Govt to soon restrict layers of subsidiaries under cos 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.
"The provision to clause (87) of section 2 of the Companies Act, 2013 provides for restricting class or classes of holding companies from having layers of subsidiaries beyond prescribed number.

"Based on suggestions received, the Ministry of Corporate Affairs is considering commencing the said provision," the ministry said in a public notice.
The notice, issued yesterday, is to gather views from the stakeholders before implementing the provision.
Amendments will be made to the Companies (Specification of Definitions Details) Rules, 2014.
The ministry said it has decided to retain the provision in the wake of reports of misuse of multiple layers of companies, where firms create shell companies for diversion of funds or money laundering.
As part of intensifying efforts to crack down on shell companies that indulge in dubious activities, the ministry is already preparing to cancel the registration of such firms after following due regulatory process.

In this regard, the ministry has sought explanations from nearly 3 lakh firms that have not been carrying out business for long.
Besides, the ministry is in the process of preparing a database of shell companies in order to curb illegal activities.
There are more than 16 lakh registered companies in the country and only around 11 lakh of them are active.