Holding Company/Subsidiary Company - The Companies Act, 1956

How do we assess which company is a “Holding Company” and which is its “Subsidiary Company”?  

A “Holding Company” may be a “Subsidiary Company” of some other Company. Similarly a “Subsidiary Company” may be a “Holding Company” of some other Company. For the purposes of the Companies Act, 1956, a company shall be deemed to be a subsidiary of another, subject to the provisions of subsection (3) of Section 4.

Illustration 1 – Controls the composition of Board of Directors.

ABC Ltd Company controls the composition of Board of Directors of DEF Ltd Company. Here, ABC Ltd Company is a Holding Company. DEF Ltd Company is deemed a Subsidiary Company, for the purposes of this Act.

Illustration 2 – Holds Preference Shares > half of the voting powers, similar to Equity Shares. It was there. Not now.

GHE Ltd Company is an existing Company, formed and registered under previous Companies’ Laws. It issued ‘Preference shares’, those days, i.e. before the commencement of this Companies Act, 1956. Those preference shares were having the same voting rights as the holders of equity shares. IJK Ltd Company held more than half of the voting power through holding ‘Preference shares’ of GHE Ltd Company.

Here, IJK Ltd Company is a Holding Company. GHE Ltd Company is deemed a Subsidiary Company., for the purposes of this Act.

Here note, that the Companies Act, 1956 discontinued to issue preference shares which carry the voting rights as the holders of equity shares. This is very rare.

Illustration 3 – Holds > half in nominal value of Equity Share Capital

LMN Ltd Company holds more than half in nominal value of its equity share capital of OPQ Ltd Company. Here, LMN Ltd Company is a Holding Company.OPQ Ltd Company is deemed a Subsidiary Company., for the purposes of this Act.  

Illustration 4 –

From above three illustrations, we have clear understanding about which company is deemed a Subsidiary Company, for the purposes of this Act.

For illustration ABC Ltd Company, mentioned above, is a Holding Company. More than half of its (nominal value) paid up equity capital is held by RST Ltd Company. In the illustration, DEF Ltd Company is deemed a Subsidiary Company of ABC Ltd Company. By virtue of this Act, DEF Ltd Company is also deemed Subsidiary Company of RST Ltd Company.

What do we understand about ‘Controls the composition of Board of Directors’?

Sometimes companies enter into an agreement or an understanding with other companies to procure / receive some  financial / technical / marketing / copyright / royalty / other sorts of assistance, in return of some powers to exercise their discretions in their Financial / Economic / Commercial decision processing. It means they allow other companies to play a strategic role in their management, as they were provided with some sort of assistance, which is very important in running the very business, at this specific juncture.

Similarly, ABC Ltd Company

a. Can exercise some power exercisable by it at its discretion without the consent or concurrence of any other person and

b. Can appoint or remove the holders of all or a majority of the directorships of DEF Ltd Company.

In simple words, if we want to understand about “Controls the composition of Board of Directors”, it is like this.  

DEF Ltd Company can appoint a director, when it (DEF Ltd Company) is favored by the exercise of power by ABC Ltd Company. Otherwise, DEF Ltd Company cannot appoint its director. DEF Ltd Company needs an approval from ABC Ltd Company, to appoint its director. It is clear that DEF Ltd Company cannot appoint a director of its choice.

Illustration 5 – Controls the composition of Board of Directors, but in Fiduciary Capacity.

Let us understand that ‘Fiduciary’ means a person who holds assets in trust for a beneficiary. This fiduciary is one in whom another has placed the utmost trust and confidence to manage and protect property or money.

Let us revisit illustration 1

Illustration 1 – Controls the composition of Board of Directors

ABC Ltd Company controls the composition of Board of Directors of DEF Ltd Company.   

Here, ABC Ltd Company is a Holding Company. DEF Ltd Company is deemed a Subsidiary Company, for the purposes of this Act.

Now if ABC Ltd Company entrusted this control to ZXY Ltd Company, as a Fiduciary. The control being exercised by ZXY Ltd Company is called that the control is being exercised in Fiduciary Capacity. Controlling the composition of Board of Directors, in Fiduciary Capacity is not treated as controlling the composition of Board of Directors, as it is meant in the Act, for this Purpose.

In case, in the place of ZXY Ltd Company, if a nominee is nominated, the treatment will be same as the nominee is treated a Fiduciary.

Now, let us go ahead from ‘Controlling the composition’ to ‘holding more than half of voting powers'. Here also above two treatments are applied if the holding of more than half of voting powers is in Fiduciary Capacity.

Fine

‘Controlling the Composition of Board of Directors’ and ‘Holding of more than half of voting powers’ in Fiduciary capacity does not enable an entity or nominee held in Fiduciary  a ‘Holding Company’.

There are some other similar instances:

i. ‘Controlling the Composition of Board of Directors’ and ‘Holding of more than half of voting powers’ by virtue of the provisions of any debentures of a company, does not enable an entity or nominee to be deemed a ‘Holding Company’.

ii. ‘Controlling the Composition of Board of Directors’ and ‘Holding of more than half of voting powers’ by virtue of the security given by a company on lending money to other company, does not enable that other entity or nominee to be deemed a  ‘Holding Company’.

Illustration 6

“Axe Company” is incorporated in United States. Its Holding Body Corporate is “Google Mes”, incorporated in United States. “Quick Airs” is a Subsidiary of “Axe Company”. All above treatments of the relationships were according to the Acts of United States. When it comes to the understanding in India, the very treatments of the relationships among the entities hold good.

Another understanding we need is:

“Munich Versions Private Ltd” is incorporated in India. It is a subsidiary of ‘Cackson Company’ a body corporate incorporated in Singapore. Assume that if the ‘Cackson Company’ incorporated in India, it would be treated as a ‘Public Company’, then for the purposes of this Act, “Munich Versions Private Ltd” is treated as a subsidiary of a Public Company.

Venkateswara Rao Sapare, Hyderabad