Analysis of Companies (Restriction on number of layers) Rules, 2017 notified by Notification No. G.S.R. 1176(E) dated : 20th September, 2017

MINISTRY OF CORPORATE AFFAIRS

NOTIFICATION

New Delhi, the 20th September, 2017

G.S.R. 1176(E).—In exercise of the powers conferred under proviso to clause (87) of section 2, section 450 read with sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules, namely:—

1. Short title and Commencement.—(1) These rules may be called the Companies (Restriction on number of layers) Rules, 2017.

(2) They shall come into force on the date of their publication in the Official Gazette

2. Restriction on number of layers for certain classes of holding companies.—

(1) On and from the date of commencement of these rules, no company, other than a company belonging to a class specified in sub-rule (2), shall have more than two layers of subsidiaries:

Provided that the provisions of this sub-rule shall not affect a company from acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country:

Provided further that for computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.

(Interpretation and Suggestions: Before notifying this proviso there is restriction only in regard to layer of Investment Company as per section 186 of the Act.  Now after notification of this rule, A company shall not have more than two layers of subsidiaries but it does not restrict to acquire a company incorporated outside India with subsidiaries beyond two layers(that should be as per law of that country). If a company have 100 subsidiaries including wholly owned  subsidiary that all will consider as one layer. Let explain with help of chart.)

(2) The provisions of this rule shall not apply to the following classes of companies, namely:—

(a) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(b) a non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934) which is registered with the Reserve Bank of India and considered as systematically important non-banking financial company by the Reserve Bank of India;

(c) an insurance company being a company which carries on the business of insurance in accordance with provisions of the Insurance Act, 1938 (4 of 1938) and the Insurance Regulatory Development Authority Act, 1999 (41 of 1999);

(d) a Government company referred to in clause (45) of section 2 of the Act.

(Interpretation and Suggestions: Following Companies can have more than two layers of Subsidiaries:

  1. Banking Company
  2. NBFC
  3. Insurance Company
  4. Government Company

(3) The provisions of this rule shall not be in derogation of the proviso to sub-section (1) of section 186 of the Act.

(Interpretation and Suggestions: The whole rule is for proviso of Sec- 2 Clause -87and not a relaxation from Section 186 (1). Section 186(1) restrict from having more than two layers of investment companies. Here investment company “means a company whose principal business is the acquisition of shares, debentures or other securities”

(4) Every company, other than a company referred to in sub-rule (2), existing on or before the commencement of these rules, which has number of layers of subsidiaries in excess of the layers specified in sub-rule (1)

(i) shall file, with the Registrar a return in Form CRL-1 disclosing the details specified therein, within a period of one hundred and fifty days from the date of publication of these rules in the Official Gazette;

(ii) shall not, after the date of commencement of these rules, have any additional layer of subsidiaries over and above the layers existing on such date; and

(iii) shall not, in case one or more layers are reduced by it subsequent to the commencement of these rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed in sub rule (1), whichever is more.

(Interpretation and Suggestions: The Company who holds more layers of subsidiaries as specified in rule 1 after the commencement of these rules, such Companies shall file a return in Form CRL-1 with ROC with in 150days from the date of publication of rule in Gazette and shall not hold additional layer of subsidiaries over and above the layers existing on such date. Further in any case if holding company reduce its layer subsequent to commencement of these rules and after that even if have such number of layer more than the number of layer are per sub rule 1 than in such case that would be a maximum for it. Let explain with help of an example.

Now in above Flow chart Company A has 4 Layers of subsidiaries b, c, d, e. Now subsequent to commencement of these rules and after that even Company A reduced the layer to 3 with b, c, d than A shall not have more layers of subsidiaries, for now is 3 or Maximum permissible as per rule 1 is 2, whichever is more i.e. 3.

(5) If any company contravenes any provision of these rules the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

(Interpretation and Suggestions: Any holding Company, Who have more than 2 layer of subsidiary company, then Holding company need to file Return in Form CRL-1, within period of 150 days (i.e.17/02/2018) from 20.09.2017, otherwise every Company and every officer in company who is in default shall be punishable with fine 10,000 Rs. and 1000 per day after 17/02/2018.)

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