You are on page 1of 6

INTRODUCTION

It's not a denying fact that today's economy is dominated by holding companies. If we go a
couple of years back and look at the Fortune 500 Annual list of top companies, we are to find
that the top 10 companies in the list owned an average of 62 subsidiary companies etc.
Many subsidiary corporations, though owned entirely by another corporation are themselves
huge corporate business enterprise. For an example Tencent Games being the Biggest Mobile
Gaming Developing Company owns such a major business as Riot Games, one of the well-
established PC video game developers.
In this paper, we are going to discuss about the same, we are going analysis the contentious
issues related to Holding and Subsidiary Companies under the ambit of Indian Companies Act,
2013. We will be discussing how Subsidiary and Holding companies are defined, what exactly
in the difference between them, and lastly our major topic of discuss will be about Holding-
Subsidiary company in the context of control test.
RESEARCH QUESTIONS
The paper deals with 3 research questions, which are as follows:
1. Understanding What a Holding and Subsidiary Company Is.
2. Determination of Holding and Subsidiary Company.
3. Who has the Control in Holding-Subsidiary Companies?
METHODLOGY
In this paper, Interpretive method of approach has been followed. Since Determining Control
in the Holding-Subsidiary company can sometime we a very troubling subject, thus the study
in this paper focuses on disclosing the exact Position of Indian Companies Act, 2013 on
Holding and Subsidiary Companies, Difference Between both and a detailed study on how is
control defined in both these companies in different scenarios.
To come to a conclusion, references has been taken from both online as well as offline available
sources. Including Bare acts, Guide books, Online Articles, News, Opinions and many more.
SCOPE
The study is limited to Indian Companies Act, 2013 and in the act, it is further limited to
material which deals with Holding and Subsidiary companies any other outside sources which
might or might not have an effect on the subject, has not been taken into consideration. Also,
the study has been limited to the Boundaries of India, and anything which deals with foreign
transaction has not been taken into consideration.
CHAPTERS
1) Definitions
A few provisions of the Companies Act, 2013 were notified and came into force from 2013
itself, however the majority of them came in effect only beginning from 1st April 2014. Under
the Indian Companies Act, 2013 various news concepts and definitions were introduced to
make the Company law meet the present-day requirements making it more relevant and
contemporary.
One of the concepts which has remained almost the same as it was in the Indian Companies
Act, 1956 is the Definitions of Holding and Subsidiary Company.
At present Section 2(46) of the Indian Companies Act, defines holding company, in relation to
one or more other companies, means a company of which such companies are subsidiary
companies.
And Section 2(87) of the act provides that 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 -
1. Controls the composition of the Board of Directors;
2. Exercises or controls more than one-half of the total share capital either at its own or
together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies, shall not have layers of subsidiaries
beyond the prescribed limit.
2) Understanding what a subsidiary and holding company is
Essentially, if one company hold more than half of the shares of another or appoints a majority
of the other company's director, the second company is a subsidiary of the first. The first
company is called the holding company.1 In the same scenarios if the company holds all the
shares of the subsidiary company, it shall be called wholly owned subsidiary.
However, 100% shareholding is technically impossible as a private company requires a
minimum of 2 shareholder. The company may give one share to another shareholder. Typically,
it is a relative of the promoters who runs the company.
3) Factors for Determining ‘Holding Company’ and ‘Subsidiary Company’
A Company is a subsidiary or another can easily be found out by relying on these two given
factors:
1. Control Over the Board of Directors of the Company by Others: This factor has
remained untouched in Indian Companies Act, 2013. Thus, if a company has a right by
which it can exercise its right to remove as well as appoint a majority or all of the
directors of the other company. Such a right is generally mentioned in the AoA (Article
of Association) of the company or can also be mentioned in an agreement between the
two companies.

2. The second factor is where simple, when one company owns more than 50% of the
‘Total Share Capital’ of the other company either by its own or with one or more of its
subsidiaries.
The control was with respect to more than 50% in the nominal value it’s equity share capital
under Companies Act, 1956. This was because after Companies Act, 1956 came into existence
‘Preference share’ had no voting rights on matters which did not affect them. Thus, to

1
https://blog.ipleaders.in/difference-between-holding-and-subsidiary-company/
determine which company is a subsidiary to another was only determined on the basis of 50%
control in the Paid-up equity control shares.
In Indian Companies Act, 2013 it has been made clear that not only the other company has to
have more than half of the ‘total share capital’ but it should also control more than half the
voting powers in the other company.

PARAPASHE FROM BELOW


4) Control Under Section 2 of Companies Act, 2013
Section 2(27) of the companies act states that control shall include the right to appoint majority
of the directors or to control the management or policy deisions excersiable by a person or
persons acting individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements or in any
other manner.
As per Rule 2(1)® of the Companies (Specification of definitions details) Rules, 2014, “Total
Share Capital,” for the purposes of sub-sections (6) and (87) of Section 2, means the aggregate
of the:-
(a) paid-up equity share captial and
(b) convertiable prefereance share captial.
5) Commercial Reason for creation of holding subsidiary structure
1. To segregate the business structure and to create the distinct entities with separate
management. For example, FMCG products can be housed under one vertical and
consumer durables and electronics can be in another. This enables the value of different
businesses to be captured separately. It facilitates buying and selling of an individual
business. An investor can directly acquire shares of the company it is interested in. If
an investor wants exposure (i.e. stake or benefit) in both segments then it can invest at
the parent company level.
2. Holding-subsidiary structure can also be used by companies to create different brands
and brand categories for different kinds of products. For example, Vivanta is the budget
brand of the Taj Group of Hotels. Companies may prefer to house different brands
under different verticals. It enables them to bundle a brand and its intellectual property
together in the event of a sale. This planning is typically done beforehand or when the
company’s operations expand and they need to be ‘organized’ or ‘restructured’ in a new
way.
3. Companies use subsidiary structures to when they do business internationally, where
they incorporate a separate subsidiary company in each country. This enables a
company to enter and exit from business with respect to a particular country.
4. Sometimes, this form of structuring enables companies to take advantage of lower tax
rates in other jurisdictions. For example, many international venture capital funds have
structured investments into India through a Mauritius entity to take advantage tax
exemptions under India and Mauritius Double Taxation Avoidance Agreements
(DTAAs).
5. The structure can be expanded and extrapolated further by adding more layers of
subsidiaries. For example, a global company may have a South Asia Holding company
which has a parent India subsidiary, and further subsidiaries for different industry
segments that the company sells products/ services in.

6) Transactions between the subsidiary and holding companies


Permitted Transactions
1. Any loan made by a holding company to its wholly-owned subsidiary company is
permitted if the said loan is used for wholly-owned subsidiaries’ principal business. The
loan should not be used for any other investment by the subsidiary company.
2. Holding company can provide guarantee/security for any loan made to its wholly-
owned subsidiary company if the said loan is used for wholly-owned subsidiaries’
principal business. The loan should not be used for any other investment by the
subsidiary company.
3. Furthermore, holding company can provide guarantee/security for any loan made to its
subsidiary company by any bank and financial institution if the said loan is used for
wholly-owned subsidiaries’ principal business. The loan should not be used for any
other investment by the subsidiary company.
Other than above, transactions between holding companies and subsidiary companies are
classified as related-party transactions under section 2(76). For these transactions, consent of
Board of directors should be given by a resolution at a Board meeting. Moreover, if these
transactions are not entered by the holding or subsidiary company in its ordinary course of
business, they have to make sure that they have followed arm’s length principle. Thereafter,
holding company and subsidiary company can enter into a contract or an arrangement for the
following things:
 Sale, purchase or supply of any goods or materials;
 Selling or otherwise disposing of, or buying, property of any kind;
 Leasing of property of any kind;
 Availing or rendering of any service;
 Appointment of any agent for purchase or sale of goods, materials, service or property;
 Appointment of related party to any office or place of profit in the company, or its
subsidiary or associate company;
 underwriting the subscription of any securities or derivatives thereof, of the company.
To further govern these related party transactions, central government came up with The
Companies (Meetings of Board and its Powers) Rules, 2014.
Prohibited Transactions
As can be seen above, permitted transactions have been specified in the act. One thing we need
to remember is that if the proper procedure has not been followed to conduct permitted
transactions, it will be in contravention of the act and will result into penalty for the company.
However other than that, the act also specifies various prohibited transactions between
subsidiary and holding company. The rationale behind is that to ensure that the directors are
not utilising the companies’ funds for their own benefit. Prohibited transactions are:

1. A subsidiary cannot have an shares in its holding company. Thus, cross-holdings are
not permitted between holding subsidiary companies. Holding company can not allot
or transfer its shares to any of its subsidiary company. If you see the holding structure
of the Tata group there are numerous cross-holdings between companies (i.e. Company
A will have some shares in Company B and Company B will also have some shares in
Company A). That is possible if the two companies are not holding and subsidiary
companies (i.e. mutual shareholding in each other should be less than 50%).
2. Any loan made by a holding company to the subsidiary company is not permitted under
the act.
3. Any loan/guarantee/security made by the subsidiary company to the director of the
holding company is not permitted.
Layering Under Companies Act
As explained above, layering under the act means subsidiary or subsidiaries of the holding
companies. As given under the proviso of section 2(87), there is a prohibition on the holding
company to not have more layers as prescribed under the act. Section 186(1) of the act specifies
that a company should not invest in more than two layers of investment companies. Keeping
in mind the proviso of section 2(87) of the act, on 20th September 2017, the Central
Government enacted “the Companies (Restriction on Number of Layers) Rules, 2017. These
rules specify that no companies shall have more than two layers of subsidiaries. This restriction
is for vertical subsidiaries not for horizontal subsidiaries.
Before going into the details of layering, let’s first understand why there is a need for restricting
layers of the company which is as follows:
1. To reduce the illicit fund flows.
2. To curb diversion of funds.
3. To keep a check on the multiple layers of subsidiaries.
4. To stop companies to reduce shell companies for diversion of funds.
5. To prevent the company from money laundering, the illegal way of obtaining money.
6. To enable the authorities to identify the beneficiaries of corporate structures.
Restrictions on Layering under the Companies (Restriction on Number of Layers) Rules, 2017
Now, let’s take a look at the provisions of these rules.
1. A company shall not have more than two layers of subsidiaries.
2. A wholly owned subsidiary company would not be taken in account as a separate layer.
3. Following classes of companies are outside the scope of these rules:
4. A banking company;
5. A non-banking financial company;
6. An insurance company;
7. A government company.
8. A company acquiring a company incorporated outside India having more than two
layers of subsidiaries provided it is in accordance with law of that country.
9. A subsidiary company who is required to have an investment subsidiary under any law
or rules.
10. These rules are prospective in nature. Therefore, any company who had more than two
layers of subsidiaries on or before these rules came into force, they are required to
11. file a return in Form CRL-1 to Registrar within 150 days of publication of these rules.
12. shall not add more layers of subsidiaries.
13. If the layers are reduced after these rules came into force, shall not increase their number
of layers beyond two.
14. A maximum fine of Rs. 10,000 will be imposed on the companies and every officer of
the company which is in contravention of these rules. If the contravention is a
continuing one, then a maximum fine of Rs. 1,000 every day will be imposed.
Whether Body Corporate a ‘Holding Company’:
As regards a body corporate incorporated outside India was concerned, the Companies Act
1956 clearly provided that, a subsidiary or holding company of the body corporate under the
laws of such country shall be deemed to be a subsidiary or holding company of the body
corporate within the meaning and for the purposes of this Act also, whether the requirements
of section 4 of Companies Act, 1956 are fulfilled or not.
No such provision exists under the Companies Act 2013. This would mean that the question of
holding company or a subsidiary company of a body corporate incorporated outside India
would be strictly interpreted according to provision of S 2(87) of the Companies Act 2013.
CONCLUSION (Yet To Finish)
The Government should issue appropriate clarifications of the intent of the law or better still
carry out necessary amendments to the Companies Act 2013, to rectify/clarify the anomalies
and issues discussed above, absence of which could lead to needless litigation.

You might also like