TMI Blog1980 (7) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... s also a company incorporated under the Act for carrying on business of hoteliers. They have a paid up capital of Rs. 24,70,000 divided into 24,700 equity shares of Rs. 100 each. In March, 1974, Oriental Ltd. acquired 2,490 equity shares of the face value of Rs. 100 each of Poonam Hotels for the aggregate price of Rs. 2,08,900, that is, at the average rate of Rs. 89 per share. This investment was within the limit of 10 per cent. prescribed under section 372 of the Act. By an agreement, in writing, dated August 19, 1975, made between Oriental Ltd. on the one hand and Poonam Hotels on the other, the Oriental Ltd. was given full and absolute right to appoint five directors on the board of directors of Poonam Hotels. This gave power to Oriental Ltd. to appoint a majority of the board of directors of Poonam Hotels with power to remove any such director and to appoint another in his place. Poonam Hotels agreed to make necessary changes in its articles of association and to incorporate therein the agreed rights of Oriental Ltd. to appoint five directors. Pursuant to the agreement dated August 19, 1975, the shareholders of Poonam Hotels, at an extraordinary general meeting held on Augu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 6, 1975, the department took the view that article 139-A of the articles of association of Poonam Hotels was contrary to the provisions of sections 255, 256 and 257 of the Act and that the said article and the resolution in this behalf were void in view of the provisions of section 9 of the Act. In a word the department held that Poonam Hotels was not a subsidiary of Oriental Ltd. They, therefore, directed Oriental Ltd. to "disinvest" the excess shareholding in Poonam Hotels and to comply with the provisions of section 372 of the Act. By way of abundant caution Oriental Ltd. sought by letter dated March 5, 1976, ex post facto sanction under section 372 of the Act in regard to the investment in shares of Poonam Hotels in excess of the ceiling prescribed by the said section. The department by their letter dated February 15, 1977, rejected this request and once again directed Oriental Ltd. to dispose of the excess shareholding within a period of six months from the date of the order. The Oriental Ltd. addressed another letter dated January 13, 1976, to the department requesting them to reconsider their previous order. By order dated July 5, 1977, the department reiterated thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other company is then known as the subsidiary of the parent or holding company. Control over the composition of the subsidiary's board is almost invariably derived from the voting rights enjoyed by the holding company by virtue of shares in the subsidiary held by it or its nominees, but it could also arise from the provisions of the subsidiary's memorandum or articles, or from a contract with the subsidiary which empowers the holding company to appoint directors to the subsidiary's board. ( Pennington's Company Law, 4th Edn., p. 639). Section 4 adopts a dual test: a body corporate is to be regarded as a subsidiary of another (holding company) if the holding company, (1) controls the composition of its board of directors in the sense that it has power to appoint or remove a majority of the board, or (2) holds more than half of its "equity share capital". (See Gower's Principles of Modern Company Law, 4th Edn., pp. 118-119). This section is adopted from section 154 of the English Companies Act, 1948. The difference between the Indian and English law is that while under the English section it is necessary for a company to be treated as having the legal status of a holding compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) does not apply to Oriental Ltd. because section 372(14)( d ) clearly says that that section shall not apply to investments by a holding company in its subsidiary. There is, therefore, no contravention of the provisions of section 372 and the view of the department must be held to be wrong. Counsel for the department contended that the control of Oriental Ltd. over the composition of the board of Poonam Hotels which they exercise by virtue of the agreement dated August 19, 1975, is in contravention of the provisions of sections 255, 256 and 257 of the Act. This argument overlooks the important fact that section 255 excludes from its purview cases which have been otherwise expressly provided in the Act. The words "save as otherwise expressly provided in this Act" used in section 255(1)( b ) are of commanding significance. Section 4(2) is an express provision for the appointment of the directors on the board of the subsidiary. That provision is not subject to section 255 because it is expressly excluded. It is true that section 255 does not expressly refer to section 4. But that is not necessary. All that is necessary is that the excluded provision must be express, that is clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion opens with the words "notwithstanding anything contained in this Act". This is a non obstante clause which vests overriding powers in the Government to nominate directors to prevent mismanagement or oppression. There is no denying the fact that the right of the members of a public company to appoint directors of their choice at a general meeting is greatly abridged when there comes into being a relationship of a holding and a subsidiary company. But this restriction inheres in the definition of the holding company. It is firmly embedded in section 4. The ability to control the conduct of the subsidiary is the hallmark of the holding company. The holding company is the controlling company. The controlled company is called a subsidiary. Counsel for the department finally argued that there was a delay in filing the petition. We are not impressed by this argument. At the request of Oriental Ltd., the Government "reconsidered" the matter and the department finally came to the conclusion in their letter dated 5th July, 1977, that Oriental Ltd. had contravened the provisions of section 372(4) of the Act in acquiring the shares of Poonam Hotels. To contest this view of the depar ..... 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