Holding of shares in a company does not constitute an undertaking. Therefore, any sale or transfer of shares would not mean sale, transfer or disposal of an undertaking within the meaning of Section 293 (1) (a) of the Companies Act, 1956 and thus approval of shareholders will not be required. Every corporate law advisor would agree that one of the most frequently visited sections...
Holding of shares in a company does not constitute an undertaking. Therefore, any sale or transfer of shares would not mean sale, transfer or disposal of an undertaking within the meaning of Section 293 (1) (a) of the Companies Act, 1956 and thus approval of shareholders will not be required.
Every corporate law advisor would agree that one of the most frequently visited sections in the Companies Act, 1956 is Section 293. This Section is important since it lists out certain businesses that a public company or a private company (which is a subsidiary of a public company) cannot do unless the shareholders bless the resolution. In other words, the approval of the board of directors is not sufficient for doing those businesses and the approval of the shareholders is also required. These businesses are:
- Selling, leasing or otherwise disposing whole or substantially the whole of the undertaking;
- Remitting or giving time for repayment of any debt due by a director to the company;
- Investing the amount of compensation received by the company in respect of the compulsory acquisition of the undertaking of the company;
- Borrowing exceeding the net worth of the company; and
- Contributing for charitable purposes which exceeds in any financial year the higher of Rs. 50,000 or 5% of last 3 years' average net profits.
Perhaps, the most important business listed above is the sale, lease or disposal of whole or substantially the whole of the undertaking of company. This business is provided in Section 293 (1)(a) of the Companies Act, 1956 and is popularly called the 293(1)(a) resolution. The importance of this business item can be measured from the fact that in case of a listed company, while no other business item listed above requires resolution by postal ballot, 293(1)(a) resolution has to be passed by means of a postal ballot - such that wider shareholders participation can be ensured.
The determining factor to see whether a 293 (1)(a) resolution is required or not is to see what is proposed to be sold, leased or disposed is an undertaking or not. If yes, then whether that undertaking constitutes whole or substantially the whole of the company's undertaking or not. If yes, then Section 293 (1) (a) will get triggered, otherwise not. Therefore, it is crucial to first determine what constitutes an 'undertaking'. Undertaking, would generally mean a separate and a distinct functioning business unit or activity or a project of a company, which can be identified as a business unit or a division. It, would however, not mean some pieces of properties or assets of the company which by themselves cannot constitute a business unit. For instance, while a cellular business division in a telecom company will constitute an undertaking but separate assets constituting the cellular business division will not qualify as an undertaking.
An interesting question arises that whether the sale or transfer of substantial or entire shareholding of a holding company in its operating subsidiary would constitute sale or transfer of an undertaking by the holding company and consequently requiring 293 (1) (a) approval of the shareholders of the holding company. One argument on this issue could be that what is proposed to be sold or transferred is nothing but the sale of those shares which give control over the operating subsidiary which ultimately owns the business unit. If effect, it would mean that as a consequence of share transfer by the holding company of its shares in the subsidiary, the undertaking of the subsidiary will indirectly get transferred to the buyer.
If this argument is accepted, then a 293 (1)(a) approval would be required. But, acceptance of such an argument could mean that the holding and subsidiary companies are not separate entities with separate assets - while the fact is that they are separate entities with separate assets. Further, even after the sale of the shares, the business division of the subsidiary will still remain with the subsidiary and it will continue to be the legal owner of the said business division. What gets transferred is the holding company's investment in the subsidiary but not the business division of the subsidiary as it will still vest in the subsidiary.
This issue had come up twice before the Bombay High Court in the matter of Brooke Bond India Limited v. U.B. Limited and then in CDS Financial Services (Mauritius) Limited v. BPL Communications Limited . In both these cases, it was held that in these situations 293 (1) (a) resolution is not required. In the Brooke Bond case, it was held that the sale of shares, whatever be their number, even if it amounts to a transfer of the controlling interest of a company, it cannot be equated to the sale of any part of the "undertaking" so as to come within the mischief of Section 293 (1)(a). In view of this, the settled position of law is that holding of shares in a company does not constitute an undertaking and consequently any sale or transfer of shares would not mean sale, transfer or disposal of an undertaking and therefore approval of shareholders will not be required.