holding and subsidiary co

8/18/2019 Holding and Subsidiary Co.

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Holding and Subsidiary Companies in India – Determining the True Character

Holding and Subsidiary Companies in India –

Determining the True Character

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TABLE O CO!TE!TS

Acknowledgement .................................................................................................0

Introduction ............................................................................................................0!

"b#ecti$es ...............................................................................................................0%

&esearch 'ethodology ...........................................................................................0(

Holding and Subsidiary Companies )))))))))))))))))...0*

Control o+ composition o+ ,oard o+ Directors )))))))))))....0-

'ore than hal+ in nominal $alue o+ euity share capital )))))))).0/

Subsidiary o+ 'ultinational ))))))))))))))))))).0

1iability +or Insol$ent Subsidiary )))))))))))))))))

Subsidiary 2stablishments )))))))))))))))))))...3

Conclusion ))))))))))))))))))))))))))))

,ibliography ))))))))))))))))))))))))))).!

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AC"!O#LE$E%E!T

At the outset4 I would like to e5press my heart+elt gratitude and thank my teacher4 &&&&& +or

putting his trust in me and gi$ing me a pro#ect topic such as this and +or ha$ing the +aith in

me to deli$er.

'y gratitude also goes out to the sta++ and administration o+ H617 +or the in+rastructure in

the +orm o+ our library and IT 1ab that was a source o+ great help +or the completion o+ this

pro#ect.

- 'inay "umar Sahu

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I!T(OD)CTIO!

A company uali+ies as a holding company when it has the power to control the

composition o+ the board o+ directors o+ another company or holds a ma#ority o+ its shares.

It has been seen that a subsidiary company4 e$en a 00 per cent subsidiary4 is a separate

legal entity and its creator and controller is not to be held liable +or its acts merely because

he is the creator and controller. 6or is the subsidiary to be held as an asset o+ the holding

company. The decision o+ the Delhi High Court in ree*heels +India, Ltd - Dr 'eda

%itra. is an illustration in point8 A +i+ty9two per cent subsidiary company proposed to issue

+urther capital which4 +ollowing Section -4 was o++ered to the e5isting holders o+ euity

shares. The holding company reuested the court that its subsidiary should be restrained

+rom going ahead with the issue as it would depri$e its parent o+ their controlling interest

and would also depreciate the $alue o+ its shares. : A;7& < re+used to issue the in#unction

prayed +or and said8 =Here the parent holds only a nominal ma#ority in the share capital o+

the subsidiary. >ith the meager ma#ority alone I am not prepared to hold4 e$en i+ it were

possible to do so +or such a purpose4 that the subsidiary company has lost its identity as a

separate legal entity?.3A holding company was not allowed to inter+ere in the disin$estment

decision o+ a sub9subsidiary company @subsidiary o+ subsidiary e$en i+ one o+ the e++ects

o+ the disin$estment could ha$e been the loss o+ position as a holding company.

1 AIR 1969 Del 258: [1969] 1 Comp LJ 138; 6andh ;roducts ;romoters @; 1td v District Borest"++icer4 (2005) 123 Comp Cas 367 a!" #$e !%es o& #$e 'ompa #o #$e *o+es#Depa+#me# ,e+e o# allo,e! #o -e a!.%s#e! a/as# #$e Depa+#me#s !%es #o a +m

ol -e'a%se some o& #$e pa+#e+s o& #$e +m ,e+e also o'e+s o& #$e 'ompa4

2 See also State o+ 7.;. $ &enusagar ;ower Co4 /-/ Supp @3 SCC 38 AI& /-/ SC **8 @// *0 CompCas 3*4 a subsidiary company was created +or the purpose o+ generating and supplying power only to its parent

company and the two were treated as one +or e5cise purposes. ;6, $ ,are#a :nipping Basteners 1td4 @3000 Comp Cas /%- ;H4 companies in a group are ne$ertheless distinct #uristic personalities with di++erent setso+ shareholders. A decree against one company cannot be e5ecuted against another company e$en i+ they are being managed by the same set o+ persons.

3 ,DA ,reweries $ Cruickshonk Co 1td4 @/ -% Comp Cas 3% ,om8 @//* 3% Corpt 1A 3*%.


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OB/ECTI'ES

The ob#ecti$e o+ this pro#ect is to 9

• To discuss the concept o+ holding and subsidiaries companies in India.

• To determine its true character.

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(ESEA(CH %ETHODOLO$0

The researcher has +ollowed the non doctrinal method +or research design. The research is

based on both primary and secondary sources. ,ooks +rom the uni$ersityEs library ha$e been

used. Computer +rom the computer laboratory o+ the uni$ersity has been used +or the purpose

o+ secondary research and is the main source o+ pro#ect.

Finay :umar Sahu

&oll 6o.9(/

Semester9%

Holding and Subsidiary Companies1S2 343

CompanyEs Act4 /%(.

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HoldingG and subsidiaryG companies are relati$e terms. A company is a holding company o+

another i+ the other is its subsidiary. According to section ! o+ the Act4 a company shall be

deemed to be a subsidiary o+ another4 i+ and only i+ 8

@a that other company controls the composition o+ its board o+ directorsJ or

@b the other company holds more than hal+ in nominal $alue o+ its euity share capital

@where a company had pre+erence shareholders4 be+ore commencement o+ the Act4 en#oying

$oting rights with that o+ euity shareholders4 +or the purpose o+ control4 holding company

should en#oy more than hal+ o+ the total $oting powerJ In the e$ent o+ a company

bankruptcy4 pre+erred stock shareholders ha$e a right to be paid company assets +irst.

;re+erence shares typically pay a +i5ed di$idend4 whereas common stocks do not. Andunlike common shareholders4 pre+erence share shareholders usually do not ha$e $oting

rights.

De5inition o5 6Common Shareholder6

An indi$idual4 business or institution that holds common shares in a company4 gi$ing the

holder an ownership stake in the company. This will also gi$e the holder the right to $ote on

corporate issues such as board elections and corporate policy4 along with the right to any

common di$idend payments. In the case o+ bankruptcy4 common shareholders are typically

the last to recei$e anything +rom liuidation. Birst4 companies pay out all debtholders. I+

there is anything remaining a+ter that4 then pre+erred shareholders are paid4 +ollowed by

common shareholders.

ShareholdersG euity represents the amount by which a company is +inanced through

common and pre+erred shares.

Howe$er4 shares held or power e5ercisable by any person as a nominee o+ that other

company shall be treated as held or e5ercisable by the said company. Thus4 the shares held

or power e5ercisable by a subsidiary shall be treated as GheldG or Ge5ercisableG by the holding

company. Bor e5ample in case G,G and CE the subsidiaries o+ company GAG4 hold together

more than hal+ o+ the euity share capital o+ company GDG4 then GDG shall be deemed to be a

subsidiary o+ GAG although it has not made any direct in$estment nor G,G or GCG singly hold

more than %0 shares4 in the company GDE.

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@c. it is a subsidiary o+ a third company which itsel+ is a subsidiary 4 o+ the controlling

company. Bor e5ample 4 where Company , is a subsidiary o+ Company A and Company C is a

subsidiary o+ Company , then Company C shall be a subsidiary o+ Company A. the

Company D is a subsidiary o+ Company C4 then Company D shall also be a subsidiary o+

Company , and conseuently also o+ Company A.

A holding company cannot be made liable +or dues o+ the subsidiary. In this case4 the

subsidiary owed certain sums to the 2mployeesE ;ro$ident Bund. The holding company was

held to be not liable in that respect4 because it could not be supposed to be the employer o+

workers o+ its subsidiary. The subsidiary was not a branch o+ the holding company.%

A subsidiary company may lose its separate identity to a certain e5tent in two cases.

Birstly4 the 1egislature may brush aside the legal +orms and reuire the companies in a

group to present a #oint picture. Thus4 Sections 3393!( contain pro$isions =designed

primarily to gi$e better in+ormation o+ the accounts and +inancial position o+ the group as a

whole to the creditors4 shareholders and public?.

Secondly4 the court may4 on +acts o+ a case4 re+use to grant a subsidiary company an

independent status. =It may not be possible to put in a strait#acket o+ #udicial de+inition as

to when the subsidiary company can really be treated as a branch4 or an agent4 or a trusteeo+ the holding company. Circumstances such as the pro+its o+ the subsidiary company

being treated as those o+ the parent company4 the control and conduct o+ business o+ the

subsidiary company resting completely in the nominees o+ the holding company... may

indicate that in +act the subsidiary company is only a branch o+ the holding company?.*

Control o5 composition o5 Board o5 Directors –

5 Industrial De$elopment Corpn4 "rissa 1td $ &egional ;B Commr4 @3003 3 Comp Cas %3* "riJ AlembicKlass Industries 1id $ Collector o+ Central 25cise Customs4 @3003 / SCC !(8 @3003 3 Comp Cas */4 two public limited companies holding shares in each other4 not allowed to be regarded as related persons. The courtalso said that a shareholder does not ha$e any interest in the business o+ the company.

6 CompanyEs Act4 /%(.

7 : A;7& < in Breewheels @India 1td $ Dr Feda 'itra4 AI& /(/ Del 3%-8 L/(/M Comp 1< - !39!. Seealso Smith4 Stone :night 1td $ ,irmingham Corpn4 L//M ! All 2& ( :, where all such cases ha$e been

re$iewed.

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issue o+ such debentures shall be disregarded.

@ or power e5ercisable by4 or by a nominee +or a company4 or its subsidiary4 other than

as in clause @3 abo$e4 shall be treated as not held or e5ercisable by it i+ the ordinary

business o+ that other company is lending money and the shares are held or power is

e5ercisable only by way o+ security in the ordinary course o+ business.

The position regarding holding subsidiary relationship was impressi$ely summarised in the

case o+ %2 'elayudhan -2 (egistrar o5 Companies.8 as +ollows 8

Section ! en$isages the e5istence o+ subsidiary companies in di++erent situations. It may be

that by acuiring su++icient share capital o+ a company4 su++icient control may be obtained

o$er that company to enable control in the composition o+ board o+ directors. ,ut4 it is also

possible to obtain such control in regard to the composition o+ the board o+ directors

without making such an in$estment in euity capital o+ the company. Such a control may

be by reason o+ an agreement such as where one company may agree to ad$ance +unds to

another company and in return may4 under the terms o+ an agreement4 gain control o$er the

right to appoint all or a ma#ority o+ the ,oard o+ directors. The +irst o+ the cases en$isaged

in section ! is the case where a control is obtained by a company in the matter o+

composition o+ the ,oard o+ directors o+ another company. That would be su++icient to

constitute the +ormer as holding company and the other as subsidiary. The second type o+

cases is where more than hal+ o+ the nominal $alue o+ the euity share capital is held by

another company. ,y $irtue o+ such holding that other company becomes a holding

company and the one whose shares are so held becomes a subsidiary company. The third

case en$isaged is where a subsidiary company o+ a holding company may be a holding

company in relation to another company. That other company is also a subsidiary o+ the

holding company o+ the subsidiary. Nuestions as to whether a company was subsidiary o+

other company cannot be decided merely on basis o+ +act that one o+ directors was

common to said companies but it has to be decided in conte5t o+ section !.

Subsidiary o5 %ultinational

10 L/-0M %0 Comp. Cas. @:er.

11 >hale Stationery ;roducts 1td. $. 7"l L300*M *% SC1 % @Delhi.

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That result did not +ollow in re+erence to the wholly owned +oreign subsidiaries o+ a

multinational corporation. A group o+ oil companies in the 7nited :ingdom owned and

controlled certain oil companies in &hodesia. The 2nglish parent company was called upon

to produce certain documents relating to a pipeline contract which were in the possession

o+ its subsidiaries. The court rules empowered the court to reuire the disclosure o+ all

documents in the =possession4 custody or power? o+ a party. The uestion was whether the

documents in the possession o+ a +oreign subsidiary could be deemed to be in the

possession o+ the =parent?. The court o+ appeal answered the uestion in the negati$e.3

1ord D266I6K laid emphasis upon the position o+ the company in the setting o+ local

laws applicable to it and the degree o+ +reedom +rom inter+erence by the parent8

=These South A+rican and &hodesian companies were $ery much sel+9controlled.Their directors were local directorsrunning their own show4 operating it with

comparati$ely little inter+erence +rom 1ondon. They were sub#ect4 o+ course4 to all local

laws and ordinances. That seems to be a di++erent position +rom the concept o+ a one9

man company4 or a 00 per cent company4 which is operating in this country with the

sel+9same directors4 or a 00 per cent parent with $arious subsidiaries. It is important to

realise that subsidiaries o+ multinational companies ha$e a great deal o+ autonomy in

the countries concerned.?

A learned commentator e5plains in the +ollowing words the $alue o+ this decision to the

international community8

=The importance o+ this case lies in the +act that +or the +irst time an 2nglish

court has held that4 i+ a multinational +inds itsel+ in a con+lict between the interest

o+ the home and the host country4 the interests o+ the host country will pre$ail.

This rule which was also adopted in Brance in the Bruehau+ case ! should now be

regarded as an established principle o+ international law.?

12 Lo+$o L#! $ $ell e#+ole%m Co L#!4 L/-0M 3 >1& (* CA.

13 Cli$e '. Schmittho++4 1i+ting the Corporate Feil4 /-0


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Liability 5or Insol-ent Subsidiary

The uestion whether the parent company should be held liable +or the debts o+ its insol$ent

subsidiary in$ol$es a di++icult problem. The di++iculty has been indicated in a case which

e5poses the legal inadeuacy and which has been thus presented8%

2nglish company law possesses some curious +eatures4 which may generate $arious results. A

parent company may spawn a number o+ subsidiary companies4 all controlled directly or

indirectly by the shareholders o+ the parent company. I+ one o+ the subsidiary companies turns

out to be the runt o+ the litter and declines into insol$ency to the dismay o+ its creditors4 the

parent company and the other subsidiary companies may prosper to the #oy o+ the

shareholders without any liability +or the debts o+ the insol$ent subsidiary. It is not surprising

that when a subsidiary collapses4 the unsecured creditors wish the +inances o+ the company

and its relationship with other members o+ the group to be narrowly e5amined4 to ensure that

no assets o+ the subsidiary company ha$e leaked awayJ that no liabilities o+ the subsidiary

company ought to be laid at the door o+ the other members o+ the group and that no indemnity

+rom or right o+ action against any other company4 or against any indi$idual is by some

mischie+ o$erlooked.(

Subsidiary Establishments

There is also the power in the Central Ko$ernment as con+erred by Section - to declare that

any establishment o+ a company carrying on the same or substantially the same acti$ity as

that carried on by the head o++ice o+ the company4 shall not be treated as a branch o++ice o+ the

company +or any o+ the purposes o+ the Act. >here proceedings were initiated against a

company at the place o+ its branch o++ice4 it was held that notwithstanding the 25planation to

Section 30 o+ the Ci$il ;rocedure Code which con+ers #urisdiction on the courts at the place

o+ the companyEs branch o++ice4 it is also necessary that the cause o+ action should ha$e arisen

there.* A charge o+ inter+erence in management o+ the complainantEs business could be

15 Southard Co 1td4 &e4 L/*/M >1& /-4 30-4 T2';12T"6 1


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alleged only against the head o++ice o+ the company and not against the branch o++ice unless it

can be shown that the branch o++ice was used +or the purpose o+ committing the wrong.-

CO!CL)SIO!

A look at the path we ha$e tra$ersed indicates that what started as direct or indirect control4

be it shareholding or otherwise has ine$itably resulted in ha$ing to rope in Subsidiary

Companies being increasingly set up by +oreign companies. That these companies should4 no

doubt4 be brought within the regulatory pro$isions as applicable to Indian companies but the

matri5 o+ Holding9Subsidiary Company relationship has become more comple5 and

complicated. This appears to be ine$itable in the conte5t o+ globalisation o+ Indian economy

and increasing +low o+ +oreign e5change into our country through Boreign Direct In$estment

@BDI in #oint $entures@A business arrangement in which two or more parties agree to pooltheir resources +or the purpose o+ accomplishing a speci+ic task. This task can be a new

pro#ect or any other business acti$ity. In a #oint $enture @


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Bibliography

• Singh A$tar4 Company 1aw4 2astern ,ook Company4 Bi+teenth 2dition.

• 'a#umdar A.: and Dr. :apoor. K.:4 Ta5mannEs Company 1aw4 Si5teenth 2dition.

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holding and subsidiary co

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