Definitional Aspects

Section 2(46) of Companies Act, 2013 – Definition of Holding Company

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

# Explanation. — For the purposes of this clause, the expression (see Interpretational Note)companyincludes any body corporate. [See Section 2(11)]

Effective date of the Section 2(46) – 12th September, 2013

# The above Explanation was added by the Companies (Amendment) Act, 2017 w.e.f.  9th February, 2018.

Section 2(87) – Definition of Subsidiary Company or subsidiary:

“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 voting power 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 (see Interpretational Note)companyincludes any body corporate; [See Section 2(11)].

  • “layer” in relation to a holding company means its subsidiary or subsidiaries;

Except the Proviso and Explanation (d) Section 2(87) was made effective from 12th September, 2013.

Interpretational note on the above definitions of Holding and Subsidiary:

Whether a Company incorporated outside India can be a Holding Company for any Indian Subsidiary?

Both the clauses of the definition were made effective on 12th September, 2013 (hereinafter referred as “the original effective date”). Generally most of the definitions were effective on the original effective date. On the original effective date when these two clauses were made effective, there was a gap in interpretation of both these clauses. Now, as on the original effective date, when we tried to read and interpret both these definition together, we came to conclusion that the “Holding Company” as defined in Section 2(46) cannot be a foreign body corporate or simply any “body incorporated outside India” cannot be termed as a “Holding Company” in relation to any Indian Company even if that body incorporated outside India has “control” as mentioned in sub-clause (i) and sub-clause (ii) of Section 2(87).

Why? The simple reason was the Explanation (c) in the definition of Subsidiary Company which read as “the expression ‘company’ includes any body corporate”.

Now, first we try to understand the impact of Explanation (c) as mentioned above we must know how to read and understand the difference between “words” and “expressions”.

For example, “mango” and “mangoes”, while reading one can say that grammatically or in linguistic sense there’s not much of difference in the common meaning conveyed by these two words as it simply mean a fruit except that while “mango” is singular and “mangoes” is plural, and mango and mangoes both have been used for a fruit. But, when we read a law, we must know difference between “words” and “expressions”. The grammatical connotation attached to “expression” is expression – would mean a “word” or “phrase” used to convey a particular/specific meaning. An “expression” may contain a single word or a group of words that would have a specific meaning while reading in a particular context.

Hence, the words “company” and “companies” legally conveys two different meanings although in linguistic sense might mean the same. Here in Section 2(87), the word “company” has a separate meaning to “companies”. In the definition of subsidiary company, in the first sentence, after the second comma, where “…means a company in which…” this word COMPANY includes “body corporate” also as defined in Section 2(11) which includes any “company incorporated outside India”. The word “COMPANY” means a “company” as defined by Section 2(20) i.e. an Indian Company and it would also include a “body corporate” as defined by Section 2(11) at the same time, therefore, wherever the term subsidiary company has been used in the Act would mean any Indian Subsidiary and also Foreign Subsidiary of any “Holding Company”.

The same explanation was not there in the definition of Holding Company in Section 2(46), hence, the word COMPANY which occurs in the first sentence of the definition of “Holding Company” which reads as “…means a company of which such companies…” was meant to be read as a “company” defined by Section 2(20) i.e. Indian Company and Section 2(11) was not to be included in the meaning of word “company”. This interpretation lead to a gap that any Subsidiary Company can be Indian and also it can be Foreign, but the Holding Company must be an Indian Company even if any foreign body corporate has control as mentioned in sub-clause (i) and sub-clause (ii) of Section 2(87). Then, the Companies (Amendment) Act, 2017 added an Explanation below Section 2(46) to give a special meaning to the word “company” in Section 2(46) to mean an Indian Company and also a Foreign Company, effective from 9th February, 2018.

CONCEPT OF CONSOLIDATION OF FINANCIAL STATEMENTS

[Section 129(3) and Rule 6 of the Companies (Accounts) Rules, 2014] 

Text of Section 129(3) –

Where a company (refer the interpretational note below) has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):

Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies in such form as may be prescribed:

Provided further that the Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed [see Rule 6 of Companies (Accounts) Rules, 2014].

Interpretational note on the applicability of Consolidation of the Financial Statements of Subsidiary Company with its Holding Company.

The concept of Consolidation of Financial Statements, in general understanding means any Holding Company has to prepare Consolidated Financial Statements in relation to its Subsidiary, although the Companies (Amendment) Act, 2017, w.e.f 7th May, 2018 extended the consolidation to include “associate companies” also. But in general understanding consolidation was meant for Holding and Subsidiary.

The word COMPANY occurring in the first sentence of Section 129(3) “…. a company has one or more subsidiaries…” would not mean the “Holding Company” as defined by Section 2(46) but strictly the meaning is confined to the meaning assigned by Section 2(20) which reads as follows:

“company” means a company incorporated under this Act or under any previous company law. 

Therefore, any foreign body having Indian Subsidiaries would not have to prepare a Consolidated Financial Statements.

Further, there are 3 conditions in the first proviso to Rule 6, if complied with then even if any Indian Company has subsidiaries (whether in India or elsewhere), such Indian Company don’t need to have to prepare Consolidated Financial Statements. The conditions are as follows:

1. If any Indian Company having subsidiaries (whether in India or elsewhere), if it’s a WOS, or if such Indian Company is not WOS but a Partly Owned Subsidiary, and the other shareholders (having common voting right or not) otherthan the Holding Company of such Indian Company, has given NOC for no Consolidation of Financial Statements of such Indian Company with its Subsidiaries.

2. Such Indian Company has not listed any securities in Indian stock exchange [BSE/NSE] or in any foreign stock exchanges [NASDAQ, NYSE, HANG SENG etc.]

3. Such Indian Company’s immediate holding company or any intermediate holding company, if in India, or the ultimate holding, if in India, has complied with the provisions of Section 129(3) for the purpose of consolidation of accounts.

Hence, the only Indian Companies having subsidiaries in India or elsewhere shall comply Section 129(3).

(Author – CS Tejas Patel from Ahmedabad and can be contacted at cs.tejas2017@gmail.com)

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3 Comments

    1. Tejas_7619 says:

      Dear Dhaval,

      Great question. An LLP, as per Section 2(1)(d)o of the Limited Liability Partnership Act, 2008, yes its a body corporate. I would modify your question a bit, you asked “what if company hold 90% in LLP?”. So, I would have asked as, what if a Company has 90% share in the Capital Contribution of an LLP? So, let’s analyse it, ANY BODY CORPORATE becomes a subsidiary of another company (let’s name it Company A for simplification) on the basis of two criteria:

      1. If that another Company A, controls the composition of the Board of Directors.
      Analysis:
      If Company A is capable of controlling the composition of the Board of Directors of the the subsidiary. Any Body Corporate if it has to be qualified as “Subsidiary Company” of Company A, its Board of Directors shall be composed by Company A in terms of Explanation (b) under Section 2(87), for this the Company must has a “Board of Directors” [as defined in Section 2(10)]. We know that, despite of the fact that an LLP being a Body Corporate, doesn’t have a “Board of Directors”. Hence, this criteria does not “get fit” on LLP. This analysis doen’t mean to say that any Boady Corporate which is not a Company registered under the Companies Act, 2013 cannot have Board of Directors, for example SBI is not a “company” under Companies Act, 2013 even though it has central governing body of “Board of Directors”. The test applied to “get fit” under this criteria is that the Body Corporate shall have a “collective governing body of Individuals” that can fit in line with the definition of “Board of Directors” defined in Section 2(10) of Companies Act, 2013. Hence, LLP is “unable” to get fit in to this criteria.

      2. Exercise/Control of more than (>) 50% of the “TOTAL VOTING POWER”.
      Analysis:
      The Second criteria is that Company must have right to exercise/control of “more than” 50% of the “TOTAL VOTING POWER” of any Body Corporate. Here the term used “total voting power” is already defined in Section 2(89) of the Act. The term “total voting power” implies that the “total” number of the votes that may be casted on any matter at a general body meeting of the Company as with regard to Company we call it as AGMs or EGMs. The test here is that, Company shall have right to vote more than (>) 50% of the total number of votes that may be casted in General Meeting of such Body Corporate and that right is exercisable through memberhip/shareholding in such Body Corporate. The LLP doesn’t have concept of “membership” and “shareholding”, the LLP has capital contribution and of course having more than 50% share in capital contribution definitely amounts to have a commanding effect over the affairs of the LLP. But, if we go as per the expression “total voting power”, then it doesn’t qualify in this criterion also, unlike SBI, being a Body Corporate it has an identified share capital and right to vote attached to such share capital, the LLP don’t have an “identified share capital”.

      So, my opinion would be even if any company has 90% share in capital contribution, it doesn’t qualified to a subsidiary company in any of two criteria as mentioned in Section 2(87).

      I hope it has served your purpose. Further if you have any more queries, write to me personally at my email mentioned at the end of the article, you are most welcome.

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