RESTRICTION OF LAYERS OF A COMPANY

[Mr. M. GOVINDARAJAN]

Subsidiary company

Section 2(87) of the Companies Act, 2013 (‘Act’ for short) defines the expression ‘subsidiary company’ in relation to any other company (that is to say the holding company) as a company in which the holding company-

• controls the composition of the Board of Directors; or
• 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.

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 to this section provides that-

• a company shall be deemed to be a subsidiary company of the holding company even if the control is of another subsidiary company of the holding company;
• 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 excisable by it at its discretion can appoint or remove all or a majority of the directors;
• the expression ‘company’ includes any body corporate;
• ‘layer’ in relation to a holding company means it subsidiary or subsidiaries.

Rules for restriction on number of layers

The Central Government, vide Notification No. G.S.R. 1176(E), dated 20.09.2017 made ‘The Companies (Restriction on number of Layers) Rules, 2017 which came into effect from 20.09.2017.

Non applicability of Rules

Rule 2(2) provides that the provisions of this rule shall not apply to the following classes of companies-

• a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949
• a non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 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;
• an insurance company being a company which carries on the business of insurance in accordance with provisions of the Insurance Act, 1938 and the Insurance Regulatory Development Authority Act, 1999;
• a Government company referred to in clause (45) of section 2 of the Act.

Restriction of layers

Rule 2(1) provides that 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.  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.  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.

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)-

•  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
• 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.

Return

Rule 2(4) provides that 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)  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;

Return form

The return to be filed is in the Form No. CRL - 1.   The following details are to be furnished in this return-

• Name of the Company
• CIN of the Company
• Number of layers of subsidiaries as on the date of commencement of these rules
• Layer wise details of subsidiary companies-

• Sl. No;
• Name of subsidiary;
• CIN of subsidiary company;
• Name of the holding company;
• CIN of holding company;
• Percentage of shares held by the holding company;

• Declaration by the Director of the company who is authorized by the Board of Directors to sign the form with details of resolution number and date, that

• the information of the subsidiaries and the layers as contained in the form is true, correct and complete and no information has been suppressed or concealed.
• He has read the provisions of section 448 and 449 of Companies Act, 2013 which provide for punishment for false statement and punishment for false evidence respectively.

• Digital signature of the Director, giving declaration

Provisions not derogation to Section 186(1)

Rule 2(3) provides that the provisions of this rule shall not be in derogation of the proviso to sub-section (1) of section 186 of the Act.

Section 186(1) provides that without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies.  The provisions of section 186(1) shall not affect-

• a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
• a subsidiary company from having any investment subsidiary for the purpose of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force

Punishment

Rule 2(5) provides that 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.