Can a Company Be a Shareholder of Another Company?

Imagine you already own a company and want to start another business. Instead of investing in the new business in your personal name, you want your existing company to own shares in it.

Can you do that?

Yes! A company can become a shareholder of another private limited company in India.

Can a Company Be a Shareholder of Another Private Limited Company in India?

Yes, a company can become a shareholder of another private limited company in India. It can invest in another business by purchasing existing shares from a shareholder or subscribing to newly issued shares. The shareholder does not have to be an individual; another private limited company or a public company can also hold shares, subject to applicable legal requirements.

Before making the investment, the investing company must check whether its Memorandum of Association (MOA) permits the proposed investment and obtain the necessary Board approval or shareholder approval, wherever required. It must also comply with the applicable investment limits and conditions under the Companies Act, 2013, including Section 186 where applicable.

The company receiving the investment must follow the correct legal procedure for issuing new shares or transferring existing shares. This includes checking its Articles of Association (AOA), respecting applicable shareholder rights and completing the required documents, statutory records and filings.

In simple words, a company can legally own shares in another company, provided the investment follows the applicable laws and the required procedures are completed.

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What Does It Mean When a Company Is a Shareholder of Another Company?

A company becomes a shareholder when it owns shares in another company. In simple words, one business invests money in another business and receives shares in return.

For example: ABC Private Limited wants to invest ₹10 lakh in XYZ Private Limited. XYZ Private Limited issues shares to ABC Private Limited in exchange for the investment.

In this case:

• ABC Private Limited becomes a shareholder of XYZ Private Limited.
• XYZ Private Limited receives the investment if the shares are newly issued.
• Both companies continue to exist as separate legal entities.

The investing company receives the rights attached to its shares, such as voting rights where applicable and the right to receive dividends when properly declared and payable.

Why Would a Company Invest in Another Company?

A company may invest in another business for several reasons:

• Business expansion: To enter a new market or business.
• Strategic investment: To build a business relationship with another company.
• New business opportunities: To start a separate business under another company.
• Financial returns: To earn potential returns through dividends or an increase in the value of its shares.

How Can a Company Become a Shareholder of Another Private Limited Company?

There are two common ways for a company to become a shareholder.

1. By Subscribing to New Shares

A company can invest in a business by subscribing to newly issued shares.

For example, XYZ Private Limited needs funds to expand its business. ABC Private Limited invests ₹10 lakh in XYZ Private Limited, and XYZ allots shares to ABC after completing the required legal procedure.

ABC Private Limited then became a shareholder of XYZ Private Limited.

This method allows the company receiving the investment to raise funds for its business.

2. By Purchasing Existing Shares

A company can also purchase shares from an existing shareholder.

Once the share transfer is properly completed and recorded, ABC Private Limited becomes a shareholder of XYZ Private Limited.

The transfer must follow the Companies Act, 2013, the target company's Articles of Association (AOA) and any applicable restrictions.

Important: When existing shares are purchased, the money generally goes to the selling shareholder, not to the company whose shares are being purchased.

What Is the Process for a Company to Become a Shareholder?

The process depends on whether the company is buying existing shares or subscribing to newly issued shares.

1. Check the Company's Documents

The investing company should check its MOA and AOA to confirm that the proposed investment is permitted and properly authorised.

It should also check whether the investment falls within the limits prescribed under Section 186 of the Companies Act, 2013, where applicable.

2. Check the Target Company's Rules

The company receiving the investment should check its AOA and existing shareholding arrangements.

For a private limited company, the AOA may restrict the transfer of shares. If new shares are being issued, the company must also follow the applicable share issue rules and existing shareholders' rights.

3. Obtain the Required Approvals

The investing company must obtain the necessary Board approval and any shareholder approval required by law.

Under Section 186, applicable investment limits and approval requirements must be checked. Where the prescribed limits are exceeded, a special resolution is generally required, subject to applicable exemptions.

The target company must also obtain the approvals required for the share issue or transfer.

4. Complete the Share Issue or Transfer

The next step depends on the type of investment.

For new shares: The target company completes the applicable share issue and allotment procedure, receives the investment and allots shares

For existing shares: The buyer and seller complete the required transfer documents and follow the applicable share transfer procedure

5. Complete the Required Filings and Records

The companies must complete the applicable statutory filings and update their records.

For a new share allotment, the target company generally needs to file Form PAS-3 with the Registrar of Companies (ROC) within the prescribed period, subject to the applicable rules.

For a transfer of existing shares, the required transfer documents and entries in the company's records must be completed.

6. Update the Shareholding Records

After completing the required procedure, the target company records the investing company as a shareholder and provides the applicable share certificate or other evidence of ownership.

The investing company should also record the investment in its books of account.

What Documents Are Required?

The documents depend on the type of investment and the companies involved. Common documents may include:

• Certificate of Incorporation of the investing company.
• PAN and company identification details.
• MOA and AOA of the investing company.
• Board resolution approving the investment.
• Shareholder resolution, if required.
• Share subscription or investment agreement, where applicable.
• Share purchase agreement, where applicable.
• Share transfer form and related documents, where required.
• Payment records and other supporting documents.
• Share allotment records and statutory filings, where applicable.

Additional documents may be needed depending on the transaction and the applicable legal requirements.

When Can a Company Face Restrictions on Becoming a Shareholder?

Although a company can generally invest in another company, it cannot ignore the applicable legal rules.

The main points to check are:

• Investment limits: Section 186 of the Companies Act, 2013, prescribes limits and approval requirements for certain company investments, subject to applicable exemptions.
• Company documents: The proposed investment must be properly authorised and consistent with the company's MOA and applicable legal requirements.
• Share transfer restrictions: A private limited company's AOA may restrict the transfer of existing shares.
• Share issue rules: New shares must be issued in accordance with the applicable legal procedure and existing shareholders' rights.
• Other applicable laws: Additional rules may apply depending on the nature of the investment, including foreign investment rules where relevant.

Therefore, a company should check the proposed investment before transferring money or completing the share transaction.

Conclusion

A company can become a shareholder of another private limited company in India. It can do so by subscribing to newly issued shares or purchasing existing shares. The process involves checking the companies' documents, obtaining the required approvals, completing the share issue or transfer and updating the statutory records.

However, the investment must comply with the applicable requirements of the Companies Act, 2013, including the rules governing company investments. Before proceeding, both companies should confirm the approvals and filings required for their specific transaction.

Need assistance? Connect with Startup Movers for company incorporation, shareholding structuring, MCA filings and expert guidance to help your business stay compliant.