Restrictions on Layers of Subsidiaries for Holding Companies

Restriction on number of layers for certain classes of holding companies under Companies (Restriction on number of layers) Rules, 2017.

The Companies (Restriction on number of layers) Rules, 2017, introduced by the Ministry of Corporate Affairs, imposes significant restrictions on the number of layers of subsidiaries a holding company can have. This regulation aims to improve transparency and simplify the corporate structure of companies in India. Enacted on September 20, 2017, these rules are crucial for corporate governance and compliance. This article delves into the specifics of these rules, their implications, and the exceptions provided.

According to the notification issued on 20^th September 2017 by the Ministry of Corporate Affairs. No company except the following, shall have more than two layers of subsidiaries:

• Banking Company
• Non-banking financial company
• Insurance Company
• Government Company

Provided that the above provisions 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, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account i.e. the Wholly owned subsidiary are exempt from the purview of layering.

Now, let us understand the meaning of subsidiary under section 2(87) of Companies act: –

• in relation to any other company (that is to say the holding company), means a company in which the holding company
  • controls the composition of the Board of Directors i.e. the power to appoint majority of directors
  • exercise more than half of voting powers either at its own or together with one or more of its subsidiary companies i.e. a company shall be deemed to be a subsidiary company even if the control is of another subsidiary company of the holding company;

** The company here includes any body corporate

Now Coming to the definition of body corporate: –

body corporate means a company as defined in 2(20) the Companies Act, 2013 and includes

(i) a limited liability partnership registered under this Act;

(ii) a limited liability partnership incorporated outside India; and

(iii) a company incorporated outside India

but does not include

(i) a corporation sole;

(ii) a co-operative society registered under any law for the time being in force; and

(iii) any other body corporate (not being a company as defined in clause (20) of section 2 of the Companies Act, 2013 or a limited liability partnership

Hence, Subsidiary includes LLP also i.e. LLP will also be considered while counting layering of subsidiaries.

Now the question is if subsidiary includes LLP, then why LLP accounts are not being consolidated with the holding company

As per the section 129(3) of Companies Act 2013, Where a company 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

The word used in the above sub section is subsidiary company or associate company that’s why the accounts of LLP are not consolidated with holding company.

Now Coming back to layering provisions :-

There is no clear definition of layering as in restriction is in the nature of step down subsidiary (vertical layer) or sister concern subsidiaries (Horizontal layers ) but referring to the possible intend of law maker it should cover only vertical layer and not the horizontal layer of subsidiary because if the restrictions is in the nature of horizontal layering it will impact the expansion of companies and it will also restrict the companies from investing or acquiring another companies

Accordingly , a company may have as many investments horizontally but restrictions are there for vertical layering as discussed above. investment.