The term holding company has been defined under Sec 2(46) of the Companies Act 2013.The bare minimum reading of the Act states that companies of which a few companies are subsidiary companies are called as holding companies. The term subsidiary company has been defined under Sec 2(87) of the Act which states it, in relation to any other company, a company in which the holding company may control the composition of board of directors, exercises control over more than one-half of the total share capital either by its own or with the aid of one or more subsidiaries. Moreover, the explanation of the section can be stated as:
A deemed subsidiary company status would be conferred on a company of the holding company even if control held on it is vide another subsidiary company. The composition of the Board of Directors shall be deemed to be controlled by another company if the company by exercise of its power has the ability to appoint or remove the majority of directors. The Act also covers body corporates within its ambit. The example of Uniliver can be taken into consideration. Uniliver holds more than 50% of shares in Hindustan Uniliver Ltd. However, it is not a company within the definition of Companies Act 2013, albeit which it is called as a holding company. This is because of the interpretation of the provision, since Sec 2(87) includes body corporates. Thus, company in which a foreign body holds more than 50% shares is called as subsidiary company in spite the latter not being registered. However, the 2017 Amendment has had huge effect on holding companies. This article will give a brief overview of the same.
EFFECT OF 2017 AMENDMENT
The amendment made an alteration of replacing the term voting rights with shares. The concept entrenched a formula of 10 DVR (Differential Voting Rights are the ones in which value of shares are considered to be lesser than actual shares) is equivalent to 1 voting right. Hence companies adjudged on the basis of voting rights previously who could not be holding companies became holding companies by virtue of holding shares. Another impact of this is that, a company cannot have more than a fixed layers of subsidiaries. Although the amendment came in the yar 2017, a gap of 4 years post the enactment and implementation of the Companies Act 2013 paved way for a company to have multiple layers of subsidiaries. The catch however is, the amendment has mandated companies having more than 2 layers of subsidiaries, within 150 days to report to the Registrar of Companies. The registrar has the authority to mandate the company to not go in for increasing the number of subsidiaries or if voluntarily closed not to reopen new subsidiaries afresh on the pretext of having owned more subsidiaries before the enforcement of the amendment. Horizontally, a company can have as many subsidiaries as it wants. But vertically, the restriction has to be confined to 2 in number.
IMPLICATION OF A HOLDING AND SUBSIDIARY COMPANY AND THE RELATIONSHIP
While on the face of it, it may appear that the autonomy a company achieves though being a subsidiary or holding company is great, many relaxations provided to a private company are not provided to the subsidiary or holding company. A private company which is a subsidiary of public company will be termed as a public company even when the subsidiary company may continue to be a called as a private company in its articles. Moreover, a company cannot buy back its own shares from the subsidiary. Loan cannot be extended to individuals or companies willing to purchase the shares of a holding company. The books of accounts of the subsidiary have to be inspected by the person authorized by the Board of Directors. The consolidated financial statement of the holding company ought to disclose details about the joint ventures, associate company and its holding in the subsidiary company. In case the holding company has more than one subsidiary, it shall prepare a consolidated financial statement of all joint ventures, associate companies and subsidiary companies. The balance sheet of a holding company should disclose all investments made by it in the subsidiary. The profit and loss account statements should disclose dividends from subsidiary companies and provisions of losses for subsidiary companies. Hence, in addition to giving its own financial statement, a consolidated financial statement should be provided by every company having a subsidiary or subsidiaries. Similarly, balance sheet of the subsidiary should also disclose all shares held by the holding company. Under Sec 226(4) there are also restrictions for appointment as auditor since a person cannot be an auditor if any of his relatives has any interest by virtue of holding shares in company, or its subsidiary or subsidiaries. In addition to this, pertaining to remuneration received by the MD or WTD of a company can even be from a subsidiary company subject to the disclosure in the annual report. The prospectus of the holding company should disclose the particulars of the subsidiary company.
CONCLUSION
The parameters ascertained for holding and subsidiary companies also pave disadvantages. While a holding company holds shares of a subsidiary, subsidiary company cannot hold shares of a holding company. Even if the nominee company holds shares, this restriction extends to the ambit of the nominees of the subsidiary companies as well. But this concept helps subsidiary companies to be a member of the holding company. If the subsidiary is made the legal representative of deceased member of the holding company, or if subsidiary is concerned in shares as a trustee or if investment is held before the company becomes a subsidiary, such an investment can continue. However, no voting rights can be enjoyed by the subsidiary company in the holding company.