Corporate India may have to go on a re-structuring drive

Govt's move to limit the number of subsidiaries to help regulators track illicit transactions to deter firms from using shell structures

A restructuring drive may be in the offing for Corporate India, following the government’s recent decision to bring down the number of subsidiaries in a company to two layers.

The move by the government is seen as part of its effort to crack down shell companies across the country.  Experts say the limited number of layers will ensure that a company does not use shell structures for money laundering and evade taxes. Indian companies will have to restructure themselves to fall in line with this amendment.

“The existing companies having more than two layers shall only require the companies to report the same within three months from the date of enforcement of the rules. However, such companies cannot have any additional layer of subsidiaries over and above the layers existing on the date of enforcement”, says Sumit Naib, associate director, Nangia and Co.

Experts say even the unlisted companies may have to face a heavy cost as they would have to shift all assets to the holding company and the entire process of transferring is considered to be time-consuming. There could be third-party rights and obligations that may cause hurdle to the companies over compliance issues, following the changes. There could also be a loss of capital gain for these companies, say experts.

While this might pinch India Inc in the short run, it will be beneficial for everyone, including banks, as they will also be able to track loans, elaborate experts.

Experts also point out that multiple layers of subsidiaries have been used for money laundering, as identified by the corporate affairs ministry.  In many cases, loans have been diverted to subsidiaries and have later returned in the hands of the promoters, they add.

Regulators have been finding it difficult to track down illicit transactions without a limit on the number of subsidiaries. With fewer subsidiaries, it will improve government's ability to track down such transactions.

Currently, there is an existing cap on the number of layered subsidiaries that an investment company can have. This cap will now be exempt for the non-banking finance companies (NBFCs), banks and the government. Also, these rules will not be applicable to foreign firms and acquisition of overseas companies.