Holding & Subsidiary Company- Provisions under CA, 2013

(ii) exercises or controls more than one-half of the total share capital 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;

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

COMPANY INCLUDES BODY CORPORATE:

As per Sec 2(87) Company include a ‘Body Corporate’.
As per Sec 2(11) body corporate includes a ‘Company incorporate out of India’.

Thus, an Indian company in which more than 50% shares are held by a foreign body corporate will be a ‘Subsidiary Company’.

Similarly, any Indian body corporate can be ‘holding company’ even if that body corporate is not registered as ‘company’ under company Act.

An Indian company can be holding/subsidiary of a foreign body corporate even if it is not registered as a Company.

SOME DECISIONS OF CASES:

A holding company is not liable for provident dues of a Subsidiary Company.
Workmen of subsidiary Company are not workmen of holding Company.
It was held that holding company is not liable for wages of its subsidiary company which was under winding up.
A holding Company can’t be penalized for violation of foreign exchange provisions of Subsidiary Company.
Holding and subsidiary companies are independent legal entities, and are to be treated as such. These can’t be treated as one single unit for all purposes.
Holding and subsidiary are separate and distinct legal entities.

IMPLICATION OF HOLDING/SUBSIDIARY RELATIONSHIP BETWEEN TWO COMPANIES:

If a Company is a Subsidiary of another Company. Following are the implication:-

Many relaxations to private Company are not available to subsidiary of public Company.	Many relaxations available to a private company are not applicable if that private company is subsidiary of another public Company. Thus, for all practical purpose, the private company is treated as a Public Company.
Subsidiary of Public Company is Public Company.	A private company which is subsidiary of a public company is a ‘public company’, even when such subsidiary company continues to be a private company in it Articles.
Subsidiary can’t given loans for purchase of shares of holding Company	A subsidiary can’t give loans or financial assistance for purchasing or subscribing to shares of its holding Company.
Company can’t buy its shares through subsidiary.	A holding company can’t buy directly or indirectly its own shares through any subsidiary company, including its own subsidiary.
Right of holding company to inspect books of account of subsidiary	Inspection of books of account of any subsidiary company shall be done by person authorized by Board of Directors.

PROVISIONS RELATING TO FINANCIAL STATEMENT FOR HOLDING AND SUBSIDIARY COMPANY:-

CONSOLIDATED FINANCIAL STATEMENT
Holding Company Financial Statement	Consolidated Financial Statement of holding company is required to disclose prescribe details about subsidiary, associate Companies and Joint ventures.
If more than one Subsidiary	If a Company has one or more subsidiaries, associate companies and Joint Ventures, it shall, prepare a consolidated financial statement of the company and of all the subsidiaries, associate companies and joint venture in the same form and manner as that of its own.
Separate Financial Statement for Holding Company	This Statement is in addition to the Separate financial statement of the holding company. The consolidate financial statement shall also be paid before the annual general meeting of the holding company along with the laying of its own financial statement.
Disclosure in balance Sheet of Holding Company	Balance sheet of holding company shall specifically disclose investments in the subsidiaries.
Disclosure in P&L account of Holding Company	Profit and Loss account of Holding company shall disclose-(a) Dividends from subsidiary Companies

PROVISIONS APPLICABLE ON HOLDING AND SUBSIDIARY COMPANY:-

TOPIC	SECTION	PARTICULAR
Investment only through two layers	186(1)	A company shall make investments through not more than two layers of subsidiary investment companies unless provided otherwise.
Disclosure in B/S of Subsidiary	Balance sheet of subsidiary Company should disclose shares held by its holding company or its ultimate holding Company, or the ultimate holding Company in aggregate.
Restriction on appointment as Auditors	226(4)	A person can’t be appointed as auditor, if he, his relative or partner is holding any security or interest in the Company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.
Combined Investigation	219(a)	If inspectors is appointed for a company under section 213, he can investigate affairs of its subsidiary or holding company also.
Loan to Director	185	Company can’t give loan to directors of its holding company.
Remuneration to MD & WTD	197(14)	A WTD or MD of a company who is getting commission from the company can get commission or remuneration from its holding or subsidiary company, subject to disclosure by the company in its annual report.
Prospectus of Holding Company	–	Prospectus of holding company should contain particular of its subsidiary.
Provisions under other laws	–	Ø Holding and subsidiary companies are treated as ‘Related Person’ for valuation purpose under Central Excise Act.Ø Holding and Subsidiary Companies are deemed to act in concert for purposes of takeover regulation of SEBI

SHARE-HOLDING OF HOLDING COMPANY BY SUBSIDIARY COMPANY:

A holding Company can and does hold shares of subsidiary, but a subsidiary can’t hold shares in its holding company. Share allotment made to subsidiary is void.

This restriction applies even if shares are held by nominee of subsidiary Company and not by the subsidiary company itself.

However there are certain cases, subsidiary can be member of its holding Company:-

a) When subsidiary is a legal representative of deceased member of holding Company.

b) When subsidiary is concerned in shares as trustee.

c) Investment held before the Company became subsidiary can continue, but in that case, subsidiary has no voting right in holding Company.

PROVISIONS IN LISTING AGREEMENT IN RESPECT OF SUBSIDIARY COMPANIES:-

The provisions relating to the compositions of the Board of Directors of the holding Company shall be made applicable to the composition of the Board of Directors of Subsidiary Companies.
At least one independent Director on the Board of Directors of the subsidiary company.
The Audit Committee of the Holding company shall also review the financial statements, in the particular the investments made by the subsidiary Company.
The minutes of the Board meetings of the subsidiary company shall be placed for review of the Board meeting of the holding Company.
The Board report of the holding Company should state that they have reviewed the affairs of the subsidiary company also.

♣ Whether a Company can be holding Company even if it does not hold 50% equity shares?

The definition of Subsidiary Company mentions ‘total share capital’. Hence, preference capital can’t be ignored. Thus, even if a company has less than 50% equity shares in another company, the other Company can be its holding company, if including preference share capital, the total holding is more than 50%.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at [email protected])