ComplianceSupport

Till a company has two layers of Subsidiaries and the Government may have taken it as until two layers the harm to economy can be managed and also these relaxations are in favor of genuine players

The Ministry of Corporate Affairs has issued Companies (Restriction on number of layers) Rules, 2017 by Notification dated 20^th September, 2017. Looking at the present trends of the Government Actions on the Black Money and Action on the Shell Companies, we can see this new rule as another move of the Government. The Rule is relaxed till a company has two layers of Subsidiaries and the Government may have taken it as until two layers the harm to economy can be managed and also these relaxations are in favor of genuine players. It is evident that multiple layers of subsidiaries were being used for siphoning of funds. Therefore, the new rule is welcoming.

Below are the provisions of the Rule:

Restriction:

With effect from 20^th September, 2017, No Company, other than following class of Company, shall have more than TWO Layers of subsidiaries:

(a) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;

(b) a non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 which is registered with the Reserve Bank of India and considered as systematically important non-banking financial company by the Reserve Bank of India;

(c) an insurance company being a company which carries on the business of insurance in accordance with provisions of the Insurance Act, 1938 and the Insurance Regulatory Development Authority Act, 1999;

(d) a Government company referred to in clause (45) of section 2 of the Act.

For computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.

However, the Rule shall not affect a company from acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country.

Non-Derogatory Provision:

The provisions of this rule shall not in derogation of proviso to section 186(1) of the Companies Act.

Action of Existing Companies:

All Companies having more than two layers of subsidiaries on or before the date of commencement of this rule. (i.e., 20^th September, 2017), shall:

1. Shall disclose the details of such subsidiaries to the Registrar of Companies in form CRL-1 with 150 days (i.e. 17^th February, 2018);
2. Shall not make additional layer of subsidiary over what is existed on 20^th September, 2017; and
3. Shall not have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed, whichever is more, in case one or more layers are reduced by it subsequent to the commencement of these rules.

Penal Provision

If any company contravenes any provision of these rules:

1. the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees; and
2. where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

 For any further query and clarification, please feel free to CONTACT US.