India: Selling Shares – Whether Sale Of An Undertaking?

A re-echoing question, which comes up while evaluating or contemplating a transaction structure and related compliance actions, is whether 'sale of shares' of a subsidiary or downstream company would be considered as 'sale of an undertaking' by the seller (company). The same gains significant importance in cases of hold co structures or entities not having business of their own (common for Indian promoter groups / family run companies).

In the Indian context, the 'sale of undertaking' has been dealt in Section 180 of the Companies Act 2013 (Act), whereby sale and transfer of an undertaking requires special resolution (i.e. approval of ¾ majority) of the members voting.

Section 180 of the Act defines 'undertaking' to mean an undertaking in which the investment of the company exceeds twenty per cent of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent of the total income of the company during the previous financial year; and the expression 'substantially the whole of the undertaking' in any financial year means twenty per cent or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

As per Section 2 (57) of the Act, the term 'net worth' is defined as the aggregate value of the paid-up share capital and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

The above provisions do not clarify whether sale of shares of a subsidiary or a downstream company would qualify as a 'sale of an undertaking'. However, there are few judicial precedents in which this question was discussed in detail.

The first notable case on this point was Brooke Bond India Limited v U.B. Limited and Others [1992(2)BomCR429] (Brooke Bond Case), in which the Bombay High Court held that "the sale of shares, whatever be their number, even if it amounts to a transfer of the controlling interest of a company, cannot be equated to the sale of any part of the undertaking". This case has subsequently been referred to in various other judgements where the same proposition has been upheld.

Around the same time, P.S. Offshore Inter Land Services Private Limited and Others v Bombay Offshore Suppliers and Services Limited and Others [[1992]75CompCas583(Bom)] prescribed another test in relation to disposal of capital assets (PS Test). In this case, the Bombay High Court held as follows:

"...If the question arises as to whether the major capital assets of the company constitute the undertaking of the company while examining the authority of the board to dispose of the same without the authority of the general body, the test to be applied would be to see whether the business of the company could be carried on effectively even after disposal of the assets in question or whether the mere husk of the undertaking would remain after disposal of the assets? The test to be applied would be to see whether the capital assets to be disposed of constitute substantially the bulk of the assets so as to constitute the integral part of the undertaking itself in the practical sense of the term."

Subsequently, the PS Test was applied in Tracstar Investments Limited and Another v Gordon Woodroffe Limited and Others [[1996]87CompCas941(CLB)] (Tracstar Case) to determine if sale of shares of a company can be qualified as 'sale of an undertaking'. In this case, the counsel for petitioners contended that (i) the sale of shares of a company should be construed as 'sale of an undertaking' as they were the only assets of the seller, and (ii) accordingly, Section 293(1)(a) of the Companies Act 1956 (then applicable companies act) would be applicable to such sale of shares and any non-compliance thereof would make such sale illegal and void. However, these contentions were not supported with any precedent and hence, could not be accepted by the honourable bench. The respondents, on the other hand, relied upon the ratio of the Brooke Bond Case - although, the honourable bench did not look into the merits of the same while ruling on the question at hand.

To elaborate, in Tracstar Case, the Company Law Board Southern Region Bench, Chennai evaluated the position of the seller post proposed sale of shares in light of the PS Test. The bench noted that while sale of shares may result in (temporary) suspension of the main business activity of the seller, the pursuit of such business cannot be ruled out. As such the board of directors is functioning and the seller is alive. The sale of the shares would not mean that the seller cannot carry on its business in future. Also, as per the memorandum of association of the seller, the business of the seller does not relate to investing money in shares of other companies. Therefore, the honourable bench was unable to accept the contention of the petitioners that by sale of the shares, the seller has parted with any undertaking or even a substantial part of the undertaking of the seller and as such rejected the contention of the petitioners in this regard. Accordingly, the bench concluded that the sale of shares does not meet the PS Test and it cannot be said that the mere husk of the undertaking would remain after the proposed disposal of shares by the seller.

To summarise, in view of the above judicial precedents and various references of the Brooke Bond Case in the subsequent judgements, it is (broadly) a settled rule that the sale of shares of subsidiary or downstream company is not 'sale of an undertaking'. However, one may prefer to closely evaluate the facts in hand / transaction structure before applying this rule, and accordingly, devise the plan of action for related approvals or compliances.

Also, on a related reference, it will be pertinent to note that the SEBI (Listing Obligations and Disclosure Requirement) Regulations 2015 (SEBI LODR Regulations) recognises the concept of a 'material subsidiary'. The term 'material subsidiary' is defined as a subsidiary, whose income or net worth exceeds twenty percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year. This becomes relevant in cases where a listed entity (or its subsidiary) is selling shares of a material subsidiary. Note that SEBI LODR Regulations sets out separate conditions and related compliances (including disclosure requirements) for dealing with the shares of a material subsidiary - for example, any change in control or reduction of shareholding below fifty percent of a material subsidiary requires a special resolution of the shareholders. Hence, one may like to factor these compliance actions while contemplating any transaction structure involving sale of shares of a material subsidiary (falling within the purview of SEBI LODR Regulations).

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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