In line with the government's move to curb misuse of multiple layers of subsidiary companies, the Ministry of Corporate Affairs ('MCA') has issued draft norms for public consultations.
As is quite well known, in many cases, multiple layers of companies are used as conduits for diversion of funds or siphoning off funds in order to evade taxes and / or deprive minority shareholders by confusing them about true state of company affairs. Most of these companies are dormant / shell companies, having no substance and used infrequently only to divert / siphon off money to the detriment of minority shareholders. Out of 16 lakh registered companies, supposedly only 11 lakh are active.
The government is likely to soon put restrictions in place on the number of subsidiaries a company can have under company law.
The provision, relating to "layering restriction on investment subsidiaries" for certain class of corporates, although part of the Companies Act, 2013 is yet to be implemented.
As per the draft rules, a holding company can only up to two layers of subsidiaries, excluding one layer of wholly-owned subsidiary.
Simultaneously, the restriction on investment through not more than two layers of investment companies would continue.
The proposed norms will be made applicable prospectively. Therefore, the existing holding companies will not be required to reduce the existing layers of subsidiary companies.
There would be some exemptions from these restrictions – e.g., Banking companies, systemically important non-banking financial companies, insurance firms and government companies.
The draft norms have been circulated to capture views from the concerned stakeholders before implementing a definitive provision on the subject.
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