Shareholding Rights of a Subsidiary in its Parent Company

[Ishita Ramani]

Introduction

In this corporate world, a subsidiary company is known as an entity that is owned and controlled by its parent company. The parent companies own more than 50% of the stock and also control the operations of the subsidiary. However, when 100 percent of the shares of an Indian subsidiary are owned by another company, such a company is known as a wholly owned subsidiary. As per the Companies Act, 2013 a subsidiary company has no right to hold or own the shares of its holding company. In this blog, we will discuss the shareholding rights of a subsidiary company in its holding company under Section 19.

What is a subsidiary?

A subsidiary company is a company that is controlled and operated by another company, and the controlling company can be either a parent company or a holding company. It is a separate legal entity governed under the Companies Act, 2013. However, he may acquire, alienate and purchase property in his name and the existence of the company shall not be affected by the death or removal of any of the members.

What is a parent company?

A parent company is a company that owns more than half of the stock of an Indian subsidiary and can therefore control its operations. A parent company is a holding company that owns a significant number of voting shares of another company.

Shareholding Rights of a Subsidiary in its Parent Company

As per the provisions of Section 19 of the Companies Act, 2013, a subsidiary company is prohibited from holding any shares in its parent company, by itself or its nominee. In other words, the Indian subsidiary has no shareholding rights in its holding company. A provision of the Act also prohibits a holding company from allotting any shares in its Indian subsidiary.

However, there are certain cases where a subsidiary company holds shares in its parent company. The cases are as follows.

• A subsidiary company holds shares in its parent company as the legal representative of a deceased member of the holding company.
• An Indian subsidiary may own shares of the parent company as a trustee.
• When an Indian subsidiary is functioning as a shareholder in its holding company prior to the establishment of that holding company.
• An Indian subsidiary has the right to vote in a meeting of the holding company only as a legal representative or in respect of shares as a trustee, as referred to in (a) and (b).

What would be the effect if a subsidiary company could hold shares in its parent company?

• There will be overlapping interests of the members of the holding company as well as the subsidiary company.
• The holding company's control over its Indian subsidiary will be affected.
• For the parent company, the objective of solving critical issues and risk diversification will no longer exist.
• A holding company may not enjoy various tax benefits.
• Dividend distribution will be a matter of conflict between parent and subsidiary companies.

A holding company in India  is an authority that exist independently and manages other companies via ownership of their shares.

Summary

A subsidiary company has no shareholding rights in its parent company as per the provisions of section 19. Such allotment or transfer of shares is prohibited under the Companies Act. However, there are certain legal conditions under which a subsidiary company can own the shares of the holding company. In case the holding company is limited by guarantee or the unlimited company has no share capital, the shares shall be converted in the interest of the members and then it shall determine that such company is a holding company of Indian subsidiary.