India Inc may lose flexibility in creating corporate structures

If there is one thing in the Companies Bill, 2013, that spells trouble for promoters, it is the set of provisions that limit flexibility in creating corporate structures.

Once the Bill is enacted, a company — unless otherwise prescribed — can make investments through “not more than” two layers of investment companies.

This will be in sharp contrast to the current position, where a company can form any number of investment companies and route its investments through them.

There are two exceptions mentioned in the new Bill. First, when an Indian company acquires a foreign company having subsidiaries beyond two levels. And second, when a subsidiary is required to have an investment subsidiary under any law, rule or regulation in force.

The new law has another provision that may give promoters sleepless nights: the Centre has retained the power to spell out the number of step-down subsidiaries any class of holding companies can have.

In other words, India Inc will be on the mat when it comes to structuring businesses — both on the number of investment companies and the number of step-down subsidiaries.

The proposals aim to prevent the misuse of subsidiaries embedded in various layers to achieve ulterior motives.

Predictably, Indian companies are miffed by these provisions as the current framework allows them to incorporate any number of investment companies or have any number of step-down subsidiaries.

Sunil Kanoria, Vice-Chairman, Srei Infrastructure Finance Ltd, says that each sector is unique, and companies within a sector create structures to manage business complexity suitably. This restriction will put Indian companies at a disadvantage in comparison with their international counterparts, who are free to create corporate structures, says Kanoria.

This, he believes, may be a hindrance in mergers and acquisitions, formation of joint ventures, special purpose vehicles or during restructuring.

Vineet Agarwal, Managing Director, Transport Corporation of India, points out that while the new Companies Bill allows two layers of investment subsidiaries, the RBI permits only one.

“This anomaly needs to be cleared,” says Agarwal.

Lalit Kumar, Partner at law firm J. Sagar Associates, is of the opinion that the rule will limit the flexibility corporates have to structure their investments.

Infrastructure and real estate companies could be affected by the provision although others will also find that it limits their freedom to structure the way they wish, adds Kumar.

Not everyone is coming out in support of corporate India on this front.

“Although this will reduce flexibility to make investments, it will help prevent creation of a web of investment companies leading to diversion of funds,” says Ashok Haldia, former Secretary of the CA Institute.

(With inputs from Amrita Nair-Ghaswalla, Jayanta Mallick, Balaji R., Vishwanath Kulkarni, Mamuni Das, Shankar S.)

This is the first part of a series on Companies Bill, 2013.

> srivats.kr@thehindu.co.in

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