CHAPTER II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO
[Sections 3 to 22]

Subsidiary company not to hold shares in its holding company.
[Section 19 is brought to force with effect from September 12, 2013.]

Corresponding provisions of the Companies Act, 1956:
Section 42.

Corresponding provisions of the English Companies Act, 2006:
Part 8, Chapter 4: Sections 136 to 144.

Applicability:

This section is applicable to all companies.

Section 19. (1) No company shall, either by itself or through its nominees, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void:

Provided that nothing in this sub-section shall apply to a case—

(a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or

(b) where the subsidiary company holds such shares as a trustee; or

(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company:

Provided further that the subsidiary company referred to in the preceding proviso shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in clause (a) or clause (b) of the said proviso.

(2) The reference in this section to the shares of a holding company which is a company limited by guarantee or an unlimited company, not having a share capital, shall be construed as a reference to the interest of its members, whatever be the form of interest.

Comments:

This section provides that a subsidiary company shall not acquire shares of its holding company. Not even through nominee (benamidar or ostensible owner) of subsidiary. And if it acquires, the same shall be void. However it allows subsidiary company to continue to hold shares of its holding company, if the same were acquired prior to it becoming subsidiary. Holding company is also prohibited from allotting or transferring shares to its subsidiary. And if it does so, the same shall be void.

This is the basic principle. Some exceptions to this principle is carved out specifically and subsidiary company can hold shares of its holding company in three cases, as stated in the first proviso to section 19(1).

By implication, from the second proviso to section 19(1), subsidiary company does not have voting right in respect of shares of holding company acquired by it, prior to becoming its subsidiary company.

Both the terms ‘holding company’ and ‘subsidiary company’ are defined under sections 2(46) and section 2(87) of the Companies Act 2013 and both definitions are brought to force from September 12, 2013.