Subsidiaries Layers limited


The Patron Government of ease of doing business was earlier considered not favourable for corporate governance. After “successful” demonetization, government looking for all possible measure it seems necessary even though earlier not much liked by it. The enforcement of the provision of limiting layers of subsidiaries is one such law. Ministry of Corporate Affairs on 20th September 2017 notified Proviso to clause (87) of section 2 and –.

By a notification dated 20th September 2017, the Central Government hereby appoints the 20th September 2017 as the date on which proviso to clause (87) of section 2 of the said Act shall come into force.

The relevant part of said clause (the proviso and explanation) read as under:

“Provided that 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 an 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;”

Restriction on number of layers

According to Rule 2(1) of these rules, on and from the date of commencement of these rules, no company, other than a company belonging to a class specified in sub-rule (2), shall have more than two layers of subsidiaries.

These rules come into force from 21st September 2017. Rule 2 is prospective in nature.

Exempted companies

According to sub-rule (2) of rule 2, the provisions of this rule shall not apply to the following classes of companies, namely:—

(a) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(b) a non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934) which is registered with the Reserve Bank of India and considered as a 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 (4 of 1938) and the Insurance Regulatory Development Authority Act, 1999 (41 of 1999);

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

These exempted companies can have any number of subsidiaries.

Exemption for foreign subsidiaries

According to the proviso to sub-rule (1) of rule 2, 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.

This means a company may have a number of layers of subsidiaries beyond two layers but not beyond the limit permitted as per the law of the host country. Technically this limit shall count with reference to top layer foreign subsidiary in the host country.

Wholly owned subsidiaries not to count

According to the second proviso to sub-rule (1) of rule 2, for computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.

Simply, where a step-down subsidiary is a wholly owned subsidiary of its holding, it will not be counted as the separate layer. In the example Hà S1à WS1àS2àWS2, there are only two layers according to this proviso.

Reporting of existing layers

According to clause (i) of sub-rule (4) of rule 2, 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), shall file, with the Registrar a return in Form CRL-1 disclosing the details specified therein, within a period of one hundred and fifty days from the date of publication of these rules in the Official Gazette.

Last date of filing Form CRL -1 is 18th February 2018.

Restriction on existing layers

According to clauses (ii) and (iii) of sub-rule (4) of rule 2, 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) –

  • shall not, after the date of commencement of these rules, have an additional layer of subsidiaries over and above the layers existing on such date; and
  • 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.

This means no new layer is created after the commencement of these rules. Where, after the commencement of these rules, a layer is reduced from existing number of layer, the number of layers shall not be increased from that reduced number of layer.

Investment subsidiaries

According to sub-rule (3) of rule 2, the provisions of these rules shall not be in derogation of the proviso to sub-section (1) of section 186 of the Act.

According to subsection (1) of Section 186 discussed earlier here, a company shall unless otherwise prescribed, make an investment through not more than two layers of investment companies.

According to proviso to subsection (1) of section 186, the provisions of this subsection shall not affect,—
(i) a company from acquiring any other company incorporated in a 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.]

Punishment

According to sub-rule (5) of these rules, If any company contravenes any provision of these rules the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

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