In what seems to have become an exclusive and welcome manner of making up for the perplexity created by the Companies Act, 2013, the Ministry has come out with yet another clarification vide General Circular no. 24/2014, Dated: 25.06.2014 on holding of shares in fiduciary capacity in associate companies. The circular has been issued in continuation to MCA circular 20/2013 dated 27th December, 2013 (Circular 2013). The clarifications assume significance as holding, subsidiary and associates relationships have a bearing on consolidation of financial statements. Fiduciary capacity creates a relationship wherein one holds the duty to another of trust, confidence and good faith. In such a situation, it is rationally incorrect to assume that the entity holding shares has the power to exercise influence as well. Instead in such cases, the shareholding must be counted as the shareholding of the beneficiary and not the shareholding of the trustee.
Provision under Companies Act, 1956
Under the Companies Act, 1956 (Act, 1956) shares or powers held in fiduciary capacity were specifically excluded from the purview of holding subsidiary relationships under section 4(3). The relevant extract of the Section is reproduced below:
“4. MEANING OF “HOLDING COMPANY” AND “SUBSIDIARY
(1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if,
(3) In determining whether one company is a subsidiary of another –
(a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it ;”Online GST Certification Course by TaxGuru & MSME- Click here to Join
Provision under Companies Act, 2013
Under Companies Act, 2013 (Act, 2013), definition of subsidiary under Section 2(87) did not expressly exclude the shares held under fiduciary capacity. Thereafter, the Ministry issued a clarification with regard to holding – subsidiary relationship vide MCA circular 20/2013 dated 27th December, 2013 wherein it was expressly stated that shares held in fiduciary capacity will be excluded while determining whether a particular company is a subsidiary of another company under provisions of section 2(87) of the Act, 2013.
Meaning of Subsidiary for the purpose of Section 129 (3)
Section 129 (3) of Act, 2013 pertaining to financial statements is reproduced hereunder:
“(3) Where a company has one or more subsidiaries, 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 in the same form and manner as that of its own 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):
Explanation.—For the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture”
Unlike in case of subsidiary companies, accounts of associates are not required to be consolidated by the company holding significant influence. However, as per Indian Accounting Standard (Ind AS) 28 investments in associates accounted for using the equity method shall be classified as non-current assets. The investors’ share of the profit or loss of such investments along with amount of investment is required to be disclosed separately.
In the absence of such a clarification, a trustee would have to disclose such a holding in its financial statements despite not being a beneficiary of the return on investment. Moreover, such a treatment shall not depict a true and fair view of the statements
Position subsequent to Circular 2014
General Circular no. 24/2014, Dated: 25.06.2014 refers to the definition of “associate” (as reproduced below), and clarifies that the shares held in fiduciary capacity shall not be counted for the purpose of determining the relationship of ‘associate company’ under section 2(6) of the Companies Act, 2013
(6) “associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty per cent. of total share capital, or of business decisions under an agreement;
Thus, in view of the aforesaid for the purpose of consolidation under Section 129 (3), associate will not be considered as subsidiary if the shares are held in fiduciary capacity.
(Vijaya Agarwala – Management Trainee at Vinod Kothari & Company can be reached at email@example.com)