3.3 Query: Allotment of shares of a holding company to its subsidiary company.
1. ABC Limited is a public limited company. Its shares are listed for trading on various stock exchanges. It holds 100% of issued capital of XYZ limited, a public limited company. As such, XYZ Limited is wholly owned subsidiary of ABC Limited. XYZ Limited in turn holds approximately 27% of shares issued by PQR Limited, another public limited company.
2. As per the querist, a proposal is being made for amalgamation of PQR Limited with ABC Limited. Under the scheme of amalgamation, ABC Limited will issue shares to the shareholders of PQR Limited in the ratio proposed in the scheme of amalgamation. Consequent upon the amalgamation of PQR Ltd. with ABC Ltd., XYZ Ltd. will become a shareholder of ABC Ltd., i.e., its holding company, and ABC Ltd. will be required to issue shares to XYZ Ltd., against the shares of PQR Ltd. held by XYZ Ltd. This will result in XYZ Ltd., subsidiary company, holding shares in ABC Ltd, its holding company.
3. The querist has sought the opinion of the Expert Advisory Committee in respect of the following issues:
(i) Whether ABC Ltd. can allot shares to XYZ Ltd., its subsidiary company, in lieu of shares of PQR Ltd.?
(ii) Whether XYZ Ltd. can hold shares in ABC Ltd., its holding company?
(iii) Whether XYZ Ltd., will be entitled to voting rights, dividends, rights shares, bonus shares and such other benefits as may accrue from time to time on the shares of ABC Ltd. held by it.
(iv) Whether any permission is required by XYZ Ltd. or ABC Ltd. for holding shares in ABC Ltd. (holding company) or allotting shares to XYZ Ltd. (subsidiary company) respectively, and if so, what is it and under which provision?
(v) The Committee may also give its opinion regarding any other issue, as may be considered relevant under the facts and circumstances of the above case. Opinion May 4, 1994
1.The Committee notes section 42 of the Companies Act, 1956, which reads as follows:
“42 (1) Except in the cases mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void.
(2) Nothing in this section shall apply –
(a) Where the subsidiary is concerned as the legal representative of a deceased member of the holding company; or
(b)Where the subsidiary is concerned as trustee, unless the holding company or a subsidiary thereof is interested under the trust and is not so interested only by way of security for the purposes of a transaction entered into by it in the ordinary course of a business which includes the lending of money.
(3)This section shall not prevent a subsidiary from continuing to be a member of its holding company if it was a member thereof either at the commencement of this Act or before becoming a subsidiary of the holding company, but except in the cases referred to in sub-section (2), the subsidiary shall have no right to vote at meetings of the holding company or of any class of members thereof.
(4) Subject to sub-section (2), sub-sections (1) and (3) shall apply in relation to a nominee for a body corporate which is a subsidiary, as if references in the said sub-sections (1) and (3) to such a body corporate included references to a nominee for it.
(5) In relation to a holding company which is either a company limited by guarantee or an unlimited company, the reference in this section to shares shall, whether or not the company has a share capital, be construed as including a reference to the interest of its members as such, whatever the form of that interest.”
2.On the basis of the above, the Committee is of the following opinion in respect of the issues raised at para 3 of the query:
(i) No.
(ii) No.
(iii) to (v) These questions do not arise in view of (i) and (ii) above. __________________________ |