Written by Garvit Singh, pursuing Diploma in Entrepreneurship Administration and Business Laws offered by Lawsikho as part of his coursework.  Garvit is a Final year student of B.A.LLB at Theerthanker Mahaveer College, Moradabad.

Introduction

Basically, if any company who holds more than 50% of the shares of another company or appoints a majority of the other company director then the second company called as a subsidiary of the first company and the first company is called as the holding company

And somehow if the holding company owns 100% shares of the subsidiary company then the subsidiary company is known as a wholly owned subsidiary.

A minimum of two investors are required by a privately owned business, so 100% shareholding is in fact unthinkable. The organization may give one offer to another investor who is well disposed or adjusted to the holding organization. Fundamentally, it is a relative of the advertisers who runs the organization.

What are the subsidiary and holding company according to the Companies Act?

Both holding and subsidiary companies are defined in companies act, 2013.

Holding company

Under section 2(46) of the companies act, 2013, Holding a company is a company that holds or owns at least 50% of the other companies shares and has the authority to make decisions of management, controls, and influences the company’s board of directors. Generally, a holding company may exist for the sole purpose of controlling and managing subsidiary companies.

Subsidiary company

Under section 2(87) of the Companies Act, 2013 The subsidiary company is the company that is constrained by the holding or parent company. It is the body corporate where the holding organization controls the arrangement of the top managerial staff. According to the companies amendment act, 2017, section 2(87)(2) if the holding company has command over more than one portion of the casting a ballot intensity of another company, that specific company will be distinguished as the subsidiary company.

What are the layers of the subsidiary company?

The layering word is used in Section 2(87) of the act which implies a subsidiary of holding company. Basically, it implies or means as vertical subsidiaries. Section 186 and provision to Section 2(87) of this Act restrict the number of layers that holding Companies can have.

Subsidiaries that are now wholly owned has been excluded from being treated as a separate layer as per the above rules.

This expression isn’t characterized anyplace in the companies act, 2013. It is utilized to indicate a subsidiary of the subsidiary company.

Restrictions for transactions between holding and subsidiary companies

The following are the amendments to the companies act 2013 which increase the ease of doing business. It is mandatory to analyze the changes brought with respect to holding subsidiary transaction under the companies act, 2013

There are several changes have been brought to the companies act 3013 by the companies (amendment) act 2015 but these are the two major changes impacting the holding-subsidiary transaction.

  • Section 185 has been corrected to lead the credits which are given by holding companies to their completely owned subsidiary and furthermore to security or assurances are given by holding the company to their subsidiary company as for advances progressed by banks and the monetary foundation gave they are utilized to the important business movement of the subsidiary company.
  • Section 185 says that related party transaction has been relaxed by amending it and by removing the need for passing a special resolution.

Changes analyzed

  1. Section 185 says that no company shall directly or indirectly advance any loans including loan represented by books debt to any of its director or any other person in whom the director is interested.
  2. It not only restricts such loans but also guarantees and or any other security provided. Prior to the 2015 amendment, no exemption was provided for loans advanced to subsidiaries by holding companies.
  3. All these subjects are applied to the conditions that these loans or guarantees are used for the principal activity business of the subsidiary company. Principal business activity is that kind of activity which is probably mentioned in the annual returns under section 92 of the companies act.
  4. Basically, this is the big relief for the business world because as the government has made clear beyond the doubt that holding companies can advance loans to their wholly owned subsidiary while they can give guarantees or security for any loan given by bank instituting to such subsidiary company.

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Restrictions for transactions

The Act elaborates on the various restricted transaction between the subsidiary and holding company. The rationale behind this is to ensure that the director is not utilizing the companies’ funds for their own benefits. So these are the restricted transaction.

  1. A subsidiary cannot have shares in its holding companies. Though cross-holding is not permitted between holding a subsidiary company. As you see the holding structure of the Tata company there are so many cross-holdings between companies i.e. company A will have some shares in company B and company B will also have some shares in company A. this is possible only when if two companies are not holding and subsidiary companies which are mutual shareholding in each other should be less than 50%.
  2. Loans that are made by holding company to the subsidiary company are not permitted under the Act.
  3. Any loan/guarantee/security made by the subsidiary company to the director of the holding company is not permitted.

Permitted transactions

  • Any advance made by a holding organization to its entirely claimed backup organization is allowed if the said advance is utilized for completely obtain auxiliary chief business. The advance ought not to be utilized for some other venture by the auxiliary organization.
  • A holding organization can give ensure/security for any credit made to its completely claimed auxiliary organization if the said advance is utilized for entirely obtain backups key organizations.
  • Moreover, a holding an organization can give ensure/security for any credit made to its backup organization by any bank and money related establishment if the said advance is utilized for entirely possessed auxiliaries’ main business. The advance ought not to be utilized for some other speculation by the backup organization.

What are the unique features of the transaction between the subsidiary and holding company?

  • There are some fixed stamp duty relaxations are available on the transaction between the subsidiary and holding companies but only when they are wholly owned. Generally, subsidiary and holding are different legal entities and their transaction and relationships between them will require another kind of contract which was executed and payment of stamp duty on each contract can be heavy.
  • So stamp duty relaxations are valuable. These exclusions have been finished with the end goal of encouraging such organizing an association of organizations. Consequently, they are not usually noticeable in the content of the state level stamp act or plan and these exclusions are made accessible through the independent warning.
  • All these transactions are needed to comply with the relevant restrictions on related party transactions and qualify as a related party transaction. These transactions are of so many kinds and demanding on the type of transaction. These principal seek to ensure that the transaction does not get influenced merely by the relationship between the parties and is executed on an arm’s length basis.
  • For loan transaction, there are more than one holding companies may issues guarantees for the obligation of the subsidiary.
  • Level 2 or level 3 subsidiary dividend transferring which is permitted to the holding company can be difficult and have unintended tax implication if the structuring is not done carefully.
  • Arm’s length pricing principal may have to apply for the income tax perspective and especially if the holding and subsidiary relationship is international. Generally, the arm’s length pricing applies in domestic situations under Indian law.

What are related party transactions?

  • Companies act, 2013 has uncovered a new era in the Indian corporate sector which places more reliance on disclosure norms rather than on approvals. Related party transaction is covered under section 188 of the companies act, 2013. Ministry of corporate affairs notified on 26th March 2014 that 188 came into force on 1st April 2014.
  • Companies act, 2013 calls for larger disclosures with the member’s approvals. The new order for related party transactions seems difficult because the definition of the related party has changed significantly.
  • A subsidiary company, holding company and associate company has been included which will have a large impact on the transaction between a group of companies. The scope of the transaction has been enhanced and proposes to cover sale, purchase, and leasing of any property of any kind including immovable property. Basically, section 188 describes the matters which require the consent of the board of director of the company prior approval of the member case of a special resolution.

Conclusion

  • These means will surely expand the simplicity of business together in India. In any case, a portion of the business individuals are contending that these measures will be against the soul of corporate administration. Shareholder power will decrease and investors might have little power to control related party transactions and other holding and subsidiary transactions due to these restrictions.
  • This may lead to a complaint even from minority shareholders, institutional investors and other section which might find such related part transaction implicit and not have much power to exercise. These restrictions increase the ease of doing businesses and it has become imperative to ascertain the changes brought with respect to holding and subsidiary transactions under the companies act, 2013.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

 

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