Holding and Subsidiary Companies, with Cross-border transactions

By:

P. Santosh Kumar (09FN-075)

Prabal Pratap Singh (09FN-076)

Pushkar Kumar Singh (09FN-082)

Rajani Singh (09FN-087)

Rajeev Kumar (09FN-088)

Varun Dhupar (09FN-114)

Holding Company

Subsidiary1

Definition (Section 4, Company Act)

Subsidiary2 Subsidiary3

Controls composition of the board

Holds more than half of equity share

capital in nominal value

Holds the holding company

Definition: Holding and Subsidiary

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Controls Board

Controls Board

Appoints a director who couldn’t have been appointed otherwise

A person appointed as a direct rot manager or to another office of employment becomes director

Nominates a director

Holds at least half of equityHold at least half equity

Has more than half of the equity share capital in nominal value

Holds at least half of total voting share if preference share holders have the same voting right as the equity share holders

ExcludesShare or power held in fiduciary capacityShare or power held by provisions of

debenturesShares or power held by a lending company

Example

Example

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Special Case: Foreign Holding

Foreign holding company

• Indian company is subsidiary/holding only if it is holding/subsidiary in of foreign company as per the law of that country.

• In case one company is foreign company, provisions of Indian Company Act is not relevant.

• Example: Vedanta Group

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Twinstar acquiring the shares of SterliteTwin

• Patriarch DP Agarwal founded a company called Twinstar Holdings Limited in Mauritius with a nominal equity capital base of $ 100 in 1993.

• Twinstar commenced operations as the subsidiary of a company

incorporated in Nassau, Bahamas, in November 1992, called Volcan Investments Limited, which had an even lower capital base — only $2, or not even Rs 100.

• Twinstar acquired the shares of Sterlite and various investment companies controlled by group promoters.

• On April 29, 1999, the investment companies were liquidated and all the shares of Sterlite came under Twinstar’s possession, making it the 100 percent owner in the investment companies. 4

• A company is an artificial legal person and the directors as a body endow the artificial legal person with human face than can act and react.

• According to the act (Company Law) “director” includes any person occupying the position of director, by whatever name called.

• The persons, through whom a company acts and does its business, are termed as directors.

• Collectively known as Board of Directors

Board of Directors

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Appointment of Directors

Foreign holding company

• Appointment by third parties (nominee directors)

• By proportional representation

• Appointment by central government

• Appointment by small share holders

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Removal of Directors

Foreign holding company

• By Shareholders: Shareholders have the right to remove a director by passing an ordinary resolution

• By Central government

• By Tribunal (NCLT)

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Managing Director

Foreign holding company

• A director who is entrusted with substantial powers of management which would not otherwise be exercisable by him

• A person may be appointed as managing Director for maximum of 2 companies

• MD has a tenure of 5 years but can be re-appointed for another 5years

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Holding & Subsidiary company BoDs

Foreign holding company

• At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a subsidiary company

• The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company

• The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company

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Director’s conflict of interest

Foreign holding company

• Clause 49 of the Listing Agreement entered into with the Stock Exchanges, requires,(as shown below) as part of Corporate Governance, the listed entities to lay down a Code of Conduct for Directors on the Board of a company. The code of conduct should be posted on the website of a company

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Code of Conduct

Foreign holding company

• Board shall lay down a code of conduct

• All Board members and senior management personnel shall affirm compliance with the code on an annual basis

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Potential conflict of interest

Foreign holding company

• Outside employment

• Improper personal benefits

• Financial interest or loans or other financial transactions

• Service on boards & Committees

• Actions of family members12

Escorts shows door to Dr Trehan

Foreign holding company

• Dr. Trehan has been the executive director of Escorts Heart Institute since it was founded in the late 1980s

• Escorts Heart Institute and Research Centre (EHIRC) believed that Dr Trehan has been focusing more on his self-promoted Rs. 10 billion Medicity, an upcoming multi-disciplinary healthcare hub in Gurgaon

• EHIRC believed it is a clear conflict of interest and thus showed Dr. Naresh Trehan the door by removing him unceremoniously from the post of executive director.

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Satyam's new board: Govt sees no of interest conflict

Foreign holding company

• Kiran Karnik was nominated to the board of Satyam Computer Services , is also a director on the board of EXL Services, a business process outsourcing (BPO) unit having direct competition with the Satyam BPO

• Deepak Parekh also nominated to the board of Satyam is on the board of WNS Global Services, another rival of Satyam BPO

• There is no conflict of interest, Corporate Affairs Minister Prem Chand Gupta said when asked about the appointment

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Ferruccio Sias And Another vs Jai Manga Ram Mukhi And Others

Foreign holding company

• Plaintiff – Mr. Ferrucio Sias ( on behalf of SAE Ltd)• Suit for damages, declaration and injunction was filed

by plaintiff stating that he is whole−time director in the company, known as SAE (India) Limited

• The persons who are sued(Defendants) are directors of SAE Ltd

• Plaintiff’s assertions against defendantso Mala fide, unauthorized and illegal activitieso Actions detrimental to interest of SAE and its share holderso Misutilizing funds of the company

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• Elettrofin Societa Anonima Finanziaria (Elettrofin)• Elettrofin was a member of Asea Brown Boveri

group (ABB group)• Elettrofin holds 32.3 percent share capital of SAE

Ltd.• Board of directors of SAE were J. M. Mukhi, K.

N.Shenoy, Luigi Ruggieri, Ferruccio Sias and Niranjan Swaroop Mittal

• J.M.Mukhi used to be elected as chairman for the meetings.

Plaintiff

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• On Aug 24 1993 the five directors passed a resolution agreeing to the increase of share capital of company

• The capital was to be subscribed by Elettrofin at a price which was a “fair price”

• The issue of share capital would increase Shareholding of Elettrofin to 51 percent

• Amalgamation of the company with ABB Ltd

Plaintiff

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• Disputes arose between the members of the board regarding the valuation of shares and the amalgamation proposal.

• A meeting of the BoDs was called, according to the plaintiff, unfairly when some of them were abroad.

• A notice was sent on sep 13, 1993 and the meeting took place on sep 15, 1993.

• The notice was sent as facsimile(fax).

Plaintiff

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• In the meeting 4 additional directors Y. L. Madan, S. C.Singhal, P. Dasgupta and J. Narayanan were appointed according to the plaintiff illegally and malafide

Plaintiff

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• Mr. Sias has the power to sue on behalf of the company ( as a corporate entity) as he has been granted power of attorney by BoDs.

• It is necessary that Proper authority by resolution of BoD, or Power of attorney authorizing institution of suits on behalf of company, or power conferred by articles of association , to institute suits on behalf of corporation.

( Oberoi Hotels (India) Pvt. Ltd. v. Observer Publications (P) Ltd )

• The provisions in the power of attorney indicate that MR.Sias can institute suits jointly with other persons named in the power of attorney.

Arguments

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• He is a whole-time director and general manager but not a managing director

• Mr.Sias cannot file a suit• Unauthorized persons can institute a suit on behalf of the

company and court can call meeting of shareholders to find their opinion. (Danish Mercantile Co. Ltd. v. Beaumont)

• In this case the action of Mr.Sias has not been ratified by the company and he is being motivated because of his connections with companies like ABB, Saldemi in Nigeria belonging to ABB group before coming to India.

Arguments

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• In the Judge’s view, the board of directors have to take action which is in interest of the company and majority shareholders.

• In this case, the foreign company holds only 33 percent of the shares and rest are owned by Financial Institutions in India.

• The company has been hijacked by the resolution passed by J. M. Mukhi, N. S. Mittal, over the objections of Mr. Sias at the meeting.

Arguments

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• Mr. Shenoy and Ruggieri were outside India and there was no proper notice to them

• Mr. Sias apparently has old connections with Elettrofin ,an Italian company, which is in turn, connection with ABB, Zurich, which is also connected with ABB,Sadelmi

• K. N. Shenoy is a director of Asea Brown Boveri (India) Limited

• Ruggieri is based in Milano, Italy, and is connected with the companies, associated with or connected with Asea Brown Boveri Limited

Arguments

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• A simple majority is not sufficient and a greater majority is required.

• According to articles of the company the quorum of the meeting of BoDs is two.

• The Notice has been sent and directors are themselves responsible for absenting from the meeting.

• By virtue of article 88 of Articles of association of SAE ltd , the BoDs can make additional directors of the company.

Arguments

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• No particular form of notice is prescribe for meeting of BoDs

• The power of attorney only gives authority to file a suit jointly with other persons

• The BoDs (Mr. Sias, Mr. Ruggieri and K. N. Shenoy) managed to pass a resolution with majority of three of them for issuing additional shares to Elettrofin instead of issuing shares to all the shareholders

Arguments

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• The board of directors of every company has a duty to that company alone and should not look after the interest of a company which may be the holding company of the company in which they are directors

• It is not open to the holding company to dictate to the board of directors.

• There is very strong assertion that Mr. Sias is looking after the interest of the foreign company

Arguments

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• Mr. Sias was GM of Saldemi in Nigeria which is a company of ABB Ltd before he became the GM of SAE Ltd

• Allocating fresh capital to Eletrrofin increasing its holding in SAE ltd to 51 percent is part of the grand design to benefit the foreign companies, rather than SAE (India) Limited, and its shareholders

Judgment

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• The interest of the shareholders of any company must, at all times, be protected by the directors of the company

• There does not appear to be any loss occasioned to the company as a result of re−constitution of the board of directors by addition of four director.

• Mr. Sias has no authority to institute the suit• The suit is accordingly dismissed

Judgment

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Foreign holding company

Sale of goods contract: Meaning of international Sale Contracts

• Where the offer or the reply relates to goods which are in the course of carriage or will be carried from the territory of on state to the territory of another

• Where the acts constituting the offer and the acceptance are effected in the territories of different states

• Where delivery of the goods is to be made in the territory of a State other than that within whose territory the acts constituting the offer and the acceptance are effected

Trans-border Transaction

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Foreign holding company

• Any two or more states shall not be considered to be different states if a valid declaration to that effect made under rules of this convention

• The present law is not applicable to  Stocks, shares, investment securities, negotiable instruments or money, electricity, Ship, Vessel or aircraft which is or will be subject to registration

Contd.

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