Companies Act 2013

Companies (Restriction on number of layers) Rules, 2017

Indian Companies can have only two layers of subsidiaries under the Companies Act 2013, with the government putting in place stricter norms as it continues with the clampdown on illicit fund flows.

The Companies (Restriction on number of layers) Rules, 2017, notified (G.S.R. 1176(E)) by Central Government, came into effect from 20th September 2017.

  1. Meaning of Layers of Subsidiary

The Rules has not defined layers of subsidiaries. As per explanation (d) to Section 2(87) which defines ‘subsidiary’, layer in relation to a holding company means its subsidiary(ies).

As per the Rules, the following are not to be considered as layers of subsidiaries.

  • One layer which consist of one or more wholly owned subsidiary(ies) shall not be taken for computing the numbers of layers.

                            

For instance:

  1. One Layer of Wholly Owned Subsidiary (WOS)

One Layer:

XYZ Ltd is holding 100% equity of A Ltd, B Ltd, C Ltd and D Ltd. Layer one consists of 4 Wholly Owned Subsidiaries, which shall not be included for computation of layers

  • The provisions of the Rules are not in derogation of the proviso to sub-section (1) of section 186 of the Companies Act, 2013 i.e.
  1. A company can acquire any other foreign company ( a company incorporated outside India), where such foreign company has investment subsidiaries beyond two layers as per law of such country.
  2. A subsidiary company may have any investment subsidiary for the purposes of meeting requirements under any law or under any rule or regulation.
  • Section 186 (1) of the Act provides that if a company invests through layers of companies, then such number of layers for making investments shall not exceed two layers.

 

  1. Companies who already have more than 2 layers of subsidiaries

While the Rules are applicable prospectively, companies that already have more than two layers of subsidiaries have to furnish details to the Registrar of Companies (ROC).

  1. Need to file CLR-1 with the ROC within 150 days (i.e. by 17th February 2018) disclosing the details of layers of subsidiaries.
  2. Not allowed to have the additional layer of subsidiaries over and above the layers existing as on 20th September 2017.
  • Once the one or more layers are subsequently reduced (post 20th September 2017), then the Company shall not add number of layers of subsidiaries beyond the permitted layers after such reduction.

There is no provision upto what time such companies can continue to have more layers of subsidiaries than two permitted layers. Hence, it seems that they can continue until so required by them.

 

  1. Companies acquiring /creating subsidiary(ies) on or after 20th September 2017.

 

3.1 INDIAN COMPANY

A company acquiring/creating any other Indian company as its subsidiary cannot have more than two layers of subsidiaries.

  • For calculating two layers of subsidiaries, holding company need to check how many layers of subsidiaries it already has.
  • Secondly, check whether holding company could further acquire any of the India company.

 

For Instance:-

  • When a Company already have subsidiaries before enforcement of these rules

B Ltd is wholly owned subsidiary of A Ltd. And C Ltd is a subsidiary of B Ltd. And D Ltd is a subsidiary of C Ltd.

NOTE: B Ltd is wholly owned subsidiary of A Ltd. Hence, it’s not treated as layer one. B Ltd is a holding company of C Ltd and hence A Ltd is the ultimate holding company of C Ltd. This will be treated as the first layer.

C Ltd is the holding company of D Ltd and hence A Ltd is the ultimate holding company of D Ltd. This will be treated as the second layer.

  • A Ltd already owns two layers of subsidiaries, hence further it can’t acquire/create any more of layers of subsidiaries below D Ltd. The restriction on A Ltd also prohibits C Ltd[1] from creating/acquiring subsidiary below it. This is so because if C Ltd which is having only one layer of subsidiary D Ltd, if it acquires/creates subsidiary below D Ltd, it will consequently have the effect of having the third layer of a subsidiary for A Ltd.
  • However, A Ltd can acquire/create another subsidiary (not below D Ltd) either directly below it or below C Ltd.

 

3.2 Foreign Company

A company acquiring a foreign company ( a company incorporated outside India) can have subsidiaries beyond two layers as per the laws of such country.

 

Instance:

  • A Ltd is an Indian holding company of B Inc (foreign company) – this is layer 1
  • B Inc is holding company of C Inc (foreign company) – this is layer 2
  • C Inc is holding company of D Inc (foreign company) – this is layer 2

In the above example, A Ltd acquires and becomes holding company of B Inc (foreign company), which is having two layers of subsidiary (C Inc and D Inc) and the law of the country where B Inc is incorporated permits such layers of subsidiaries. A Ltd thus becomes an ultimate holding company of C Inc. and D Inc. Thus, in such a case, Indian company may have more than two layers of subsidiaries.

  • After the acquisition of a foreign company, an Indian company is not required to file any information on layers of subsidiaries with ROC as per the Rules.

 

  1. Penalty for non-compliance

If any company contravenes any provision of the Rules, the company and every officer of the company who is in default shall be punishable with fine UPTO Rs. 10,000/- and where the contravention is a continuing one, with a further fine UPTO Rs.1000/- for every day after the first during which such contravention continues.

Amount of penalty is similar to prescribed under section 450 of the Act which prescribes the general amount of penalty where no penal amount for contravention of any provisions of the Act is specified.

Amount of penalty is discretionary and can be adjudicated by ROC u/s.454 of the Act. The offence of non-compliance with the Rules is compoundable u/s.441 of the Act.

[1] due to explanation (a) under section 2(87) of the Companies Act 2013

 

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