by LegitPro Associates | Sep 7, 2023 | Corporate Law, Knowledge Series
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.
by LegitPro Associates | Aug 8, 2023 | Corporate Law, Knowledge Series, Real Estate
Key Considerations in Commercial Real Estate Leasing: Demystifying the Legal Landscape
Commercial real estate leasing involves a myriad of legal considerations for consumers. The lease agreement serves as the backbone of the leasing process, requiring careful review to protect consumer rights. Commercial real estate leasing can be a complex and intricate process for consumers, involving various legal considerations that must be carefully navigated. At the core of this process lies the lease agreement, which is the foundation of the lease relationship.
To protect their rights and interests, consumers must thoroughly review the lease agreement, paying close attention to its terms and conditions. This includes understanding and negotiating key aspects such as rent, lease duration, maintenance responsibilities, and dispute resolution mechanisms. Financial considerations are also critical, as consumers must strike a balance between the cost of the lease and the value they receive. This involves negotiating the rent amount and understanding and accounting for additional expenses, such as common area maintenance (CAM) fees, insurance costs, property taxes, and utilities. Moreover, consumers need to be vigilant about the condition of the property they are leasing. Conducting thorough inspections and ensuring that the lease agreement clearly outlines the landlord’s maintenance responsibilities can help protect their investment and avoid potential disruptions to their business operations. Another important aspect for consumers to consider is the flexibility to assign or sublease the leased premises.
Understanding the terms and conditions related to assignment and subleasing provisions allows consumers to assess their options for growth and expansion while adhering to the landlord’s requirements. In addition, consumers should carefully review the default and termination clauses in the lease agreement to safeguard their interests in case of any unforeseen circumstances. These clauses define the consequences of default and outline the procedures for terminating the lease, ensuring that consumers have appropriate remedies and protections.
Lastly, compliance with applicable laws and regulations is essential for consumers to maintain their integrity and avoid legal issues. Understanding and adhering to zoning restrictions, permits, licenses, and other legal obligations prevents potential legal consequences and contributes to responsible business practices. Consumers can establish a solid foundation for a successful and secure leasing experience by considering and navigating these legal aspects of commercial real estate leasing.
In conclusion, commercial real estate leasing involves a range of legal aspects that must be carefully addressed in the lease agreement. By paying close attention to the terms and conditions related to the leased premises, financial obligations, property condition and maintenance, assignment and subleasing, default and termination, and compliance with laws and regulations, landlords and tenants can establish a secure and fair leasing arrangement. Seeking the guidance of legal professionals experienced in commercial real estate law is advisable to ensure that all legal considerations are adequately addressed, protecting the interests of all parties involved.
by LegitPro Associates | Jul 24, 2023 | Corporate Law, Regulatory Compliances, Startup
While corporate governance has been a top matter of discussion over the past year, the latest incident of Mojocare founders confessing to its investors on inflating revenue has underlined the need to keep a close watch on the operations of startups. Venture-funded startups like BharatPe, Byju’s, Zilingo, Rahul Yadav’s 4B Networks and Trell are among companies that have allegedly had governance issues in the last one year.
Everyone is cautious about what might be happening even in early-stage firms and it’s better to get it checked in early stages given the current state of affairs. India is emerging as one of the fastest-growing start-up nations in the world, with over 98,000 start-ups, 400+ incubators, and 108+ unicorns. Indian start-ups are making their presence felt across the world,
contributing to both the socio-economic growth of India and other emerging economies, as well as gaining recognition from global investor communities, including governments.
The start-up sector in India has, over the last few years, become a key indicator of the economic growth of the country. A start-up is faced with several issues that must be dealt with in order for it to grow into a successful organization. Apart from planning the most effective business strategies, a start-up needs to look at the regulatory, legal and tax regimes of the country where it is proposed to be set up and carry on business. In many instances, appropriate structuring for a start-up helps to prevent future complications and mitigate risks at a future stage. Introducing corporate governance norms early in a start-up has several benefits that can outweigh the potential diversion of focus.
Here are some of the key benefits:
▪ Enhanced accountability: Corporate governance norms ensure that the startup is accountable to its stakeholders, including investors, customers, and employees. This can help establish trust and credibility, which is essential for the long-term success of the business.
▪ Improved decision-making: By establishing a clear framework for decision-making, corporate
governance norms can help the startup make better decisions that align with its values and
objectives.
▪ Reduced risk: Corporate governance norms can help the startup identify and manage potential risks, including legal and regulatory compliance, financial reporting, and data privacy.
▪ Increased access to capital and partnership: Investors and lenders are more likely to invest in startups that have established corporate governance norms. This can help the startup raise capital more easily and at more favorable terms. Furthermore, start-ups that adopt good governance practices tend to attract higher valuation premiums, which can assist in their overall fundraising and growth journey.
▪ Stronger reputation: A startup that upholds high standards of corporate governance is likely to have a stronger reputation in the market, which can help attract customers, employees, and partners.
While there is a potential risk that corporate governance norms could increase costs and/or curtail innovative thinking, it is possible to mitigate this risk by balancing governance with a culture of innovation and regularly reviewing and updating governance frameworks. The overall benefits far exceed the possible downsides.
Start-ups are growing at a fast pace and with strong aspirations. The Indian start-up ecosystem is poised to create jobs, generate wealth, and transform societies. The governance framework has the potential to act as a catalyst for start-ups to remain conscious during important decision-making processes.
LegitPro Associates Corporate Governance team completed 2 assignments of Drafting Comprehensive
Governance framework for one Series A funded start-up and another for Series B funded start-up.
Corporate governance acts as a knight in shining armor, rescuing both founders and partners at all stages, during and after fund-raising. As the saying goes, right begets right and wrong begets wrong. Following the sound principles of corporate governance will always enable a start-up to make sound investment decisions, establish best practices in the form of rights, duties, obligations, and liabilities, and ensure its smooth functioning and growth. This framework is the first step of many in the right direction!
