as private companies and no insistence will be placed on them by the Department to comply with the requirements of sub‑sections (2) and (4) of section 43A. Where, however, for its own protection any such company applies for the approval of Central Government under section 43A(4), it should first fulfil the obligations imposed on it under section 43A(2) and then only seek Central Government s approval under sub‑section (4). 7. Companies which have failed to reorganise their shareholdings by 31‑12‑1961 would be deemed to have become and continued as public limited companies on and from 28‑3‑1961 and would become liable to penal proceedings as prescribed in law for failure to comply with the provisions of sub‑section (2) of section 43A as well as other provisions of the Act applicable to public limited companies.