Friday, 29 September 2017

Restriction on number of layers of Subsidiaries

Section 2(87) of the Companies Act, 2013 defines the term ‘subsidiaries’ and recently, the proviso to the sub-section which provides for prescribing a limit to number of layers of subsidiaries which a holding company may have, has been notified. Companies (Restriction on number of layers) Rules, 2017 (the ‘Rules’) provides that a company cannot have more than two layers of subsidiaries except in following cases:

a.       A banking company;
b.      A systematically important non-banking financial company;
c.       An insurance company;
d.      A government company;
e.      A company acquiring another company incorporated outside India with subsidiaries beyond two layers;
f.        In computing two layers, a holding company having one layer of more than one wholly owned subsidiaries will be taken as one.
g.       Those allowed under Section 186(1) of Companies Act, 2013.

Every company have more layers than prescribed are required to file a return with the Registrar of Companies and are restricted to add to the layers beyond two or such number as is existing as on the date of the Rules, whichever is more.

It may be noted that both J J Irani Committee report as well as the Companies Law Committee formed in 2015 recommended against having any restriction on number of layers of subsidiaries which a company may have, as it will significantly put Indian companies at a disadvantage vis-à-vis their international counterparts.

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