4 November 2017

LIMITATION ON LAYERS OF SUBSIDIARIES OF A COMPANY IN INDIA

The Ministry of Corporate Affairs (MCA) has recently notified the Companies (Restriction on Number of Layers) Rules 2017 (Companies Layer Rules) under the Companies Act 2013 (Companies Act) whereby a company is not permitted to have more than two layers of subsidiaries.

Important Points under the Companies Layer Rules: 

• Restriction on number of subsidiaries: After the commencement of the Companies Layer Rules, no company, other than the class of companies mentioned below, shall have more than two layers of subsidiaries.

• Computation: For the computation of number of layers under the Companies Layer Rules, one layer which consists of one or more wholly owned subsidiaries shall not be taken into account. Further, an Indian company may acquire a foreign company with subsidiaries beyond two layers, as per the laws of such country.

• Companies not covered under Companies Layer Rules: The following companies are exempted from the application of these rules: (a) A banking company as defined in the Banking Regulation Act, 1949; (b) A non-banking financial company registered with the Reserve Bank of India under the Reserve Bank of India Act, 1934; (c) An insurance company carrying on insurance business as per the Insurance Act, 1938; (d) A government company as defined in the Companies Act.

• Existing Companies with more than two layers of subsidiaries: Companies which have excess layers of subsidiaries on the date of commencement of these rules shall: (a) File a return with the MCA disclosing the layer wise details of subsidiary companies within 150 days from the date of commencement of the these rules; (b) Not have additional layers of subsidiaries over and above the number of layers existing on the date of commencement of these rules; (c) In case such company has reduced one or more layers subsequent to these rules, it shall not have more layers beyond the layers it has after such reduction, or it shall not exceed the number of layers as specified in these rules, whichever is more.

• Default:Contravention of these rules by a company and every officer in default of the company shall be punishable with a fine of Rs 10,000 (Rupees Ten Thousand Only), and Rs 1000 (Rupees Thousand Only) per day, for every day during which the default continues.

MHCO COMMENTS:

Earlier, the Companies Act only provided for restriction in making investments through not more than two layers of investment companies and there was no restriction in the number of subsidiaries a company could have. However, the Companies Layer Rules has brought about a change in the functioning of Indian companies by bringing strict filing requirements and has put a necessary ban on a company from having excessive number of subsidiaries in order to combat siphoning of funds by individuals behind such companies.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91-22-40565252 or legalupdates @mhcolaw.com for any assistance.