Government to soon restrict layers of subsidiaries under companies law

The government will soon put in place restrictions on the number of subsidiaries a corporate can have under the companies law, as it steps up the fight against illicit fund flows. The provision, which provides for “layering restriction on investment subsidiaries” for certain class of corporates, is part of the Companies Act, 2013. However, the particular provision is yet to be implemented. In this regard, the ministry  which is implementing the Act has now floated the draft norms for public consultations.

Layering restriction on investment subsidiaries were incorporated in the Companies Act, 2013 “with a view to check misuse of multiple layers of subsidiaries for diversion of funds/ siphoning off funds as a measure of minority investor protection,” the ministry said. As per the draft rules, a holding company would be allowed to have only up to two layers of subsidiaries, excluding one layer of wholly-owned subsidiary. At the same time, the ministry said restriction on investment through not more than two layers of investment companies would continue to be in place. The proposed rules will be applicable prospectively which means that existing holding companies will not have to reduce the existing layers of subsidiaries. Banking companies, systemically important non-banking financial companies, insurance firms and government companies will be exempt from the restrictions.

July 20th, 2017