Companies can have only two layers of subsidiaries: Centre

Press Trust of India New Delhi | Updated on January 10, 2018

Corporates can have only two layers of subsidiaries under the companies law, with the government putting in place stricter norms as it continues with the clampdown on illicit fund flows.

While the rules will be applicable prospectively, companies that already have more than two layers of subsidiaries have to furnish details about them to the government.

Banking and non-banking financial companies as well as insurance firms and government companies have been exempted from the restrictions, according to a notification issued by the Corporate Affairs Ministry.

The rules, notified after public consultation, came into effect from September 20. It assumes significance against the backdrop of concerns that shell companies are being floated to act as conduits for illicit funding activities.

The Ministry, which is implementing the Companies Act, said the cap of two layers of subsidiaries will not affect a company from acquiring an overseas firm that has “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,” it said.

In case of violation of the norms, the company as well as every officer of that firm who is in default would face penalties.

The fine would be up to ₹10,000 and, in case of repeated violation, the penalty “may extend to ₹1,000 for every day after the first during which such contravention continues”.

Companies that have more than two layers of subsidiaries should disclose the details to the ministry within 150 days.

This would not be applicable for banking, NBFC, insurance and government companies.

Along with the relevant section, the ministry notified the ‘Companies (Restriction on number of layers) Rules, 2017’ on September 20.

Layering restriction on investment subsidiaries were incorporated in the Companies Act, 2013 “with a view to check misuse of multiple layers of subsidiaries for diversion of funds/siphoning off funds as a measure of minority investor protection,” the ministry had said while issuing the draft rules in June.

Under the companies law, a subsidiary is an entity where the holding company controls the composition of the board of directors, among other criteria.

Earlier this month, the ministry had said that over 1.06 lakh directors would be disqualified for their association with shell companies. The move came after the registration of 2.09 lakh companies that have not been carrying out business activities for a long period were cancelled.

Published on September 22, 2017

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like