Update on Layering of Subsidiaries

[The following guest post is contributed
by Siddharth Raja, Senior Partner & National Executive
Director, Argus Partners, Solicitors & Advocates.  Monica
 and Divya Mirlay, Associates of the Firm, assisted
in the preparation of the post.  Views are personal and do not reflect or
incorporate the views or positions of the Firm. Comments are welcome.]
This is an
immediate follow-up to the authors’ previous
on the Blog on the topic]
The very same day that our
guest post appeared on this Blog, the Lok Sabha passed
the Companies Amendment Bill, 2016 (now the Companies Amendment Bill, 2017)
through a voice vote after a nearly four-hour long discussion.  The Bill
has, however, been significantly altered from the original form that was tabled
in 2016 through no less than 43 amendments.  
The amendment that is
directly relevant to our post omits the proposed deletion of the proviso to
Section 2(87) of the Companies Act, 2013, thereby retaining the power of the
Central Government to impose a cap on the layers of subsidiaries a holding
company can have.  The decks are therefore, now clear for the Central
Government to go ahead with the promulgation of the proposed amendments to the Companies
(Specification of Definitions Details) Rules, 2014 (“Proposed Amendments”), now
that legislative authority for the same is clear, express and indeed,
reiterated by Parliament (although there is still the stage of the Bill needing
to be passed by the Rajya Sabha).  In our view, unfortunately, the
introduction of such layering restrictions will negatively impact, in
particular, the ease of doing business in India, a point adverted to in our
Indeed, the apprehensions
mentioned in our post are underscored — except that now there can be no
possibility of the prejudice were the layering restrictions to be done away
with entirely by Parliament.  The Companies Law Committee Report of 2016
has been disregarded in this behalf, and the Standing Committee of Parliament
that examined the original Bill and made further recommendations in December 2016
did not comment or make a recommendation on this aspect.  
It appears that the Ministry
of Corporate Affairs (MCA) has had its day in the face of, and contrary to,
learned and considered opinion, not once but twice from two specially
constituted committees that have examined this issue threadbare in the
past.  Moreover, it appears to be a concerted and daresay an ill-conceived
move coming barely a month after the Proposed Amendments were first circulated
by the MCA, and just a week after the window closed to receive and consider
comments.  While the alacrity with which the MCA appears to have moved is
commendable, it does raise and leave key questions as to the manner in which
policy is made and implemented on an important issue here impacting corporate
The Bill that the Lok
Sabha has passed continues to clarify that for the purposes of the definition
of “holding company”, the expression company includes any body
corporate.  This may well lead to the position that, while an overseas
holding company can legitimately acquire several layers of overseas
subsidiaries’ holding of its Indian onshore interests (if those were permitted
by the laws of such foreign jurisdictions), an Indian holding company is not so
entitled by these Proposed Amendments as regards its Indian, downstream
subsidiaries.  In other words, it creates an incentive perhaps to
structure the holding-subsidiary layers offshore.  In those circumstances,
adverse impact, albeit of a different type from the one we referred to, may
well be caused to Indian corporate groups going forward vis-a-vis their foreign
competitors, for instance.  Quite apart from the fact that the Proposed
Amendments only make reference to the acquisition of overseas subsidiaries in
accordance with the laws of these jurisdictions, without dealing with existing
overseas subsidiaries that must, we believe, be clearly ‘grandfathered’.
The MCA’s and the
Government of India’s proposals look likely to lead to more tangled webs of
interpretation on, and implementation of, this matter.
– Siddharth Raja
(assisted by Monica Umesh and Divya Mirlay)

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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