Section 2(87) Subsidiary Company

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SECTION 2 (87): SUBSIDIARY COMPANY  

Unless the context requires otherwise, the term ‘subsidiary company’ or ‘subsidiary’ wherever appearing in the Companies Act, 2013 shall have the following meaning:

“subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company –
(i) controls the composition of the Board of Directors; or
(ii) 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:

Provided that 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 – For the purposes of this clause, –
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) 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 exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

Chapter I is on PRELIMINARY [Sections 1 and 2].

Section 2(87) is brought to force with effect from September 12, 2013, except the proviso and explanation (d).

Explanation (d) is brought to force from April 01, 2014. The proviso is not yet brought to force.

The Companies (Specification of definitions details) Rules, 2014 notified with effect from April 01, 2014, is relevant.

Corresponding provisions of the Companies Act, 1956:

Section 2(47) and section 4.

Corresponding provisions of the English Companies Act, 2006:

Section 1159 and Schedule 6.

Comments:
Where the composition of the Board of Directors of a company (including body corporate), say S Ltd., is controlled by another company (holding company), say H Ltd., either directly (on its own) or together with its one or more subsidiaries, then such company (or body corporate) [S Ltd.] is said to be subsidiary of the other company, H Ltd. Such control can also be through any subsidiary of the holding company, H Ltd. .

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The composition of a company’s Board of Directors shall be deemed to be controlled by another company, even if he same is not actually so controlled, if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors .

The term ‘control’ is defined u/s. 2(27) as under:

‘Control’ shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Where more than one-half of the total share capital of a company (including body corporate), S Ltd., is controlled by another company (holding company), H Ltd., either directly (on its own) or together with is one or more subsidiaries, then such company (or body corporate), S Ltd., is said to be subsidiary of the other company, H Ltd. Such control can be through any one or more subsidiary / subsidiaries of the holding company .

‘Total share capital’:

The term ‘total share capital’ is not defined under the Companies Act, 2013.

However, the term ‘share’ is defined u/s.2(84) to mean a share in share capital of a company and includes stock. U/s. 43 share capital can be of two kinds, equity share capital and preference share capital.

The term ‘total share capital’ is defined under the Rules ((Rule 2(1)(r) )) as:

In these rules, unless the context otherwise requires, “Total Share Capital”, for the purposes of sub-sections (6) and (87) of section 2, means aggregate of the:-

(a) paid-up equity share capital-


and

(b) convertible preference share capital.

Thus, where more than one-half of the aggregate of

(i) paid-up equity share capital, and

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(ii) convertible preference share capital

of a company (including body corporate) is exercised or controlled by another company, the former company becomes subsidiary company.

This is in deviation from definition of ‘subsidiary company’ under:

(i) Section 4 of the Companies Act, 1956 as well as

(ii) definition (Para 5) of Accounting Standard 21 (‘AS21’) on Consolidated Financial Statement.

Under Act of 1956 emphasis was only on equity share capital and in AS 21 emphasis is on voting power.

The Central Government (Ministry of Corporate Affairs or MCA) have authority to limit number of layers of subsidiary companies that certain kinds of companies can have. MCA to specify number of subsidiary companies that a subsidiary of certain kinds of companies can have. .

List of some of the provisions where the term ‘subsidiary company’ is used in the Companies Act, 2013:

  1. Associate company does not include subsidiary company. ((Section 2(6) ))
  2. To seek approval of NCLT for following different financial year than April 01 to March 31, where an Indian company is either a holding company or a subsidiary company of a company incorporated outside India and is required to follow different financial year for consolidation of accounts. ((first proviso to section 2(41) ))
  3. A subsidiary of a government company is treated as Government Company. ((Section 2(45) ))
  4. A company which is subsidiary of a public company shall be deemed to be a public company. ((Section 2(71) ))
  5. A subsidiary company is treated as related party. ((Section 2(76)(viii) ))
  6. A subsidiary company cannot be a small company. ((proviso to Section 2 (85) ))
  7. Certain class of holding companies can have only limited number of layers of subsidiary companies. ((proviso to section 2(87) )) Layer means subsidiary of subsidiary. ((Explanation (d) to Section 2(87))).
  8. Subsidiary company is prohibited from holding shares (directly or through nominee) of its holding company. ((Section 19(1) ))
  9. Company shall not give financial assistance for purchase of its shares or shares of its holding company to any person. ((Section 67(2) )). An exception being ESOP ((Section 67(3)(b) )) or loan to employees up-to 6 months of salary for beneficial ownership ((Section 67(3)(c) ))
  10. Companies are prohibited to buy-back its securities through, inter alia, its subsidiaries. ((Section 70(1)(a) ))
  11. Inspection of books of accounts of a subsidiary company is not open to directors of holding company and is open only to such persons, as may be authorized by a resolution of the Board of holding company. ((proviso to Section 128(3) ))
  12. Auditor of holding company can access records of its subsidiary (including its associates and joint ventures) for consolidated financial statement purpose. ((proviso to Section 143(1) ))
  13. An individual can be director of maximum 10 public companies and in reckoning 10 public companies, directorship held in private companies which are either holding or subsidiary company of a public company shall be included. ((Explanation to Section 165(1) ))
  14. A company shall make investment through not more than two layers of investment companies. However, if investor company is a subsidiary company, it can have more than two layers of investment companies for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force. ((proviso to Section 186(1) ))
  15. Shorter procedure for merger or amalgamation of holding company and its wholly owned subsidiary company. ((section 233(1) ))
  16. Section 185 do not apply to loan by holding company to its wholly owned subsidiary company; any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary ((Rule 10(1) of the Companies (Meetings of Board and its Powers) Rules, 2014 ))
  17. Section 185 do not apply to any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company ((Rule 10(2) of the Companies (Meetings of Board and its Powers) Rules, 2014 ))
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Section 2 (87) Subsidiary Company

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