Corporate world every holding company having a wholly-owned subsidiary have one or more person as “nominee” shareholders to on record as a registered shareholder holding a nominal number shares in a wholly-owned subsidiary company to satisfy the requirement of the minimum number of members. Treating these registered shareholders as “nominee” is not the perspective of the Company Law but of the Contract Law as applicable to the contract between the company and these shareholders. Let us discuss.
In my earlier post here, I clearly mentioned that in actual sense it is not possible to have a wholly-owned subsidiary in “true sense”.
Under Companies Act, there is a requirement of a minimum number of two or seven members depends upon the type of the company. These registered shareholders may, in turn, declare that holding company have a beneficial interest in these shares. For company law, the full stop is here. These members remain registered shareholders and what constitutes beneficial interest depends upon the agreement and the declaration.
For company law registered shareholders are not the nominee of anyone. Yes, the holding company have a beneficial interest and that only.
The contractual status between the holding company and these registered shareholders of the subsidiary company is actually nothing to do with companies act. Any violation of that contract has no actual remedy under the company law. Though, the Companies Act limits the right of the available remedy under section 89(8).
Practically, holding companies execute a contract between the holding company and these registered shareholders of the wholly-owned subsidiary company. Often, such contract backed by company or board resolutions which usually allow its certain employees or ‘contractors’ to become registered shareholders in the subsidiary company. These contractors take investment amount from holding company and usually govern by private contracts. These employees or contractors declare before the subsidiary company that other party of their private contract – the holding company – have beneficial interests in shares registered in their name. Only under this private contract, these registered shareholders become a nominee of holding company not under the companies act.
However, due to market practice, these registered shareholders are called “nominee shareholders” and this terminology though well understood does not reduce their position.
Being registered shareholders (subject to terms of their private contract), their shareholders may transfer their shares, claim dividend, and change or modify their declaration of a beneficial interest in favour of someone else. A close reading suggests it is possible that more than one person has different beneficial interests in a single share.
The beneficial interest is an under-explored area of the investment ecosystem.
Aishwarya Mohan Gahrana
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