Section 81(ia)
This query is : Resolved
13 February 2012
A Private limited is a wholly owned subsidiary of B Ltd. Paid up share capital of A Private Limited comprises of 50,000 equity shares of Rs.10/- each fully paid up. Out of the 50,000 equity shares, 49,994 shares are held by B Ltd. and one share each is held by six nominees of B Ltd. to comply with the provisions of Section 12 of the Companies Act, 1956.
Now, B Ltd. had infused 50 Crs. by way of share application money towards equity shares of A Pvt. Ltd. which is pending allotment till date. A Pvt. Ltd. intends to allot shares against the share application money pending allotment. Whether this will be treated as Preferential allotment under Section 81(1A) of the Companies Act, 1956 and it has to comly with the provisions of said section and Unlisted Public Companies (Preferential Allotment) Rules, 2003 as amended till date?
Thanks
Now, B Ltd. had infused 50 Crs. by way of share application money towards equity shares of A Pvt. Ltd. which is pending allotment till date. A Pvt. Ltd. intends to allot shares against the share application money pending allotment. Whether this will be treated as Preferential allotment under Section 81(1A) of the Companies Act, 1956 and it has to comly with the provisions of said section and Unlisted Public Companies (Preferential Allotment) Rules, 2003 as amended till date?
Thanks
13 February 2012
Sec 81 is not applicable to private companies including those which are subsidiaries of public companies unless Articles of Association otherwise provides.
13 February 2012
Dear Mitesh
Agreed that Section 81 of the Companies Act, 1956 is applicable to Public Limited Companies. But if you look at the definition of Public Limited Company provided under Section 3 (1)(iv), it includes a Private Limited which is a subsidiary of a Public Limited Company. If a subsidiary of a Public Limited Company is not to be treated at par with a Public Limited Company, then what was the purpose of amending the definition of Public Limited Company in 2000?
Agreed that Section 81 of the Companies Act, 1956 is applicable to Public Limited Companies. But if you look at the definition of Public Limited Company provided under Section 3 (1)(iv), it includes a Private Limited which is a subsidiary of a Public Limited Company. If a subsidiary of a Public Limited Company is not to be treated at par with a Public Limited Company, then what was the purpose of amending the definition of Public Limited Company in 2000?
13 February 2012
I agreed that Private companies which are subsidiary of public companies are treated at par with Public companies,but not for all the provisions under the Act.
For e.g. Take Sec 77 (2), it reads as under;
No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company;
In section 77, Act has clearly differentiated Public Company & Private Company which is a subsidiary of public company. If Both Public Company & private company subsidiary of public companies are placed at par, why the legislature has mentioned both phrase ? they might have just mentioned public companies only.
Similarly in Sec 316 also state that [No public company and no private company which is a subsidiary of a public company] shall, after the commencement of this Act, appoint or employ any person as managing director, if he is either the managing director or the manager of 2[any other company (including a private company which is not a subsidiary of a public company)], except as provided in sub-section (2).
Even in certain cases, provisions are applicable only to private companies which are subsidiary of public company. e.g Sec 372A
My view is that only for certain provisions of the act, private company subsidiary of public company is placed at par with Public companies.
For e.g. Take Sec 77 (2), it reads as under;
No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company;
In section 77, Act has clearly differentiated Public Company & Private Company which is a subsidiary of public company. If Both Public Company & private company subsidiary of public companies are placed at par, why the legislature has mentioned both phrase ? they might have just mentioned public companies only.
Similarly in Sec 316 also state that [No public company and no private company which is a subsidiary of a public company] shall, after the commencement of this Act, appoint or employ any person as managing director, if he is either the managing director or the manager of 2[any other company (including a private company which is not a subsidiary of a public company)], except as provided in sub-section (2).
Even in certain cases, provisions are applicable only to private companies which are subsidiary of public company. e.g Sec 372A
My view is that only for certain provisions of the act, private company subsidiary of public company is placed at par with Public companies.
13 February 2012
Dear Mitesh!
The Sections you quoted were made applicable prior to amendment of definition of Public Limited Company. Prior to amendment in 2000, there was no calrity as to whether a Private Limited Company which is a subsidiary of a Public Limited Company has to be treated at par with a Public Limited Company and has to comply all the provisions of Companies Act, 1956 as are applicable to a Public Limited Company or has to comply with only those sections wherein it has been specifically mentioned that the section shall be applicable to Private Companies which are subsidiaries of Public Limited Companies.
But in 2000, definition of Public Limited Company was amended so as to include Private Companies which are subsidiaries of Public Limited Companies within the scope of Public Limited Companies.
The Sections you quoted were made applicable prior to amendment of definition of Public Limited Company. Prior to amendment in 2000, there was no calrity as to whether a Private Limited Company which is a subsidiary of a Public Limited Company has to be treated at par with a Public Limited Company and has to comply all the provisions of Companies Act, 1956 as are applicable to a Public Limited Company or has to comply with only those sections wherein it has been specifically mentioned that the section shall be applicable to Private Companies which are subsidiaries of Public Limited Companies.
But in 2000, definition of Public Limited Company was amended so as to include Private Companies which are subsidiaries of Public Limited Companies within the scope of Public Limited Companies.
23 July 2025
You're raising a very nuanced and important question regarding **Section 81(1A)** of the Companies Act, 1956 and its applicability to **private companies that are subsidiaries of public companies**.
Let’s break this down step by step:
---
## 🔹 **1. Background of Section 81 and 81(1A)**
* **Section 81(1)**: Deals with **rights issue** – further issue of capital must first be offered to existing shareholders in proportion to their shareholding.
* **Section 81(1A)**: Applies when a company **proposes to issue shares to persons other than existing shareholders**, i.e., **preferential allotment**, and requires a **special resolution**.
By default, **Section 81 applies to public companies**, not private companies — **unless** their **Articles of Association (AoA)** state otherwise.
---
## 🔹 **2. Definition of Public Company – Section 3(1)(iv)**
After the 2000 amendment, a **private company that is a subsidiary of a public company** is **deemed to be a public company** for **certain provisions** of the Act.
🟡 However — **this does not mean all provisions applicable to public companies automatically extend to such private subsidiaries**.
This interpretation is reinforced by judicial decisions and Departmental clarifications.
---
## 🔹 **3. Specific to Your Case**
* **A Pvt. Ltd.** is a **wholly owned subsidiary** of **B Ltd.**, a public company.
* **49,994 shares** are held by **B Ltd.**, and **6 nominee shareholders** hold the rest.
* **B Ltd. infused ₹50 Cr** as **share application money**, pending allotment.
* Now A Pvt. Ltd. wants to **allot equity shares** against this money.
### 🔸 Is it a **Preferential Allotment** under Section 81(1A)?
✔ **Yes**, because the allotment is **not pro-rata to all existing shareholders** (though there’s only one real shareholder and its nominees), and is being made **specifically to the holding company**, it would **technically fall under preferential allotment**.
### 🔸 Is Section 81(1A) applicable?
Here’s the key point:
* Though **Section 81** (including 81(1A)) is **not applicable to private companies**, **it becomes applicable** to a **private company that is a subsidiary of a public company** *only if* it is **explicitly provided** or if **the AoA says so**.
📌 **Unless the Articles of Association of A Pvt. Ltd. provide that Section 81 applies**, the company **need not comply** with Section 81(1A).
---
## 🔹 Departmental View (and Prevailing Practice):
According to **DCA Circular No. 8/99 dated 4 June 1999** and subsequent clarifications:
> “A private company which is a subsidiary of a public company will be treated as a public company for the purposes of those provisions where the law expressly so provides…”
✅ This means that **Section 81(1A)** is **not automatically applicable**, **unless**:
* The **AoA provides** that it applies; or
* The company **voluntarily follows** it to maintain transparency or regulatory alignment.
---
## 🔹 Final Answer:
🟢 **No, Section 81(1A) is not mandatorily applicable** to **A Pvt. Ltd.** (a subsidiary of a public company) **unless its Articles of Association provide so**.
🔸 However, as a **good corporate governance practice**—especially considering SEBI or investor scrutiny—some companies **voluntarily follow the Preferential Allotment Rules**, even if technically not required.
---
## 🔖 Recommendation:
* **Review the AoA** of A Pvt. Ltd.
* If AoA **does not incorporate Section 81**, then **preferential allotment can be made without complying with Section 81(1A)**.
* **However**, ensure that:
* Board resolution and allotment process are properly documented.
* PAS-3 and relevant ROC filings are made.
* Valuation and pricing are as per applicable norms, especially for group companies.
Let me know if you’d like a **draft resolution** or **compliance checklist** for the proposed allotment.
Let’s break this down step by step:
---
## 🔹 **1. Background of Section 81 and 81(1A)**
* **Section 81(1)**: Deals with **rights issue** – further issue of capital must first be offered to existing shareholders in proportion to their shareholding.
* **Section 81(1A)**: Applies when a company **proposes to issue shares to persons other than existing shareholders**, i.e., **preferential allotment**, and requires a **special resolution**.
By default, **Section 81 applies to public companies**, not private companies — **unless** their **Articles of Association (AoA)** state otherwise.
---
## 🔹 **2. Definition of Public Company – Section 3(1)(iv)**
After the 2000 amendment, a **private company that is a subsidiary of a public company** is **deemed to be a public company** for **certain provisions** of the Act.
🟡 However — **this does not mean all provisions applicable to public companies automatically extend to such private subsidiaries**.
This interpretation is reinforced by judicial decisions and Departmental clarifications.
---
## 🔹 **3. Specific to Your Case**
* **A Pvt. Ltd.** is a **wholly owned subsidiary** of **B Ltd.**, a public company.
* **49,994 shares** are held by **B Ltd.**, and **6 nominee shareholders** hold the rest.
* **B Ltd. infused ₹50 Cr** as **share application money**, pending allotment.
* Now A Pvt. Ltd. wants to **allot equity shares** against this money.
### 🔸 Is it a **Preferential Allotment** under Section 81(1A)?
✔ **Yes**, because the allotment is **not pro-rata to all existing shareholders** (though there’s only one real shareholder and its nominees), and is being made **specifically to the holding company**, it would **technically fall under preferential allotment**.
### 🔸 Is Section 81(1A) applicable?
Here’s the key point:
* Though **Section 81** (including 81(1A)) is **not applicable to private companies**, **it becomes applicable** to a **private company that is a subsidiary of a public company** *only if* it is **explicitly provided** or if **the AoA says so**.
📌 **Unless the Articles of Association of A Pvt. Ltd. provide that Section 81 applies**, the company **need not comply** with Section 81(1A).
---
## 🔹 Departmental View (and Prevailing Practice):
According to **DCA Circular No. 8/99 dated 4 June 1999** and subsequent clarifications:
> “A private company which is a subsidiary of a public company will be treated as a public company for the purposes of those provisions where the law expressly so provides…”
✅ This means that **Section 81(1A)** is **not automatically applicable**, **unless**:
* The **AoA provides** that it applies; or
* The company **voluntarily follows** it to maintain transparency or regulatory alignment.
---
## 🔹 Final Answer:
🟢 **No, Section 81(1A) is not mandatorily applicable** to **A Pvt. Ltd.** (a subsidiary of a public company) **unless its Articles of Association provide so**.
🔸 However, as a **good corporate governance practice**—especially considering SEBI or investor scrutiny—some companies **voluntarily follow the Preferential Allotment Rules**, even if technically not required.
---
## 🔖 Recommendation:
* **Review the AoA** of A Pvt. Ltd.
* If AoA **does not incorporate Section 81**, then **preferential allotment can be made without complying with Section 81(1A)**.
* **However**, ensure that:
* Board resolution and allotment process are properly documented.
* PAS-3 and relevant ROC filings are made.
* Valuation and pricing are as per applicable norms, especially for group companies.
Let me know if you’d like a **draft resolution** or **compliance checklist** for the proposed allotment.
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