Ministry of Corporate Affairs has notified the Companies (Restriction on number of layers) Rules, 2017 (“Rules”) vide notification no. G.S.R. 1176(E) dated 20th September, 2017.
Rule 2 of the Rules restricts any company from having more than two layers of subsidiaries.
- An Indian Company acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country.
- A banking company as defined in section 5 (c) of the Banking Regulation Act, 1949;
- A non-banking financial company as defined in Section 45-I (f) of the Reserve Bank of India Act, 1934 which is registered with the Reserve Bank of India and considered as Systematically Important Non-banking Financial Company by the Reserve Bank of India;
- An insurance company carrying on business in accordance with provisions of the Insurance Act, 1938 and the Insurance Regulatory Development Authority Act, 1999;
- A Government company referred to in clause (45) of section 2 of the Companies Act, 2013 (“Act”).
Section 2 (45) of the Act “Government company” means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.
Compliances for Existing Companies –
Existing company/ies to which the restriction under Rule 2 applies, which has two layers of subsidiaries shall comply with the following:
i. File return in Form CRL-1 with the Registrar disclosing the details specified therein,within 150 daysfrom the date of publication of these rules in the Official Gazette (20.9.2017 + 150 days);
ii. Shall not have any additional layer of subsidiaries over and above the layers existing on such date after 20.09.2017 (the date of publication of these rules in the Official Gazette); and
iii. In case one or more layers are reduced by a company subsequent to the commencement of these rules (20.09.2017)< then such company shall not have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed in sub-rule (1) (2 layers), whichever is more.
Any company and every officer of such company which contravenes any provision of these rules shall be punishable with:
Fine – Upto Rs. 10,000/-.
For continuing contravention:
Further fine – Upto Rs. 1,000/- for every day after the first day (on which contravention occurred) during which such contravention continues.
- For computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary(ies) shall not be taken into account.
- The provisions shall not be derogatory to Proviso of Section 186 (1) of the Act.
Section 186 (1) states that a company shall (unless otherwise prescribed) make investment through not more than two layers of investment companies. The provision shall not be prejudicial to two types of investments as given under Provisos (i) and (ii), being:
i. acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country; and
ii. a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law for the time being in force.]