Companies Can Now Have Only Two Layers Of Subsidiaries

companies that already have more than two layers of subsidiaries have to furnish details about them to the government.

Banking and non-banking financial companies as well as insurance firms and government companies have been exempted from the restrictions, according to a notification issued by the corporate affairs ministry.

The rules, notified after public consultation, came into effect from September 20. It assumes significance against the backdrop of concerns that shell companies are being floated to act as conduits for illicit funding activities.

The ministry, which is implementing the Companies Act, said the cap of two layers of subsidiaries would not affect a company from acquiring an overseas firm that has “subsidiaries beyond two layers as per the laws of such country”.

“...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,” it said.

In case of violation of the norms, the company as well as every officer of that firm who is in default would face penalties. The fine would be up to Rs 10,000 and in case of repeated violation, the penalty “may extend to Rs 1,000 for every day after the first during which such contravention continues”.

Companies that have more than two layers of subsidiaries should disclose the details to the ministry within 150 days.