The subject matter of this article is a question that has often plagued the Indian courts.  Section 180(1)(a) of the Companies Act, 2013 (‘CA 2013’) places restrictions on the board of directors of a company in respect of selling, leasing or disposing of the whole or substantially the whole of the undertaking of the company.  It provides that in respect of such matters, a special resolution of the shareholders is a prerequisite before any action can be undertaken by its board of directors.  It is key to mention here that Section 180 of CA 2013 is only applicable to public companies.  

Explanation to Section 180(1)(a) of CA 2013 defines the term ‘undertaking’ to mean “an undertaking in which the investment of the company exceeds 20% (twenty per cent) of its net worth as per the audited balance sheet of the preceding financial year (‘FY’) or an undertaking which generates 20% (twenty per cent) of the total income of the company during the previous FY”. Further, the explanation also provides that the expression ‘substantially the whole of the undertaking’ in any FY means “20% (twenty per cent) or more of the value of the undertaking as per the audited balance sheet of the preceding FY”.

While CA 2013 provides for the quantitative criteria for determination of an ‘undertaking’ and the term ‘substantially the whole of the undertaking’, it leaves a lacuna in defining the qualitative elements of what comprises within an ‘undertaking’.  This becomes more relevant in the context of large companies having assets which qualify the quantitative criteria set out in the CA 2013, but in essence (i.e. by the very nature of the asset)may not be capable to qualify as an ‘undertaking’ (i.e. having a business/ commercial existence of its own) – one such example being, investments by a company in shares of another company.

Additional compliances to be undertaken by Listed Entities

In terms of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’), there are certain additional compliances that are required to be undertaken by listed companies.

Per Regulation 37A of the LODR Regulations that came into effect last year, a listed entity carrying out sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of such entity or where it owns more than 1 (one) undertaking of the whole, or substantially the whole of, any of such undertakings is required to undertake the following actions:

  • take prior approval of shareholders by way of special resolution; and
  • disclose the object of and commercial rationale for carrying out such sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of the entity, and the use of proceeds arising therefrom, in the statement annexed to the notice to be sent to the shareholders.

Further, the said regulation requires the shareholder approval from amongst the majority of the public shareholders, before such a transaction can be acted upon by the company.  It is also key to mention herein that such public shareholders should not be interested in the transaction in question. The only exemption from these requirements is when the transaction is between a listed entity and its wholly owned subsidiary.

The Explanation to Regulation 37A(1) of the LODR Regulations provides that the terms “undertaking” and “substantially the whole of the undertaking” shall have the same meaning as assigned to them under Section 180(1)(a) of CA 2013.

Judicial Interpretation of the term ‘undertaking’

In view of the above ambiguity, reliance on case laws dealing with the subject matter becomes imperative. The Indian courts have, in various case laws, expounded upon the term ‘undertaking’. In the case of Rustom Cavasjee Cooper v. Union of India[1], the Supreme Court interpreted the term ‘undertaking’ in the following manner: “The undertaking is an amalgam of all ingredients of property and is not capable of being dismembered. That would destroy the essence and innate character of the undertaking. In reality the undertaking is a complete and complex weft and the various types of business and assets are threads which cannot be taken apart from the weft.

The Karnataka High Court in the case of International Cotton Corporation P. Ltd. v Bank of Maharashtra[2] referred to the Webster’s New Standard Dictionary to describe the term ‘undertaking’. The court stated that “The word “undertaking” has been defined as “any business or any work or project which one engages in or attempts as an enterprise analogous to business or trade””. It further held that “The business or undertaking of the company must be distinguished from the properties belonging to the company.

In P.S. Offshore Inter Land Services Pvt. Ltd. and Ors. v. Bombay Offshore Suppliers And Services Ltd. and Ors.[3], the Bombay High Court prescribed a test to be applied for assessing 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” (‘Asset Test’). It observed that “If the question arises as to whether a major capital asset of the company constitutes 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 the disposal of the assets.”

Whether ‘sale of shares’ amounts to ‘sale of undertaking’

Indian courts have dealt with this question quite often owing to the ambiguity as regards the legislative intent of Section 180(1)(a) of CA 2013.  In Tracstar Investments Limited and Ors. v. Gordon Woodroffe Limited and Ors.[4], the Company Law Board made a reference to the Asset Test and applied the same to the facts of that case.  It stated that “The main object of the company is not even to engage in the business of investing in shares. Consequently, the disposal of these shares would not bring the business of the company to a standstill. Thus, the sale of the shares does not certainly pass through the test prescribed.

Further, in the case of CDS Financial Services (Mauritius) Ltd. vs. BPL Communications Ltd. and Ors.[5], the Bombay High Court referred to its earlier decision in Brooke Bond India Ltd. v. U.B. Ltd. And Ors.[6], wherein it had held that “The sale of shares, whatever be their number, even if amounts to a transfer of the controlling interest of a company, cannot be equated to the sale of any part of the “undertaking” so as to come within the mischief of section 293(1)(a)”.

The Bombay High Court in Principal Commissioner of Income Tax – 16 v. UTV Software Communication Limited[7], distinguished between the expressions ‘transfer of shares’ and ‘transfer of an undertaking’, under the provisions of the Income Tax Act, 1961 stating that “transfer of shares cannot be considered to be a slump sale of an undertaking within the provisions of Section 2(42C) of the Act.”  In this case, the Bombay High Court referred to the impugned order of the Income Tax Appellate Tribunal (‘ITAT’), with which it agreed ultimately.  In arriving at its decision, the ITAT had relied on the Supreme Court judgement in Bacha F. Guzdar v. CIT[8] in which it was observed that “the interest of a shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders.

Interestingly, there is an independent compliance requirement under Regulation 24(5) of the LODR Regulations, where a listed entity cannot dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than or equal to 50 (fifty) percent or cease the exercise of control over the subsidiary without passing a special resolution in its general meeting.  This specific requirement applicable to listed entities for ‘sale of shares in a subsidiary’ leads to an argument that the LODR Regulations specifically deal with ‘sale of shares’ under Regulation 24(5) and thus, the provisions of Regulation 37A are not intended to deal with sale of shares but sale of an ‘undertaking’ (i.e., an operating business, in effect).  


The quantitative qualifiers provided in the explanation to Section 180(1)(a) of CA 2013 do not provide a complete perspective regarding what constitutes an ‘undertaking’.  Therefore, on the legislative front, there appears to be a vacuum.

However, based on the judicial interpretation provided by the various case laws discussed in this article, it may be inferred that ‘sale of shares’ may not always constitute a ‘sale of undertaking’ under Section 180(1)(a) of CA 2013.  This is because the quantitative thresholds as prescribed under CA 2013 cannot be applied in isolation without having regard to the ‘qualitative’ aspects of determining whether the shares which are the subject matter of the relevant transaction would comprise of an ‘undertaking’ in the first place.  

Written By Nidhi Arora (Partner) and Manan Kapoor (Senior Associate)

[1] [1970] 3 SCR 530

[2] [1971] 41 COMPCAS 226 (KAR)

[3] [1992] 75 Comp Cas 583 (Bom)

[4] [1996] 87 COMPCAS 941 (CLB)

[5] [2004] 121 CompCas 374(Bom)

[6] 1992 (2) BomCR 429

[7] 2019 SCC OnLine Bom 2225.

[8] 1955 SCR (1) 876

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