MCA restricts subsidiaries to two layers

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The Ministry of Corporate Affairs through Notification No. GSR. 1176 (E) dated 20 September, enacted the Companies (Restriction on Number of Layers) Rules, 2017. The rules prescribe that a company cannot have more than two layers of subsidiaries, except banking companies (as defined under the Banking Regulation Act, 1949), non-banking financial company as defined under the Reserve Bank of India Act, 1934, is registered with the Reserve Bank of India, and is considered as systemically important; an insurance company, which operates in accordance with the Insurance Act, 1938; and a government company as defined under the Companies Act, 2013 (CA 2013).

CA 2013 in the definition of “subsidiaries”, restricted the number of layers of subsidiaries that a holding company could have, to a number that the government could prescribe. The rules also make an exception for acquiring companies beyond the permitted two layers, if the company being acquired is incorporated outside India, and the laws of such country permit such acquisition; acquisition of a company incorporated outside India, and having more than two layers of subsidiaries in accordance with the laws of such country, and; the incorporation of an investment subsidiary by a subsidiary company, for the purposes of meeting any law in force at that time.

Layers comprising of wholly owned subsidiaries will not be taken into account in the computation of the number of layers. Where a company has more than two layers of subsidiaries at the time of enactment of the rules, it has to, within 150 days of such date, disclose details in accordance with form CRL-1, in the format specified in the rules, and should not increase the number of layers of subsidiaries beyond two, after that date.

Contravention of the rules would attract a fine which may extend to ₹10,000 (US$150), and where the contravention continues, a further fine of ₹1,000 for every day that the contravention continues would be levied.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.