CS Divesh Goyal
Definition of Holding Company
BARE ACT LANGUAGE
As per Section 2(46) “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies;
Definition of Holding Company
BARE ACT LANGUAGE
As per Section 2(87) “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 anybody corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;
COMPANY INCLUDES BODY CORPORATE:
Thus, an Indian company in which more than 50% shares are held by a foreign body corporate will be a ‘Subsidiary Company’.
Similarly, any Indian body corporate can be ‘holding company’ even if that body corporate is not registered as ‘company’ under company Act.
An Indian company can be holding/subsidiary of a foreign body corporate even if it is not registered as a Company.
SOME DECISIONS OF CASES:
IMPLICATION OF HOLDING/SUBSIDIARY RELATIONSHIP BETWEEN TWO COMPANIES:
If a Company is a Subsidiary of another Company. Following are the implication:-
|Many relaxations to private Company are not available to subsidiary of public Company.||Many relaxations available to a private company are not applicable if that private company is subsidiary of another public Company. Thus, for all practical purpose, the private company is treated as a Public Company.|
|Subsidiary of Public Company is Public Company.||A private company which is subsidiary of a public company is a ‘public company’, even when such subsidiary company continues to be a private company in it Articles.|
|Subsidiary can’t given loans for purchase of shares of holding Company||A subsidiary can’t give loans or financial assistance for purchasing or subscribing to shares of its holding Company.|
|Company can’t buy its shares through subsidiary.||A holding company can’t buy directly or indirectly its own shares through any subsidiary company, including its own subsidiary.|
|Right of holding company to inspect books of account of subsidiary||Inspection of books of account of any subsidiary company shall be done by person authorized by Board of Directors.|
PROVISIONS RELATING TO FINANCIAL STATEMENT FOR HOLDING AND SUBSIDIARY COMPANY:-
|CONSOLIDATED FINANCIAL STATEMENT|
|Holding Company Financial Statement||Consolidated Financial Statement of holding company is required to disclose prescribe details about subsidiary, associate Companies and Joint ventures.|
|If more than one Subsidiary||If a Company has one or more subsidiaries, associate companies and Joint Ventures, it shall, prepare a consolidated financial statement of the company and of all the subsidiaries, associate companies and joint venture in the same form and manner as that of its own.|
|Separate Financial Statement for Holding Company||This Statement is in addition to the Separate financial statement of the holding company. The consolidate financial statement shall also be paid before the annual general meeting of the holding company along with the laying of its own financial statement.|
|Disclosure in balance Sheet of Holding Company||Balance sheet of holding company shall specifically disclose investments in the subsidiaries.|
|Disclosure in P&L account of Holding Company||Profit and Loss account of Holding company shall disclose-(a) Dividends from subsidiary Companies
(b) Provisions for losses of subsidiary Companies.
|Every Company having a subsidiary or subsidiaries has to submit consolidated financial statement in addition to its own ‘financial statement’.|
|Disclosure on Website(such disclosure is required only if the company has its website)||Company is required to:-(a) Place separate audited accounts in respect of each of its subsidiary on its website, if any and
(b) Provide a copy of separate audited financial statements in respect of each of its subsidiary, to any shareholder of the Company
PROVISIONS APPLICABLE ON HOLDING AND SUBSIDIARY COMPANY:-
|Investment only through two layers||186(1)||A company shall make investments through not more than two layers of subsidiary investment companies unless provided otherwise.|
|Disclosure in B/S of Subsidiary||Balance sheet of subsidiary Company should disclose shares held by its holding company or its ultimate holding Company, or the ultimate holding Company in aggregate.|
|Restriction on appointment as Auditors||226(4)||A person can’t be appointed as auditor, if he, his relative or partner is holding any security or interest in the Company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.|
|Combined Investigation||219(a)||If inspectors is appointed for a company under section 213, he can investigate affairs of its subsidiary or holding company also.|
|Loan to Director||185||Company can’t give loan to directors of its holding company.|
|Remuneration to MD & WTD||197(14)||A WTD or MD of a company who is getting commission from the company can get commission or remuneration from its holding or subsidiary company, subject to disclosure by the company in its annual report.|
|Prospectus of Holding Company||–||Prospectus of holding company should contain particular of its subsidiary.|
|Provisions under other laws||–||Ø Holding and subsidiary companies are treated as ‘Related Person’ for valuation purpose under Central Excise Act.Ø Holding and Subsidiary Companies are deemed to act in concert for purposes of takeover regulation of SEBI
Ø Companies act treats holding and subsidiary companies as group Companies.
SHARE-HOLDING OF HOLDING COMPANY BY SUBSIDIARY COMPANY:
A holding Company can and does hold shares of subsidiary, but a subsidiary can’t hold shares in its holding company. Share allotment made to subsidiary is void.
This restriction applies even if shares are held by nominee of subsidiary Company and not by the subsidiary company itself.
However there are certain cases, subsidiary can be member of its holding Company:-
a) When subsidiary is a legal representative of deceased member of holding Company.
b) When subsidiary is concerned in shares as trustee.
c) Investment held before the Company became subsidiary can continue, but in that case, subsidiary has no voting right in holding Company.
PROVISIONS IN LISTING AGREEMENT IN RESPECT OF SUBSIDIARY COMPANIES:-
♣ Whether a Company can be holding Company even if it does not hold 50% equity shares?
The definition of Subsidiary Company mentions ‘total share capital’. Hence, preference capital can’t be ignored. Thus, even if a company has less than 50% equity shares in another company, the other Company can be its holding company, if including preference share capital, the total holding is more than 50%.
(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at [email protected])