Aditya Shah

A Company incorporated under the statute has an identity of its own, which is different from its members and shareholders, etc. A subsidiary company is an incorporated entity which has an identity of its own, which shall be separate from its holding company. Generally, holding company need not interfere into the business of its subsidiary company; however under The Companies Act, 2013,

a holding company, in certain circumstances, would be required to oversee the activities of its subsidiary company. Since various provisions under Companies Act, 2013 cast obligation upon the holding company to keep itself in loop with the activities of the subsidiary, especially pertaining to those where conflict of interest may arise whenever such activity requires independence. Further Revised Clause 49 of the listing agreement also provides for listed holding company to oversee the business activities of its subsidiary company. Following is the list of various activities of subsidiaries which holding company needs to be prudent about:-

Provision under Companies Act, 2013.

Section or Provision under CA, 2013. Pertaining Provision where Holding Company to oversee the work of Subsidiary.
Section 129(3) Financial Statements The company shall also attach along with its financial statements, a separate statement containing salient features of the financial statements of subsidiary.
Section 136(1) Disclosure of Financial Statements on the website of holding company Every company having a subsidiary shall place separate audited accounts in respect of each of its subsidiary on itsWebsite; if company has any website.
Section 137 (1) Accounts of Overseas Subsidiary Every company having overseas subsidiary, shall attach accounts of its overseas subsidiary, which is incorporated outside India and does not have established place of business in India, along with financial statements of the company which have been filed with the Registrar of Companies.
Section 141(3) Disqualification of auditor where security interest exists in subsidiary company A person shall not be appointed as auditor or becomes disqualified (if already appointed), if such person or his relative or partner is holding any security or interest in the subsidiary company. However, relative of auditor may hold securities of face value not exceeding Rs. 1,00,000/- . However, corrective action may be taken within 60 days of such acquisition or interest.
Section 141(3) Disqualification of auditor when indebted to subsidiary company A person shall not be appointed as auditor of the company or becomes disqualified (if already appointed) if such person or his relative or partner is indebted to the subsidiary company in excess of Rs. 5,00,000/-.
Section 141(3) Disqualification of auditor when security provided to subsidiary A person shall not be appointed as auditor of the company or becomes disqualified (if already appointed) if such person has given guarantee or provided security in connection with the indebtedness of any third person to its subsidiary company for an amount not exceeding Rs. 1,00,000/- .
Section 141(3) Disqualification of auditor where business relationship exist in subsidiary company A person or firm shall not be appointed as auditor of the company if such person or firm whether directly or indirectly has business relationship with the subsidiary company.Business Relationship shall be constructed as any transaction entered into for commercial purpose except:-

  • Commercial transactions which are in nature of professional services permitted under The Companies Act, 2013, or The Chartered Accountants Act, 1949 and Rules and regulations made thereunder.
  • Commercial transactions which are in ordinary course of business of the company at arm’s length price; for instance, sale of product or providing services to the auditor, as customer, where company is engaged in such relevant category of business.
Section 141(4) Office of the auditor shall be vacated where any of the disqualification has been attracted If person who has been appointed as an auditor of the company incurs any of the disqualifications as stated above, then he shall vacate his office as such auditor.
Section 144 Disqualifications of auditor when any of the mentioned categories of service are provided to subsidiary company Auditor of the company shall not provide following services, directly or indirectly[1] to the subsidiary company:-(a) accounting and book keeping services;

(b) internal audit;

(c)design and implementation of any financial information system;

(d) actuarial services;

(e) investment advisory services;

(f) investment banking services;

(g)rendering of outsourced financial services;

(h) Management services.

Section 144 Transitional Provision where disqualification has been attracted Company shall ensure that auditor of the company shall cease to provide aforesaid services to its subsidiary company by 31st March, 2015.
Section 149 (6) Disqualification of any person for being appointed as Independent Director A person cannot be appointed as independent director of the holding company-·         who is or has been promoter of subsidiary company;

·         who is related to promoter or director of the subsidiary company;

·         who has or had pecuniary relationship with the subsidiary company or their promoter or director during the two preceding financial year or current financial year;

·         whose relative has or had pecuniary relationship or transaction with its subsidiary company or its promoter or director amounting to 2% or more of its gross turnover or total income or fifty lakh rupees, whichever is lower, during the two immediately preceding financial years or during the current financial year;

·         if he or his relative hold or held the position of KMP or is or has been employee of the subsidiary company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed

·         if he or his relative is or had been an employee or proprietor or a partner of firm of auditors or company secretaries in practice or cost auditors of subsidiary company in any of immediately preceding three financial years

·         if he or his relative is or has been an employee or proprietor or a partner of any legal consulting firm that has or had any transaction with subsidiary company amounting to 10% or more of the gross turnover of such firm

·         if he is the CEO or director of any non-profit organization that receives 25% or more of its receipts from the subsidiary company

Section 167(1) Director to vacate his office in holding company where he ceases to be in employment in subsidiary company by virtue of which he was appointed as director of holding company A director shall vacate his office when such director was appointed as director by virtue of his holding any office or other employment in subsidiary company and when such director ceases to hold such office or other employment in that company.
Section 170(1) Maintenance of Register of directors and KMP’s interest in subsidiary Company shall maintain register wherein company shall enter particulars of directors and KMP which includes the details of security held by them in the company’s subsidiary company or other subsidiary of the same holding company.
Section 185 Restriction on Loan to Subsidiary A holding company shall not lend to any of its subsidiaries where any director or   two or more directors of such   holding company hold more than 25% of total voting power of such subsidiary company.
Section 188 Consent of board of holding to be required where related party of the board has been appointed in subsidiary company Consent of the board of the holding company shall be required where any related party of the holding company has been appointed to any office or place of profit in the subsidiary company, except where such appointment has been made on an arm’s length basis.
Section 188 Consent of share holder to be required where remuneration for appointment of related party in subsidiary exceeds certain limit Wherever remuneration for appointment of related party of the holding company to office or place of profit in the subsidiary company exceeds Rs. 2,50,000/- then such appointment must be approved by the share holder of holding company by a special resolution.
Section 197(14) Board Report of holding Company to contain remuneration or commission received by its director from subsidiary company Where ever any director of the company who is in receipt of any commission from the company and who is MD or WTD of the company shall not be disqualified from receiving any remuneration or commission from subsidiary company subject to disclosure by the company in the Board Report. However the same shall be subject to provision contained under Section 197 of the Act.
Section 202 Company not to pay MD/ WTD or Manager compensation for loss of office where such director has been guilty in respect to affairs of subsidiary company A company may make payment to MD or WTD or Manager but not to any other director by way of compensation for loss of office, or as consideration for retirement from office or in connection with such loss or retirement. However, no such payment can be made where the director has been held guilty of fraud or breach of trust in relation to gross negligence or gross mismanagement in conduct of the affairs of subsidiary company.

 Provision under Listing Agreement

Provision under Listing Agreement Pertaining Provision where Holding Company to oversee the work of Subsidiary.
Clause 32 Disclosure Requirement Listed holding company has to disclose- amounts at the year end and the maximum amount of loan/ advances/ investment outstanding during the year of such person who has taken loan from the holding company, and holds any share in subsidiary company, where company has extended loan or advance any amount in nature of loan.
Clause 49 V-A Independent Director on the board of holding company to be director in subsidiary At least one independent director on the board of directors of the holding company shall be a director on the board of directors of a material non-listed Indian subsidiary [2]company.
Clause 49 V-B Audit Committee of listed holding to review financial of subsidiary company The Audit Committee of listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company.
Clause 49V-C Board of holding company to review minutes of unlisted subsidiary The minutes of the board meeting of unlisted subsidiary company to be placed before the board meeting of the listed holding company. The management of listed holding company shall bring before the board of directors listed holding company a statement of all significant transactions and arrangements[3] entered into by the unlisted subsidiary company.

Thus holding companies, which can also be term Parent Company in relation to its subsidiary company, can also require to behave like a parent for subsidiary company. Since there are obligations casted upon the holding company to re-view the work done by its subsidiary company, in certain case, and certain activities done by subsidiary company either in present or past would affect holding company in one or the other way. Especially where it comes to listed holding company, obligation becomes more onerous, since major business transaction of subsidiary which passes through board of subsidiary and financial statements are subject to review by board and audit committee of holding company.

[1] directly or indirectly shall include rendering of services by auditor –

1. Where auditor is individual either himself or through its relative any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual.

2. Where auditor is firm either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.

[2] A subsidiary to be considered as Material if the Investment of the Company in the subsidiary exceeds 20% of the consolidated Net worth as per Audited Balance Sheet of the previous financial year or where subsidiary has generated 20% of the consolidated income of the company during the previous financial year

[3] Significant transaction / arrangement means any transaction or arrangement that exceeds or is likely to exceed 10% of total revenues or total expenses or total assets or total liabilities of the material unlisted subsidiary for immediately preceding accounting year.

(Author is associated with Vinod Kothari & Company and can be reached at aditya@vinodkothari.com)

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0 responses to “Taking Care of Children: Companies Act imposes obligations pertaining to Subsidiaries”

  1. Reji says:

    Is any disclosure required if the subsidiary company transacts with a company that is undergoing litigation with the holding company?

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