HOLDING COMPANY & SUBSIDIARY COMPANY RELATIONSHIP-LAW DECODED-BY CS ROHIT KUMAR

Holding-Subsidiary Company Relationship

In this article, we will discuss the various criteria which create holding and subsidiary relationship between two companies. Understanding holding-subsidiary relationship important to know status of related parties between two companies and to consolidation of books of account.

DEFINITION UNDER COMPANIES ACT, 2013

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

Explanation:- For the purpose of this clause, the expression  "company"  includes any body corporate;]

To understand this definition, we need to look subsidiary definition as well which is given u/s 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 one-half of the [total voting power] either at its own or together with one or more of its subsidiary companies:

However, if 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. [Circular No. 20/2013 dated 27th December, 2013]

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.

A company can not have more than two layers of subsidiary, but this limit shall not be applicable on a banking company, NBFC, insurance company or a government company. [Companies (Restriction on Number of layers) Rules, 2017]

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;


COMPLIANCES:

  1. Companies which have more than two layers of subsidiary companies  shall file a form CRL-1 disclosing details.

NON-COMPLIANCE:

If any company contravenes any provision of the rules the company and every officer of the companies who is in default shall be punishable with file which may extend to Rs. 10,000 and where the contravention is a continuing one, with a further fine which may extend to Rs. 1,000 for every day.


CONTENTIOUS ISSUES?

Criteria to control Board composition: 

Following are usual mode of forming a board controlled subsidiary:
  • By making a provision in the articles empowering the holding company to appoint or remove the directors.
  • By entering into contract with the shareholders of the subsidiary company.

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