Holding and Subsidiary Company

 

 

Let’s discuss the provision of Subsidiary and Holding Company

As per the Companies Act, 2013

Subsidiary Company

Section 2(87) "subsidiary company" or "subsidiary

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 1/2 of the total voting power either at its own or together with one or more of its subsidiary companies:

Conditions:

Such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (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;

(c) the expression "company" includes any body corporate;

(d) "layer" in relation to a holding company means its subsidiary or subsidiaries;

 

Note: Wholly Own subsidiary (WOS) is a subsidiary company where holding company owns 100% of the shares of other company, However, A private company requires a minimum of two shareholders, so 100% shareholding is actually impossible. The company may give one share to another shareholder (who is friendly or aligned to the holding company). Normally, it is a relative of the promoters who run the Company.

 

Clarification with regard to holding of shares or exercising power in a fiduciary capacity - Holding and Subsidiary relationship under Section 2(87) of the Companies Act, 2013 under general circular No. 20 /2013

it is 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.

 

Holding Company

Section 2(46) of the Companies Act, 2013 ) "holding company", in relation to one or more other companies, means a company of which such companies are subsidiary companies;

In simple words, The Company is said to be the holding company if that particular company holds/owns at least 50% of voting rights of other companies and has the authority to make management decisions, influences and controls the company’s board of directors.

 

Layers of subsidiaries

The word layer as used in the section 2(87) of the act implies subsidiary or subsidiaries of a holding company. Section 186 and proviso to Section 2(87) of the Companies Act restricts the number of layers that holding companies shall have. It must be read along with the Companies (Restriction on Number of Layers) Rules, 2017.

Section 186 (1) Without prejudice to the provisions contained in this Act,

Ø  a company shall unless otherwise prescribed, make the investment through not more than two layers of investment companies:

But the provisions of this sub-section shall not affect,—

        I.            a company from acquiring any other company incorporated in a the country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country:

      II.            a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

 

The Companies (Restriction on number of layers) Rules, 2017.

Restriction on number of layers for certain classes of holding companies.—

(1) On and from the date of commencement of these rules, other than a company belonging to a class specified in sub-rule (2), Company shall not have more than two layers of subsidiaries:

However, the provisions of this sub-rule shall not affect a company from acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country:

For computing the number of layers under this rule:

Ø  One layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.

It can be said that wholly owned subsidiaries have been excluded from being treated as a separate layer as per the rules above.

 

 

(2) Following classes of companies are exempt from restriction on number of layers:—

a)      a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;

b)      a non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 which is registered with the Reserve Bank of India and considered as systematically important non-banking financial company by the Reserve Bank of India;

c)       an insurance company being a company which carries on the business of insurance in accordance with provisions of the Insurance Act, 1938 and the Insurance Regulatory Development Authority Act, 1999

d)      a Government company referred to in clause (45) of section 2 of the Act.

(3) The provisions of this rule shall not be in exemption of the proviso to section 186(1) of the Act.

(4) Every company, other than a company referred to in sub-rule (2), existing on or before the commencement of these rules, which has number of layers of subsidiaries in excess of the layers specified in sub-rule (1) –

(i)                  shall file, with the Registrar a return in Form CRL-1 disclosing the details specified therein, within a period of  150 days from the publication of these rules in official Gazette.

(ii)                shall not, after the date of commencement of these rules, have any additional layer of subsidiaries over and above the layers existing on such date; and

(iii)               shall not, in case one or more layers are reduced by it subsequent to the commencement of these rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed in subrule (1), whichever is more.

(5) If any company contravenes any provision of these rules

Ø  the company and every officer of the company who is in default shall be punishable

Ø  with fine which may extend to 10,000 rupees and

Ø  where the contravention is a continuing one,

Ø  with a further fine which may extend to 1,000 rupees for every day after the first during which such contravention continues.

 

 

Why Government restricting the layers of number of subsidiaries?

The limit on layers of subsidiaries is anticipated to keep a check on multiple layers of holding-subsidiary structures for circulation /routing of funds with a view of prohibiting companies from misusing the manifold layers and enable regulators/ authorities to identify the ultimate beneficiaries of complex corporate structures.

 

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