Stuti Textiles Private Ltd. is a wholly owned subsidiary of SS Textiles Limited. It has only5 members and restricts the right to transfer their…

According to Section 2 (68) of the Companies Act,2013 Private Company means a company which restricts the right to transfer its share and prohibits any invitation to the public to subscribe for any share in the company. But, according to proviso to Section 2 (71) of the Companies Act,2013 a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its Articles of Association. The shares of a Public Company is freely transferable. In the instant case, since Stuti Textiles Private Ltd. is a wholly owned subsidiary of SS Textiles Limited, restriction of Stuti Textiles Private Ltd. to transfer share is not correct as it is deemed to be a Public Company. Thus, restriction on transfer of shares is incorrect. Alternate Answer (b) (i) According to Section 2 (68) of the Companies Act,2013 (the Act), a Private Company must, by its Articles of Association (AoA), include specific restrictions, including the restriction on the right to transfer its shares. Under the proviso to Section 2 (71) of the Act, a Private Company that is a subsidiary of a Public Company is ‘Deemed to be a Public Company for the purposes of the Act. Judicial precedents (such as Hillcrest Realty v. Hotel Queen Road) confirm that the "deemed public" status does not alter the basic characteristics of a Private Company. The restriction imposed by Stuti Textiles Pvt. Ltd. (STPL) limiting transfer of shares only to employees of the company is a valid restriction. Further, the proposal of some members to invite a group of people to subscribe to shares in STPL is contrary to the provisions of the Act. Hence, the opposition by virtue of the existing restriction in the Articles of Association of Company is justified. In the given case, STPL can still limit its members subject to maximum of200 (currently it has - 5) and restrict share transfers as per its Articles of Association, within the parameters and modalities as decided/ may be decided by the shareholders of the Company, which is owned by a Public Limited Company. However, being a Wholly Owned Subsidiary Company, where all the members/ shareholders are nominated by the holding company, such type of proposed transfers can be permitted, but after amending the Articles of Association of the Private Company. In view of the above, the restriction of share transfers by Stuti Textiles Pvt. Ltd. is legally correct, even though it is a subsidiary of a Public Company.