CA Intermediate (Batch Aug 2023)

Solution of Test of
Chapter 1 - Preliminary

Part A - MCQ

Q1. b
Q2. c
Q3. c
Q4. b
Q5. c
Q6. d
Q7. d
Q8. b
Q9. b
Q10. d

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 Part B - Subjective

1.
a. According to section 2(85) of the Companies Act, 2013, small company means a company, other than a public
company, having –

(A) paid-up share capital not exceeding INR 50 lakh or such higher amount as may be prescribed which shall
not be more than INR 10 crore (the prescribed limit is INR 4 crore); and

(B) turnover as per profit and loss account for the immediately preceding financial year not exceeding INR 2
crore or such higher amount as may be prescribed which shall not be more than INR 100 crore (the
prescribed limit is INR 40 crore):

Provided that nothing in this clause shall apply to a holding company or a subsidiary company.

Also, according to section 2(87), subsidiary company, in relation to any other company (that is to say the holding
company), means a company in which the holding company exercises or controls more than one-half of the total
voting power either at its own or together with one or more of its subsidiary companies.

Further, as per the proviso to section 2(71), if a Private company is a subsidiary of a Public company, it is deemed
to be a public company.

In the given question, Bull Limited (a public company) holds 3,00,000 equity shares of Bear Private Limited (having
paid up share capital of 6,00,000 equity shares @ 10 totalling 60 lakhs). Hence, Bear Private Limited is not a
subsidiary of Bull Limited and hence it is a private company and not a deemed public company.

Further, the paid-up share capital ( 60 lakhs) and turnover ( 19 crores) is within the limit as prescribed under
section 2(87), hence, Bear Private Limited can be categorised as a small company.

b. According to section 2(6) of the Companies Act, 2013; a company becomes an associate of another company if
that other company exercises significant influence in the first mentioned company. Significant influence means
control of at least 20% of the total voting power.

Since, Bull Limits controls 50% of the total voting power in Bear Private Limited (i.e. holding 3,00,000 shares out
of total 6,00,000 shares), Bear Private Limited is an associate company of Bull Limited.

2. According to section 2(71) of the Companies Act, 2013, Public company means a company –

(a) which is not a private company and

(b) having a minimum paid-up share capital as may be prescribed

Provided that if a private company is subsidiary of a public company, then it will deemed to be a public company
even though it is a private company as per its articles.

Also, according to section 2(87), subsidiary company, in relation to any other company (that is to say the holding
company), means a company in which the holding company
(i) controls the composition of the Board of directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together with one or more
of its subsidiary companies.

Explanation - A company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in point (i) or (ii) is of another subsidiary company of the holding company

Now, in the current case, Mars Private Limited is a private company as per its articles. But as soon as Pluto Limited
acquired 60% voting power in Mars Private Limited, Mars Private Limited will become a subsidiary of Pluto Limited and
accordingly will deemed to be a public company.

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 Further, if Neptune Private Limited is a subsidiary of Mars Private Limited, it will also become a subsidiary of Pluto
Limited because of the above-mention acquisition. Accordingly, Neptune Private Limited will also become a
deemed public company.

3. As per the provisions of section 2(68) of the Companies Act, 2013; ‘Private company’ means a company having a
minimum paid-up share capital as may be prescribed and which by its articles, except in case of OPC, limits the number
of its members to 200

Provided that where 2 or more persons hold one or more shares in a company jointly, they shall, for the purposes of
this clause, be treated as a single member.

Provided further that -

a. persons who are in the employment of the company; and
b. persons who, having been formerly in the employment of the company, were members of the company while in
that employment and have continued to be members after the employment ceased,
shall NOT be included in the number of members.

In the instant case, Sincere Limited is a public company has 235 members. But its total members for the purpose of
section 2(68) will be as follows –

a. Relatives of Directors 40
b. Employees (not counted in 200) -
c. Ex-employees (they acquired the shares after leaving the employment, so they will be 15
counted)
d. 10 couples holding shares jointly in the name of husband and wife (will be counted a 10
single member)
e. Others 140
Total members 205

Thus, to convert Sincere Limited into a private company, its number of members shall be reduced by 5 by the Board
of directors.

4. Also, according to section 2(87), subsidiary company, in relation to any other company (that is to say the holding
company), means a company in which the holding company –
(i) controls the composition of the Board of directors; or
(ii) exercises or controls more than one-half of the total voting power either at its own or together with one or more
of its subsidiary companies.

Explanation –

a. A company shall be deemed to be a subsidiary company of the holding company even if the control referred to in
point (i) or (ii) is of another subsidiary company of the holding company

b. the composition of a company's Board of Directors shall be deemed to be controlled by another company if that
other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority
of the directors;

Now, in the current case, Saras Private Limited is 1 crore consisting of 8 lakh equity shares of 10 each and 2 lakh
cumulative preference shares of 10 each. Since, nothing is mentioned, we are presuming that preference share
capital is not entitled to any voting rights.

Total Equity shares in Saras Private Limited = 8,00,000 shares

Shares held by Jeevan Private Limited = 2,00,000 shares
Shares held by Sudhir Private Limited = 2,50,000 shares

Jeevan Private Limited and Sudhir Private Limited are subsidiaries of Piyush Private Limited.

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 So, total shares held by Piyush Private Limited in Saras Private
= 4,50,000 shares
Limited through its subsidiaries

Thus, Piyush Private Limited is holding more than 50% of the Total voting power in Saras Private Limited through its
subsidiaries. Accordingly, Saras Private Limited is a subsidiary of Piyush Private Limited.

As per the notification dated 27th December 2013, Ministry (MCA) clarified that the shares held by a company or power
exercisable by it in another company in a fiduciary capacity shall not be counted for the purpose of determining the
holding–subsidiary relationship in terms of the provision of section 2(87) of the Companies Act, 2013.

Accordingly, if Jeevan Private Limited and Sudhir Private Limited held these shares in the capacity of a trustee on
behalf of some other company, then these shares will not be considered for holding-subsidiary relation and accordingly,
Saras Private Limited will not be a subsidiary of Piyush Private Limited.

5. As per section 2(42) of the Companies Act, 2013; “Foreign company” means a company or body corporate
incorporated outside India which –

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner

Further, as per Rule 2, ‘Electronic Mode’ means carrying out electronically based, whether main server is installed in
India or not, including, but not limited to –
(i) business to business and business to consumer transactions, data interchange and other digital supply
transactions;
(ii) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or
from citizens of India;
(iii) financial settlements, web-based marketing, advisory and transactional services, database services and
products, supply chain management;
(iv) online services such as telemarketing, telecommuting, telemedicine, education and information research; and
(v) all related data communication services.

Now, in the current case, Teresa Ltd. is a company registered in New York (U.S.A.). The company has no place of
business established in India, but it is doing online business through data interchange in India (the main sever being
located in New York itself).

Accordingly, as per the legal provisions mentioned above, Teresa Limited is a foreign company.

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