FOREIGN HOLDING COMPANY CAN ISSUE SHARES, AS PART OF CONSIDERATION ON BEHALF OF INDIAN TRANSFEREE COMPANY
GlobeOp Financial Services (India) Private Limited (Demerged Company) is having registered office at A/301, Fortune 2000 C-3, Bandra Kurla Complex, Bandra-East Mumbai – 400 051. It provides automated middle and back-office support, fund administration, family wealth managers, institutional investors in the United Kingdom and internationally and risk reporting services. The company is based in Mumbai.
GlobeOp Financial Services Technologies (India) Private Limited (Resulting Company 1.) is having registered office at Unit 2&3,4th Floor office Level, Bldg.5&6 Mindspace, Airoli, Serene Properties Pvt. Ltd. SEZ, Airoli Navi Mumbai – 400708.
GlobeOp Holding Company (Mauritius) Private Limited (Resulting Company 2.) is having registered office 8TH Floor Medine Mews, La Chaussee Street, Port Louis. It is Holding Company of Resulting Company 1.
GlobeOp Financial Services (India) Private Limited and GlobeOp Financial Services Technologies (India) Private Limited had filed petitions to seek sanction of a scheme of arrangement and demerger between between GlobeOp Financial Services (India) Private Limited (‘GFSPL’) and GlobeOp Financial Services Technologies (India) Private Limited (‘GFSTPL’) and GlobeOp Holding Company (Mauritius) Private Limited (‘GHCPL’) and their respective shareholders.
The scheme envisages demerger of an undertaking of GFSPL and transfer of the same to GFSTPL with effect from the appointed date under Section 394 of the Companies Act, 1956. The scheme envisages that in consideration of the transfer of the demerged undertaking, GHCPL, which is 100% holding company of GFSTPL (Resulting Company No.1) and which is described in the scheme as Resulting Company No.2, shall issue shares to the shareholders of the demerged company.
Consideration paid by Foreign Holding Company:
The scheme provides for issue and allotment of 10 equity shares of GHCPL of USD 1 each fully paid up for every 61 equity shares of GFSPL of INR 1 each fully paid up in consideration of the demerger.
Facts of the case:
In the case of the present scheme of petitions, the holding company of the transferee company, whose shares are issued to the shareholders of the transferor company, is a foreign company. It is submitted that Section 394(4)(b) provides that ‘transferee company’ does not include any company other than the company within the meaning of the Companies Act, 1956 though the transferor company may include any body corporate, whether a company within the meaning of the Companies Act, 1956 or not.
That makes no difference as far as the facts of and issues arising in, these particular cases are concerned. The transferee company is an Indian company. It is only that its holding company, whose shares are allotted to the shareholders of the transferor company, is a foreign company and not a company within the meaning of the Companies Act 1956.
Objection raised by Regional Director (RD):
The opposition is mainly on the ground that having regard to the provisions of Section 394 of the Companies Act, 1956 only a transferee company can allot shares towards consideration of transfer, and not any other person, whereas, for demerger and transfer of the undertaking of GFSPL in the present case, the shares have been allotted by GHCPL, which is a Holding company of the transferee company, namely, GFSTPL. GFSTPL, which is the resulting company insofar as the demerger is concerned, is not issuing any shares and therefore, the scheme is not in consonance with the provisions of the Companies Act, 1956.
Secondly, the scheme is also against the provisions of Income-tax Act, 1961 having regard to the definitions of ‘demerger’ and ‘resulting company’ contained in Section 2(19AA) and 2(41A) read with Section 2(19AAA) of the Income-tax Act. The Income-tax Department’s Counsel is present on notice and also supports the objections raised by the Regional Director with reference to the provisions of the Income-tax Act.
The objection of the Regional Director has no merit and the same is rejected.
Sanctioning Scheme of Arrangement:
The Court has held that the consideration for the transfer of an undertaking can come in the form of any legitimate consideration which the transferor is entitled to accept a contract of transfer and that the consideration in the form of shares issued by the Holding company of the transferee is a valid consideration.
The Court had clarified that the sanction of the scheme, as proposed by this Court, does not in any way bind the Income-tax Department to take any particular view of the scheme of arrangement sanctioned by this Court insofar as the tax implications of the transaction are concerned. In the face of this clarification, which is also issued in the present scheme petitions, learned Counsel for Regional Director and Income-tax Department have no further objections to the scheme on the ground of non-compliance with the provisions of the Income-tax Act referred to above and the scheme was sanctioned by High Court and order was passed by S C Gupte.
The consideration may not necessarily come in the form of allotment of shares of a transferee company and it may well be in the form of shares of a holding company of the transferee company. There is no requirement of law that such holding company must be a company within the meaning of the Companies Act, 1956.