Definition of subsidiary and holding company – OPC Registration

Companies Act, 2013: Section 2(87)

Section 2(87) of the 2013 Act was notified vide SO 2754(E) and has been in effect from 12-09-2013. To note that the proviso to s. 2(87)(ii) has not been notified at the time of going to press.Section 2087) corresponds to s. 4 of the 1956 Act with substantial changes. Section 129(3) of the 2013 Act also refers to the term subsidiary and gives an expanded meaning to the term by including associate company and joint ventures within its scope.

Scope of section 2(87) of Companies Act, 2013

subsidiary

In the 1956 Act there was only one section viz., s. 4 which defined both subsidiary and holding company. In the 2013 Act while s. 2(46) defines “holding company” s. 2(87) defines “subsidiary company”. While most of the criteria for determination of a subsidiary as contained in s. 4(1) of the 1956 Act have been retained in s. 2(87) of the 2013 Act, some of them have been omitted or modified therein. The Central Government has kept the power to limit the layers of subsidiaries that a company can have. Deeming provisions relating to foreign companies (which was earlier covered under s. 4(6) of the 1956 Act) to be considered as a subsidiary or holding company as contained in the 1956 Act have been omitted in clause (87) of s. 2 of the 2013 Act. A foreign subsidiary of a foreign company which is a subsidiary of the Indian company will however be considered as a subsidiary of the holding company in India by virtue of Explanation (c) to s. 2(87) of the 2013 Act whereby the term ‘company’ includes a ‘body corporate’.

As per General Circular No. 23/2014 bearing No. 1/13/2013- CL-V dated 25th June, 2014, there is no bar on a foreign company incorporating a subsidiary in India as public or private company under the provisions of the 2013 Act. This clarification was issued as the 2013 Act does not have a provision similar to s. 4(7) of the 1956 Act which exempted companies in India from the deeming provision of being treated as treated companies if such Indian subsidiaries were wholly owned subsidiaries of such foreign companies.

“Exercises or control more than one half of total share capital….” [Section 2(87)(ii) of Companies Act, 2013]

Rule 2(r) of Companies (Specification of definitions details) Rules, 2014 provides that for the purpose of this clause “total share capital” means the aggregate of paid up equity capital and convertible preference capital. Under s. 4 of the 1956 Act it was exercising or control of more than half of the voting power which determined the relationship of holding and subsidiary company. In that Act, for computing the voting power, preference shares issued before coming into force of 1956 Act, if carried voting rights, were also to be taken into consideration to determine whether the same was more than 50% of the voting power. As per s 1159(1)(a) of English Companies Act, 2006 also, a company will be a holding company of another only if it holds majority voting rights in the latter. Now as per the 2013 Act, it is the total share capital. What is the necessity to change from ‘voting rights’ which has been universally recognized to ‘total share capital’ has not been explained. If the total share capital were to mean only total equity capital, the position would not have changed as it more or less means voting power. Now by Rule 2(r) as indicate above, it has been clarified that the total share capital means paid up equity capital and convertible preference capital. The logic of adding convertible preference capital is not known. If it is on the basis that they would have the potential of being converted into equity later, then, convertible debentures should also have been included. As per second provision to s. 472) of the 2013 Act, if dividend is not paid on the preference shares for consecutive two years, then the holders of the preference shares will have voting rights on all the resolutions placed before the general meeting. If convertible preference shares, the voting rights of which are contingent upon conversion, is included in the total capital then, in our opinion, the preference shares having voting rights under proviso to s. 47(2) could not have been included in the total capital. In our view, the change from total voting power to total share capital is not called for. Further, there appears to be a drafting error in the expression “excises or control more than one half of total share capital”. Under the 1956 Act the expression was “exercises or controls more than half of the total voting power”. While the word “exercise” was appropriate when the same was used with reference to voting power, the use of the word now relating to holding of total share capital does not carry any meaning.

Sub-subsidiary [Explanation (a) to section 2(87) of Companies Act, 2013)

This Explanation provides a third type of subsidiary listed in clause 87 of section 2 of the 2013 Act. This comes in the category of a group of companies in which one is controlling the other not by direct shareholding or power to appoint directors but indirectly through a subsidiary. For example, for a company (A) to be holding company of another company (B) it is not necessary that that company A should satisfy either of the requirements in sub-clauses (i) or (ii) of section2(87) of the 2013 Act for being the holding company of B. If another subsidiary (C) of A satisfies the requirements in  sub-clauses (i) or (ii) in respect of company B, then, company A shall be construed to be the holding company of B.

Deemed control of composition of company board [Explanation (b) to section 2(87) of Companies Act, 2013]

As provided in Explanation (b) of s. 2(87) of the 2013 Act the Board of directors of company will be deemed to be controlled by another if, and only if, that other, at its own discretion has power to appoint or remove the whole or a majority of the directors of the first-mentioned company. ‘At its discretion’ means that it does not require the ‘consent or concurrence’ of any other person.

Meaning of “body corporate” [Explanation (c) to section 2(87) of Companies Act, 2013]

For understanding the import of Explanation (c) to s. 2(87) of the 2013 Act, it is worthwhile to examine the corresponding provision in the 1956 Act. Section 4 of the 1956 Act defined both holding and subsidiary companies in a single section and in sub-section (5) it was provided “In this section, the expression “company” includes anybody corporate”, The extended definition of ‘company given therein, thus, would apply to holding company” and “subsidiary company” wherever they occurred in the 1956 Act. Wherever used in the 1956 Act, included also a foreign incorporated company. It followed that, if any foreign body corporate was the holding company of a private company in India, the latter was to be treated as a subsidiary of a public company where the foreign body corporate could not be considered a private company within the definition under section 3 of the 1956 Act.

In the 2013 Act there are two separate definition clauses in s. 2 in relation to  ‘holding company’ and ‘subsidiary company’. Definition of “holding company” is in clause (46) of section 2 of the 2013 Act wherein it is provided “holding company” in relation to one more other companies, means a company of which such companies are subsidiary companies”. The whole clause talks of only ‘company’ and not ‘body corporate’. ‘Company’ is defined in clause (20) of s. 2 of the 2013 Act that it “means a company incorporated under this Act or any previous company law. From this definition, it is apparent that for a company to be a holding company, it has to be registered under this Act or any previous company law.

The heading of s. 2(87) of the 2013 Act is “subsidiary company”. Explanation to clause (87) of s. 2 of the 2013 Act begins with “for the purpose of this clause”- (c) “the expression company includes any body corporate”. It may be noted that in this clause, the term “holding company” has also been used. Therefore, the question that arises is whether, the expression holding company would also include any body corporate. In our view it does not. Since clause (87) of s. 2 of the 2013 Act deals with the definition of “subsidiary company” the usage of the expression holding company” is only for the purpose of determining the circumstances under which a company becomes its subsidiary. The Explanation that the expression company’ includes any body corporate” has to be only with reference to a subsidiary and not to a holding company.

In our view, since the heading of clause 2(87) of the 2013 Act is “Subsidiary company” and the Explanation itself says that the same is for the purpose of that clause, notwithstanding the fact that the said clause mentions “holding company” also, the term body corporate’ would apply only to a subsidiary company and not to a holding company. It is to be further noted that if the intention of the Legislature is that the term body corporate’ should also include ‘holding company’ then clause (46) of s. 2 of the 2013 Act could have been differently worded like “‘holding company in relation to one or more companies, means a body corporate of which such companies are subsidiary companies”. Thus, in whatever manner the expression “body corporate’ in clause (87) of section  2 of the 2013 Act is analysed, it would be clear that the expression does not include “holding company”. In other words, a company incorporated in a foreign country cannot be construed to be a holding company of a company incorporated under this Act or any previous company law.

Layer of subsidiaries of a holding company

As per provision in clause (87) of s. 2 of the 2013 Act the Central Government may prescribe class or classes of holding companies which shall not have layers of subsidiaries beyond such numbers as may be prescribed. In the 1956 Act, there was no such stipulation and a company could have any number of layers of subsidiary companies.

Relevant Rules issued under Companies Act, 2013

Rule 2(1)(r) of the Companies (Specification of definitions details) Rules, 2014 states that for the purpose of clause (87) of s. 2 of the 2013 Act ‘”total share capital” means the aggregate of paid up equity capital and convertible preference capital.

Section 4 of Companies Act, 1956

Historical background. The definition of holding and subsidiary in s. 4 of the 1956 Act was founded on s. 154 of English Act, 1948. In the Notes on clauses in the Companies Bill, 1953, it was stated as under: “As suggested by the Company Law Committee (Para 27), the definitions are based on those found in s. 154 of the English Act. A few minor drafting improvements have also been effected.” (Clause 4 of the Companies Bill, 1953).

The recommendations of the Committee were as follows: “We have entirely recast the definitions of subsidiary and holding companies and replaced the existing definitions in s. 2 of the Act by the provisions of s. 154 of the English Companies Act, 1948. The effect of this new definition would be that company A would be deemed to be a subsidiary of company B, if one of the following conditions applies:

(i) company B is both a member of company A and controls the composition of the Board of Directors, or

(ii) company B holds more than half of company A’s equity share capital in nominal value, or

(iii) company A is a subsidiary of any subsidiary of company B.

“As a corollary, a company is defined as a holding company of another, when that other company fulfills the above conditions so as to make it a subsidiary of the first. It will be noted that a company under the new definition, may be the subsidiary of another even though it is not a company within the meaning of the Act.”

Companies (Amendment) Act, 1960

 Section 4 of the 1956 Act was amended on the basis of the recommendations made by the Companies Act Amendment Committee of 1957. The Companies (Amendment) Act, 1960 substituted clause (b) of sub-section (1) and clause (c) of sub-section (2) of s. 4 of the 1956 Act. Section 4(7) of the 1956 Act was also inserted vide companies (Amendment) Act, 1960.

The Notes on clauses in the Companies (Amendment) Bill, 1959 explained the reasons for the proposed changes as under “The amendments seek to remove certain drafting defects -(i) in clause (b) of sub- section (1) of s. 4 in that the holders of preference shares issued before the commencement of the Act which may carry the same voting rights as equity shares are not covered by it, though such voting rights are  preserved under s. 90; and (ii) in clause c) of sub-s (2) of section 4 which is inconsistent with s. 253 which prohibits a body corporate from being appointed as a director of a company. It is proposed to place a private company registered in India, which is a subsidiary of a foreign public company, at par with an Indian private company which is a subsidiary of a public company registered in India. An exemption is proposed to be provided in the case of a private company registered in India which is a wholly owned subsidiary of a public company incorporated outside India”(Clause 3 of the Bill).The Joint Committee, thereafter, observed as under:

“The amendments made in the clause are clarificatory in nature. The Committee considers it necessary to treat an Indian Company, the entire share capital of which is held by one or more bodies corporate incorporated outside India, as a private company which is subsidiary company for the purposes of the Act”.

Companies (Amendment) Act, 2000

The words “managing agent, secretaries and treasurers” have been omitted from s. 4(2)(b) by the Amendment Act of 2000. The amendment is of consequential nature. The Notes on Clauses stated thus: “Clause 4 seeks to omit the expression “managing agent, secretaries and treasurers” in clause (b) of sub-section (2) of s. 4 of the Act which is of consequential nature. For one person company registration in Coimbatore visit our website, and you can get a right solution.

Leave a Reply