Status of Private Limited Company u/s 4(7) of Companies Act, 1956

Introduction: It is important to check the status of Private Limited Company, if the shareholder of such Private Limited is Body Corporate incorporated outside India. It is also important from the audit point of view since if the status of such Private Limited Company is established as Subsidiary of Public u/s 4(7) of Companies Act, 1956 then all the Compliances under Companies Act, 1956 has to be been taken care as it
is a Public Company. This section becomes operative only when a Private Limited is having one shareholder as Body Corporate Incorporated outside India.
Extract of Bare Section:
[(7) A private company, being a subsidiary of a body corporate incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India.
Understanding:
1)    This section is operative when the subscriber(s) / Shareholder(s) of a Private Limited Company is Body Corporate incorporated outside India.
2)    This section establish the fact that such Private Limited Company should be considered as Subsidiary of Public Limited Company.
3) If it is established then the Private Limited Company needs to take care of all the provisions of Companies Act, 1956 as it is being taken care by normal Public Limited Company.
Interpretation
“A private company, being a subsidiary of a body corporate incorporated outside India”
Under 4 (7) a private Company is a subsidiary of a Body Corporate incorporated outside India, if that Body Corporate holds more than 50% of equity capital in the Company.
“if incorporated in India, would be a public company within the meaning of this Act”
Then, if such Body Corporate is incorporated in India becomes a public company within the meaning of section 3 (1)(iv) of India Companies Act, 1956.
Litmus test for this:
1)         Definition under section 3 (1) (iv) with respect to the definition given in the law of the country in which it is registered.
2)      Articles of Association or any other constitution document of Body Corporate .

“shall be deemed for the purposes of this Act to be a subsidiary of a public company if the entire share capital in that private company is not held by that body corporate whether alone or together with one or more other bodies corporate incorporated outside India”

Then, this particular points decides the status of such Private Company, whether it becomes subsidiary of Public Company or not. Below is the holding pattern which will clarify the same:

Shareholder 1	Shareholder 2	Status
Foreign Body Corporate (Public Company) – 99%	Non-resident Individual – 1%	Subsidiary of Public
Foreign Body Corporate (Public Company) – 99%	Foreign Individual – 1%	Subsidiary of Public
Foreign Body Corporate (Public Company) – 99%	Indian Company – 1%	Subsidiary of Public
Foreign Body Corporate (Public Company) – 99%	Resident Individual – 1%	Subsidiary of Public
Foreign Body Corporate (Public Company) – 99%	Foreign Body Corporate (Public or Private)- 1%	Private Company
Foreign Body Corporate (Public Company) – 99%	Foreign Body Corporate (Public or Private)- 1%	Private Company

 Conclusion:

This section becomes operative only when the Foreign Body corporate is a Public Company under Section 3(1)(iv) of Indian Companies Act, 1956 with respect to the definition given in the law of country where it is registered. Further such Body Corporate should be the alone shareholder of the Private Company, if such Body Corporate holds shares in Private Company along with any other Body

Corporate then the Private Company can retain its status of “Private