Tag: 12 Sept 2013

Section 2(87): Subsidiary company or subsidiary.

Subsidiary company or subsidiary.
Unless the context requires otherwise, the term ‘subsidiary company’ or ‘subsidiary’ wherever appearing in the Companies Act, 2013 shall have the following meaning:

“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 share capital either at its own or together with one or more of its subsidiary companies:
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 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;

Chapter I is on PRELIMINARY [Sections 1 and 2].

Section 2(87) is brought to force with effect from September 12, 2013, except the proviso and explanation (d).
Explanation (d) is brought to force from April 01, 2014. The proviso is not yet brought to force.

The Companies (Specification of definitions details) Rules, 2014 notified with effect from April 01, 2014, is relevant.

Corresponding provisions of the Companies Act, 1956:
Section 2(47) and section 4.

Corresponding provisions of the English Companies Act, 2006:
Section 1159 and Schedule 6.

Comments:
Where the composition of the Board of Directors of a company (including body corporate), say S Ltd., is controlled by another company (holding company), say H Ltd., either directly (on its own) or together with its one or more subsidiaries, then such company (or body corporate) [S Ltd.] is said to be subsidiary of the other company, H Ltd. Such control can also be through any subsidiary of the holding company, H Ltd. .

The composition of a company’s Board of Directors shall be deemed to be controlled by another company, evenif he same is not actually so controlled, 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 .

The term ‘control’ is defined u/s.2(27) as under:

‘Control’ shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Where more than one-half of the total share capital of a company (including body corporate), S Ltd., is controlled by another company (holding company), H Ltd., either directly (on its own) or together with is one or more subsidiaries, then such company (or body corporate), S Ltd., is said to be subsidiary of the other company, H Ltd. Such control can be through any one or more subsidiary / subsidiaries of the holding company .

‘Total share capital’:
The term ‘total share capital’ is not defined under the Companies Act, 2013.

However, the term ‘share’ is defined u/s.2(84) to mean a share in share capital of a company and includes stock. U/s. 43 share capital can be of two kinds, equity share capital and preference share capital.

The term ‘total share capital’ is defined under the Rules ((Rule 2(1)(r) )) as:

In these rules, unless the context otherwise requires, “Total Share Capital”, for the purposes of sub-sections (6) and (87) of section 2, means aggregate of the:-
(a) paid-up equity share capital-
and
(b) convertible preference share capital.

Thus, where more than one-half of the aggregate of

(i) paid-up equity share capital, and

(ii) convertible preference share capital

of a company (including body corporate) is exercised or controlled by another company, the former company becomes subsidiary company.

This is in deviation from definition of ‘subsidiary company’ under:
(i) Section 4 of the Companies Act, 1956 as well as
(ii) definition (Para 5) of Accounting Standard 21 (‘AS21’) on Consolidated Financial Statement.

Under Act of 1956 emphasis was only on equity share capital and in AS 21 emphasis is on voting power.

 

The Central Government (Ministry of Corporate Affairs or MCA) have authority to limit number of layers of subsidiary companies that certain kinds of companies can have. MCA to specify number of subsidiary companies that a subsidiary of certain kinds of companies can have. .

 

List of some of the provisions where the term ‘subsidiary company’ is used in the Companies Act, 2013:

  1. Associate company does not include subsidiary company. ((Section 2(6) ))
  2. To seek approval of NCLT for following different financial year than April 01 to March 31, where an Indian company is either a holding company or a subsidiary company of a company incorporated outside India and is required to follow different financial year for consolidation of accounts. ((first proviso to section 2(41) ))
  3. A subsidiary of a government company is treated as government company. ((Section 2(45) ))
  4. A company which is subsidiary of a public company, shall be deemed to be a public company. ((Section 2(71) ))
  5. A subsidiary company is treated as related party. ((Section 2(76)(viii) ))
  6. A subsidiary company cannot be a small company. ((proviso to Section 2 (85) ))
  7. Certain class of holding companies can have only limited number of layers of subsidiary companies. ((proviso to section 2(87) )) Layer means subsidiary of subsidiary. ((Explanation (d) to Section 2(87) )).
  8. Subsidiary company is prohibited from holding shares (directly or through nominee) of its holding company. ((Section 19(1) ))
  9. Company shall not give financial assistance for purchase of its shares or shares of its holding company to any person. ((Section 67(2) )). An exception being ESOP ((Section 67(3)(b) )) or loan to employees upto 6 months of salary for beneficial ownership ((Section 67(3)(c) ))
  10. Companies are prohibited to buy-back its securities through, inter alia, its subsidiaries. ((Section 70(1)(a) ))
  11. Inspection of books of accounts of a subsidiary company is not open to directors of holding company and is open only to such persons, as may be authorised by a resolution of the Board of holding company. ((proviso to Section 128(3) ))
  12. Auditor of holding company can access records of its subsidiary (including its associates and joint ventures) for consolidated financial statement purpose. ((proviso to Section 143(1) ))
  13. An individual can be director of maximum 10 public companies and in reckoning 10 public companies, directorship held in private companies which are either holding or subsidiary company of a public company shall be included. ((Explanation to Section 165(1) ))
  14. A company shall make investment through not more than two layers of investment companies. However, if investor company is a subsidiary company, it can have more than two layers of investment companies 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. ((proviso to Section 186(1) ))
  15. Shorter procedure for merger or amalgamation of holding company and its wholly owned subsidiary company. ((section 233(1) ))
  16. Section 185 do not apply to loan by holding company to its wholly owned subsidiary company; any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary ((Rule 10(1) of the Companies (Meetings of Board and its Powers) Rules, 2014 ))
  17. Section 185 do not apply to any guarantee given or security provided by a holding company in respect of
    loan made by any bank or financial institution to its subsidiary company ((Rule 10(2) of the Companies (Meetings of Board and its Powers) Rules, 2014 ))

Section 2(46) Holding company

Chapter I
PRELIMINARY

Provisions of the Companies Act, 2013:
Section 2(46): Holding company.
This provision is brought to force with effect from September 12, 2013.

Corresponding provisions of the Companies Act, 1956:
Section 2(19) and section 4.

Corresponding provisions of the English Companies Act, 2006
Section 1159 and Schedule 6.

Applicability:
Unless the context requires otherwise, the term ‘holding company’ wherever appearing in the Companies Act 2013 shall have the following meaning.

(46) “holding company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies;

List of some of the provisions where the term ‘holding company’ is used in the Companies Act, 2013:

  1. Employees’ stock option can be given to directors, officers or employees of, inter alia, holding company. [Section 2(37)].
  2. To seek approval of NCLT for following different financial year than April 01 to March 31, where an Indian company is either a holding company or a subsidiary company of a company incorporated outside India and is required to follow different financial year for consolidation of accounts. [first proviso to section 2(41)].
  3. A holding company is treated as related party. [Section 2(76)(viii)].
  4. A holding company cannot be a small company. [provsio to section 2(85)].
  5. Certain class of holding companies can have only limited number of layers of subsidiary companies. [proviso to section 2(87)]. Layer means subsidiary of subsidiary. [Explanation (d) to section 2(87)].
  6. Holding company is prohibited from allotting or transferring its shares to any of its subsidiaries. [section 19(1)].
  7. Company shall not give financial assistance for purchase of its shares or shares of its holding company to any person. [section 67(2)]. An exception being ESOP [section 67(3)(b)] or loan to employees upto 6 months of salary for beneficial ownership [section 67(3)(c)].
  8. Inspection of books of accounts of a subsidiary company is not open to directors of holding company and is open only to such persons, as may be authorised by a resolution of the Board of holding company. [proviso to section 128(3)].
  9. Holding company, in addition to its financial statement (stand alone), shall also prepare consolidated financial statement of itself and its subsidiaries (including its associates and joint ventures). [Section 129(3)]. Holding company shall also attach salient features of financial statements of its subsidiaries (including its associates and joint ventures).
  10. every company having a subsidiary or subsidiaries shall,—
    (a) place separate audited accounts in respect of each of its subsidiary on its website, if any;
    (b) provide a copy of separate audited financial statements in respect of each of its subsidiary, to any shareholder of the company who asks for it. [fourth proviso to Section 136(1)].
  11. a company shall, along with its financial statements to be filed with the Registrar, attach the accounts of its subsidiary or subsidiaries which have been incorporated outside India and which have not established their place of business in India. [fourth proviso to Section 137(1)]
  12. Auditor of holding company can access records of its subsidiary (including its associates and joint ventures) for consolidated financial statement purpose. [proviso to section 143(1)].
  13. An individual can be director of maximum 10 public companies and in reckoning 10 public companies, directorship held in private companies which are either holding or subsidiary company of a public company shall be included. [Explanation to Section 165(1)].
  14. Loan, inter alia, to director of holding company or his relative or partner is prohibited with some exceptions. [section 185].
  15. Shorter procedure for merger or amalgamation of holding company and its wholly owned subsidiary company. [section 233(1)].

Section 470 Power to remove difficulties.

CHAPTER XXIX
MISCELLANEOUS

[Section 470 is brought to force with effect from September 12, 2013.]

Power to remove difficulties.

Section 470. (1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions, not inconsistent with the provisions of this Act, as appear to it to be necessary or expedient for removing the difficulty:

Provided that no such order shall be made after the expiry of a period of five years from the date of commencement of section 1 of this Act.

(2) Every order made under this section shall, as soon as may be after it is made, be laid before each House of Parliament.

Section 469 Power of Central Government to make rules.

CHAPTER XXIX
MISCELLANEOUS

[Section 469 is brought to force with effect from September 12, 2013.]

Power of Central Government to make rules.

Section 469. (1) The Central Government may, by notification, make rules for carrying out the provisions of this Act.

(2) Without prejudice to the generality of the provisions of sub-section (1), the Central Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provision is to be or may be made by rules.

(3) Any rule made under sub-section (1) may provide that a contravention thereof shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during which such contravention continues.

(4) Every rule made under this section and every regulation made by Securities and Exchange Board under this Act, shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or regulation.

Section 468 Powers of Central Government to make rules relating to winding up.

CHAPTER XXIX
MISCELLANEOUS

[Section 468 is brought to force with effect from September 12, 2013.]

Powers of Central Government to make rules relating to winding up.

Section 468. (1) The Central Government shall, make rules consistent with the Code of Civil Procedure, 1908 providing for all matters relating to the winding up of companies, which by this Act, are to be prescribed, and may make rules providing for all such matters, as may be prescribed.

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely:—

(i) as to the mode of proceedings to be held for winding up of a company by the Tribunal;

(ii) for the voluntary winding up of companies, whether by members or by creditors;

(iii) for the holding of meetings of creditors and members in connection with proceedings under section 230;

(iv) for giving effect to the provisions of this Act as to the reduction of the capital;

(v) generally for all applications to be made to the Tribunal under the provisions of this Act;

(vi) the holding and conducting of meetings to ascertain the wishes of creditors and contributories;

(vii) the settling of lists of contributories and the rectifying of the register of members where required, and collecting and applying the assets;

(viii) the payment, delivery, conveyance, surrender or transfer of money, property, books or papers to the liquidator;

(ix) the making of calls; and

(x) the fixing of a time within which debts and claims shall be proved.

(3) All rules made by the Supreme Court on the matters referred to in this section as it stood immediately before the commencement of this Act and in force at such commencement, shall continue to be in force, till such time the rules are made by the Central Government and any reference to the High Court in relation to winding up of a company in such rules shall be construed as a reference to the Tribunal.

Section 467 Power of Central Government to amend Schedules.

CHAPTER XXIX
MISCELLANEOUS

[Section 467 is brought to force with effect from September 12, 2013.]

Power of Central Government to amend Schedules.

Section 467. (1) Subject to the provisions of this section, the Central Government may, by notification, alter any of the regulations, rules, Tables, forms and other provisions contained in any of the Schedules to this Act.

(2) Any alteration notified under sub-section (1) shall have effect as if enacted in this Act and shall come into force on the date of the notification, unless the notification otherwise directs:

Provided that no such alteration in Table F of Schedule I shall apply to any company registered before the date of such alteration.

(3) Every alteration made by the Central Government under sub-section (1) shall be laid as soon as may be after it is made before each House of Parliament while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the alteration, or both Houses agree that the alteration should not be made, the alteration shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done in pursuance of that alteration.

Section 463 Power of court to grant relief in certain cases.

CHAPTER XXIX
MISCELLANEOUS

[Section 463 is brought to force with effect from September 12, 2013.]

Power of court to grant relief in certain cases.

Section 463. (1) If in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the court hearing the case that he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused, the court may relieve him, either wholly or partly, from his liability on such term, as it may think fit:

Provided that in a criminal proceeding under this sub-section, the court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust.

(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a court before which a proceedings against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).

(3) No court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted.

Section 462 Power to exempt class or classes of companies from provisions of this Act.

CHAPTER XXIX
MISCELLANEOUS

[Section 462 is brought to force with effect from September 12, 2013.]

Power to exempt class or classes of companies from provisions of this Act.

Section 462. (1) The Central Government may in the public interest, by notification direct that any of the provisions of this Act,—

(a) shall not apply to such class or classes of companies; or

(b) shall apply to the class or classes of companies with such exceptions, modifications and adaptations as may be specified in the notification.

(2) A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in disapproving the issue of the notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses.

Section 461 Annual report by Central Government.

CHAPTER XXIX
MISCELLANEOUS

[Section 461 is brought to force with effect from September 12, 2013.]

Annual report by Central Government.

Section 461. The Central Government shall cause a general annual report on the working and administration of this Act to be prepared and laid before each House of Parliament within one year of the close of the year to which the report relates.

Section 460 Condonation of delay in certain cases.

CHAPTER XXIX
MISCELLANEOUS

[Section 460 is brought to force with effect from September 12, 2013.]

Condonation of delay in certain cases.

Section 460. Notwithstanding anything contained in this Act,—

(a) where any application required to be made to the Central Government under any provision of this Act in respect of any matter is not made within the time specified therein, that Government may, for reasons to be recorded in writing, condone the delay; and

(b) where any document required to be filed with the Registrar under any provision of this Act is not filed within the time specified therein, the Central Government may, for reasons to be recorded in writing, condone the delay.