In order to check misuse of multiple layers of subsidiaries for diversion of funds and siphoning off funds,
the Companies Act, 2013 (2013 Act):
a) Prohibits prescribed holding companies from having layers of subsidiaries beyond prescribed numbers
b) Requires that no investments can be made through more than two layers of investment companies. These provisions were sought to be omitted from the 2013 Act on the recommendation of the Companies Law Committee (CLC) set up by the Ministry of Corporate Affairs (MCA). CLC felt that these restrictions may become too obtrusive and impractical in the modern business world, and have a substantial bearing on the structuring and the ability of companies to raise funds. Subsequently, in view of reports of misuse of multiple layers of companies, where companies create shell companies for diversion of funds or money laundering, the government decided to retain
these provisions and placed a draft notification of the Rules to be prescribed, for public commentsin June 2017.
On 20th September 2017, MCA notified the Companies (Restriction on Number of Layers) Rules, 2017 (the Notification). The Notification prescribes classes of holding companies who shall not have layers of subsidiaries (as specified in the Notification). Highlights of the Notification On and from 20th September 2017, no company shall have more than 2 layers of subsidiaries. A Company may acquire a company incorporated outside India with subsidiaries beyond 2 layers as per the local laws of such country.
In computing the number of layers, one layer which consists of one or more wholly-owned subsidiary or
subsidiaries shall not be taken into account. The following classes of holding companies are exempted
from the applicability of the Notification:
- Banking Companies
- Systematically Important Non-Banking Financial Companies
- Insurance Companies
- Government Companies
Existing companies having more than 2 Layers of Subsidiaries as on 20 th September, 2017 are required to
ensure the following:
- File a return in the prescribed form with the Registrar of Companies within 150 days of 20th
- Shall not have any additional layer of subsidiaries over and above the existing layers on or after 20th
September, 2017; and
- In case one or more layers of subsidiaries are reduced by such companies subsequent to the date of
Notification, the number of layers permissible shall not be more than:
- Number of Layers after such reduction; or
- 2 layers
In case of contravention of the Notification, the company and every officer of the company who is in
default is punishable with fine up to Rs. 10,000 and in case of continuing default, with a further fine upto
Rs. 1,000 per day of default.
The notification is long pending and the cap on layers of subsidiaries is expected to reduce multiple
layers of holding-subsidiary structures which are typically used for siphoning off /routing of funds and
will enable regulators/ authorities to identify the ultimate beneficiaries of complex corporate structures.
The carve out for wholly owned subsidiaries provides the much needed flexibility for financial and tax
structuring specifically in infrastructure sector.