Continuing its crack down on the shell companies, the Government has put more restrictions to control flow of funds within companies. In this 5th issue of CS Edge, we will know one more step taken by the Government in this regard.
On September 20, 2017, it issued rules to put restrictions on the number of layers of subsidiaries by a company. These rules are called the Companies (Restriction on number of layers) Rules, 2017. Click here to read the rules.
As per the rules, a holding company cannot have more than two layers of subsidiaries. Let us first understand what is a subsidiary.
WHAT IS A SUBSIDIARY?
As per section 2(87) of the Companies Act, 2013, “subsidiary company” or “subsidiary” means a company in which the holding company—
- controls the composition of the Board of Directors; or
- exercises or controls more than 50% of the total share capital
A wholly-owned subsidiary means a subsidiary which is completely owned by its holding company. i.e the holding company holds 100% of the total share capital of the subsidiary company.
The background
The two-layered restriction was already covered in section 186 (1) of the Companies Act, 2013. As per the section, a company cannot make investment thorough more than two layers of investment companies.
These rules bring more specification to the restriction.
Some companies are exempted from these rules. Also, while computing the number of layers, wholly owned subsidiaries are not considered.
EXEMPTIONS TO SOME COMPANIES
These provisions are not applicable to the following class of companies:
- a banking company
- a systematically important non-banking financial company registered with the Reserve Bank of India
- an insurance company carrying on the business of insurance
- a Government company
PROSPECTIVE APPLICABILITY
The rules are applicable prospectively. This means that if an existing company has more than two layers, it can continue to do so. It need not reduce the number of layers. But will not be allowed to add another layer, unless it is a wholly owned subsidiary company.
Case: ABC Ltd. has two subsidiaries – XYZ Limited and MNP Limited. XYZ Ltd. has a subsidiary DEF Limited. DEF Limited has a wholly own subsidiary TUV limited.
Is ABC Ltd. crossing the layer limits allowed?
Answer: As per the rules, this arrangement is allowed. However, if TUV Ltd. was not a wholly owned subsidiary, then ABC Ltd. would have been crossing the limits on layers imposed under the Rules.
So, ABC Ltd. can have any number of subsidiaries. However, there is a cap on the subsidiary of a subsidiary.
COMPLIANCE BY COMPANIES
Existing companies, which have more than two layers of subsidiaries, have to file e-form CRL-1 within 150 days from the date of publication of the said Rules. In the form, a company has to give details of the layers, the subsidiaries and the percentage held by the company.