Holding-Subsidiary Transactions: Post Companies (Amendment) Act, 2015

Debottam Chattopadhyay

1. INTRODUCTION

Following the amendments to Companies Act, 2013- to increase the ease of doing business, it has become imperative to analyse and ascertain the changes brought with respect to holding-subsidiary transactions under Companies Act, 2013.

Several major changes have been brought to the Companies Act, 2013 by the COMPANIES (AMENDMENT) ACT, 2015. Two of the major changes impacting the holding-subsidiary transactions are as follows:

1. Section 185 has been amended to exempt loans given by holding companies to their wholly-owned subsidiaries and also to security or guarantees given by holding companies to their subsidiary companies with respect to loans advanced by banks and financial institutions provided they are used for the principal business activity of the subsidiary company.
2. Section 188 that deals with related party transactions has been relaxed by amending it and by removing the need for passing a special resolution. Further, need for passing any resolution has been done away with when it comes to a wholly-owned subsidiary.

2. CHANGES ANALYSED

Section 185 states that no company shall directly or indirectly advance any loan including loan represented by book debt to any of its directors or any other person in whom the director is interested. It not only prohibited such loans but also guarantees and or any other security provided. Prior to the 2015 amendment no exemption was provided for loans advanced to subsidiaries by holding companies. Now such a loan is exempted provided the subsidiary is a wholly-owned subsidiary. Further, in relation to security and guarantees all such guarantees are exempted from this provision when the Holding company provides it. All these apply, subject to the condition that these loans/guarantees are used for the principal business activity of the subsidiary company. Principal business activity one can say is probably the one mentioned in the Annual Returns under Section 92 of Companies Act, 2013. This is a huge relief for the business world as the Government has made it clear beyond an iota of doubt that holding companies can advance loans to their wholly owned subsidiaries while they can give guarantee or security for any loan given by a bank/financial institution to such subsidiary company. Consequently, this will indeed increase the ability for subsidiary companies to raise capital for several business purposes.

Under 2(76) a related party includes a holding-subsidiary relationship. Prior to the amendment to validate certain prescribed related party transaction it was mandatory to get a special resolution passed but now a simple resolution is required. The amendment has now made certain related party transaction faster and less cumbersome from the legal perspective. A plain resolution is much easier to be passed in an annual general meeting than a special resolution. Therefore, now transactions between holding and subsidiary company can be substantially eased. There is no need for a separate resolution to validate related party transaction between holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

It is also imperative to analyse the definitions of subsidiary company and wholly-owned subsidiary company which have now been given differential footing under Sections 185 and 188:

Section 2(87) defines “subsidiary company” or “subsidiary” to be any company which in relation to the holding company is a company in which the holding company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than half of the total share capital either at its own or together with one or more of its subsidiary companies subject to certain conditions. Further it is explained that— (a) a company shall be deemed to be a subsidiary company of the holding company even if the control 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.

Section 233 is the only provision of the Companies Act, 2013 that has mentioned wholly-owned subsidiary but the Act does not define it anywhere. Generally, it is a company whose entire share capital is controlled by the holding company.

3. CONCLUSION

These steps will indeed increase the ease of doing business in India. But several sections of the society are arguing that some of these measures will be against the spirit of Corporate Governance. Shareholder powers will significantly decrease and investors might have little power to control-related party transactions and other holding-subsidiary transactions due to these changes. This may lead to grievances even from minority shareholders, institutional investors and other sections that might find such related party transactions opaque and might not have much power to exercise.