Deemed Public Companies: The Blurred Line Between Private Control and Public Accountability (Part 1)

Legal Anatomy of Deemed Public Companies

Few concepts in Indian company law blur boundaries as much as the notion of a deemed public company. Sitting squarely in a legal grey zone (private in structure yet public in oversight), deemed public companies retain the form and designation of private companies, while the law binds them to the compliance regime of public companies.

With the increasing scrutiny of the Ministry of Corporate Affairs (“MCA”) in relation to corporate disclosures and subsidiary relationships, the legal treatment of deemed public companies has gained renewed relevance. This classification has wide-ranging implications, increasing not only statutory compliance burdens but also governance obligations, affecting funding flexibility, shaping investor rights and influencing transaction structuring. For corporate groups, promoters, and investors, knowing when a private company is treated as a deemed public company, and what that triggers, is critical to effectively navigate India’s corporate law regime.

As the opening piece in a two-part series, this article seeks to explore the historical evolution of the concept in Indian company law and its practical relevance. Part 2 will delve into the provisions of the Companies Act, 2013 (“Act”) that apply to such companies.

Origins and Evolution

The term ‘deemed public company’ has not been expressly defined in the Act. Instead, the concept stems from Section 2(71) of the Act, which defines a public company to include any private company that is a subsidiary of a company that is not private, i.e., of a public company. Consequently, a private company that falls under the umbrella of a public parent, becomes, for all practical and legal purposes, a public company, despite having been incorporated as a private entity.

The origins of this concept can be traced back to Section 43A of the Companies Act, 1956 (“Erstwhile Act”), which created a hybrid category of companies by treating private companies as public companies if they met certain conditions, such as accepting public deposits or exceeding prescribed capital or turnover thresholds. It reflects the legislative intent to prevent the misuse of a private structure for activities that bear public character. The Companies (Amendment) Act, 2000 simplified the provision, removing many of the earlier triggers. The Act removed the threshold-based approach prescribed under the Erstwhile Act entirely and adopted a simpler formulation: whereby a private company becomes deemed public solely by being a subsidiary of a public company. This carried forward the core principle of Section 43A while dispensing with the older conditional tests.

Under Section 2(87) of the Act, a subsidiary is a company in which the holding company controls the composition of the board or holds more than 50% of the voting power, directly or through another subsidiary. Consequently, a private company becomes deemed public when a public company holds a majority of its shares or controls its board, and even without direct shareholding, all downstream subsidiaries of a public company inherit the deemed public status. Unlike the older threshold-based regime, the present classification shifts the spotlight to group architecture rather than commercial activity.

Identity versus Compliance

A distinctive feature of this classification is the mismatch between a company’s legal identity and its compliance obligations. Although the Act does not require a deemed public company to drop the suffix ‘Private Limited’ from its name, it must nevertheless comply with a slew of provisions applicable to public companies. This hybrid nature often results in inadvertent lapses in compliance, particularly when private companies become subsidiaries of listed or other public companies through investments, group restructurings, or internal reorganisations. In large corporate groups with listed parents, it is common for multiple private subsidiaries to automatically qualify as deemed public companies.

This has made several companies inadvertently deemed public due to holding company-operating company structures, foreign parents structured as public companies in their home jurisdictions, special purpose vehicles formed for acquisitions or ringfencing assets, and private equity/ venture capital funds investing through multi-layered public-company vehicles.

Judicial Interpretation

Several ambiguities persist when analysing whether the full rigour of the law (from a compliance standpoint) would be applicable on deemed public companies. While one may look to the jurisprudence that has evolved from the analysis of the corresponding provision in the Erstwhile Act which permitted inclusion of transfer restrictions in the articles of association and the appointment of lesser directors than required for public companies (reinforcing the pliant nature of a private company’s constitution), the interpretation may not hold under the Act, which has omitted such variability for deemed public companies.

Transactional Hurdles

The MCA has not issued clear guidance on whether all public-company provisions under the Act would squarely apply to deemed public companies, nor has it been clarified whether private company exemptions extend to such entities. A direct consequence of this uncertainty is its impact on mergers & acquisitions and private equity transactions where investors typically seek to incorporate shareholder-level contractual arrangements, such as transfer restrictions, tag-along and drag-along rights, affirmative voting thresholds, exit mechanisms or pre-emption rights into the target company’s constitutional documents. In public companies, many of these restrictions are void for offending free transferability. These unresolved issues have resulted in divergent industry practices and frequent uncertainty during due diligence exercises entailing compliance reviews for deemed public companies as well as in deal structuring.

Conclusion

In essence, deemed public companies sit at the intersection of statutory fiction and regulatory silence. What was intended as a clean, subsidiary-based classification has evolved into a compliance minefield, one that affects dealmaking and generates interpretational friction. It is an outcome of the legislature’s longstanding intent to prevent private company structures from shielding enterprises that, by virtue of public-company parentage, carry a broader accountability footprint. While Section 43A of the Erstwhile Act relied on activity-based thresholds to capture companies operating with public-facing characteristics, the Act’s subsidiary-based formulation sought to introduce clarity and curb circumvention by tying the classification to group control rather than commercial conduct. However,in the absence of explicit guidance on the scope of compliance requirements as well as on exemptions, the need for defining the contours of the deemed public status becomes not only desirable but legally imperative.