On September 20, 2017, the Ministry of Corporate Affairs (“MCA”), announced the enforcement of proviso to Section 2(87) of the Companies Act, 2013 (the “Act”), which deals with the restriction on the number of permitted layers of subsidiaries for a company. All banking, NBFCs, insurance and government companies are excluded from this restriction.
The MCA simultaneously also notified the Companies (Restriction on Number of Layers) Rules, 2017 (the “Rules”), which restricts a company from having more than two layers of subsidiaries. However, this will not affect a company from acquiring a company incorporated outside India with subsidiaries beyond two layers subject to laws of such country. Further, for computing the number of layers, one layer which consists of one or more wholly owned subsidiaries will not be taken into account.
The Rules also prescribe mandatory furnishing of information by existing companies that already have more than two layers of subsidiaries. Such companies are required to disclose relevant details to the registrar of companies within 150 days. In case of violation of the Rules, the company and its officers will face a fine of up to INR 10,000 and, for repeated violation, the fine may extend to INR 1,000 for every day after the first during which such contravention continues.
Despite industry opposition, the limitation on the layers of subsidiaries, may aid the government in lifting the corporate veil to clearly access the ownership of assets which are held by companies through a complex web of subsidiaries. It may also aid the government in its fight against illicit fund flow and shell companies. However, in certain cases the restriction might cause a setback to ease of doing business in India.
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Last Updated on 25th January 2019