What is a subsidiary company?

In simple terms, a subsidiary company means a company that is controlled by some other company, and that some other company or controlling company is called a holding company. To become a subsidiary the holding company must have control more than one half (i.e. more than 50%) of the total voting power or power to appoint or remover the majority of the Directors of such a subsidiary.

What is a wholly-owned subsidiary?

Where a subsidiary company has total voting power exercisable by the holding company only, i.e. 100% of the paid-up capital is held by the holding company, in such case the subsidiary is called a wholly-owned subsidiary.

What is the definition of a subsidiary company as per companies act, 2013?

Section 2 (87) of the Companies Act, 2013 defines the term subsidiary or subsidiary company. It states that a company is said to be the subsidiary of another company i.e. holding company if the holding company is 

  1. Controlling the composition of the Board of Directors; or
  2. exercises or controls more than one-half (more than 50%) of the total voting power either at its own or together with one or more of its subsidiary companies.

What is Deemed subsidiary?

The explanation of Section 2(87) of the Companies Act, 2013 explains that a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company.

How to determine whether the composition of the Board of Directors is controlled by a holding company?

Explanation to Section 2(87) of the CompaniesAct, 2013 explains that the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors. 

Generally, in case of wholly-owned subsidiaries, the power to appoint or to remove directors on the Board of the subsidiary company is given by Articles of Association of the subsidiary. But it can be through an agreement entered between the holding and subsidiary company.

Checkpoints to determine whether a company is a subsidiary

  1. Paid-up share capital held by such company and total voting power

It is very important to understand the difference between paid-up share capital held a member and total voting power of the member. The ownership of the company is determined by the equity shareholders of the company. Paid-up share capital of the company may consist of equity + preference shares or equity shares with differential rights if the company has issued any. 

There are two methods of conducting votes at a meeting 1. By a show of hands and 2. By poll. Under the show of hands, one vote each member is considered. But when a poll is demanded, one share one vote principle is applied. 

When we say total voting power, it means a total number of votes which may be cast if the poll is demanded on any matter at a meeting of a company, where all the members thereof or their proxies having the right to vote on that matter are present at the meeting and cast their votes. 

Therefore determining paid-up capital with voting rights and paid-up capital non-voting rights is important. If such voting power of the holding company is more than 50% on any matter at the meeting then the company is said to be a subsidiary of such a holding entity.

  1. Articles of Association of the Company

In the case of wholly-owned subsidiary companies, the Articles of Association of the subsidiary may provide specific power to appoint and remove directors on the Board of the subsidiary. Therefore checking whether Articles provide any such power is important.

  1. Any specific agreement defining the relationship and powers

Apart from AoA, the agreements between the companies may give specific rights regarding control over the management of the subsidiary company. Such agreements may be entered in the situations where the companies are amalgamated or merged and share purchase or any related agreements are executed.

What is the meaning of the term control and how it is relevant in determining the relation between holding and subsidiary company?

Section 2(27) of the Companies Act, 2013 defines control as under: 

“control” shall include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

The term control has wide meaning but in this scenario of establishing holding and subsidiary relationship, the Act specifically provides for two major controls i.e. 

  1. Controlling the composition of the Board
  2. Controlling more than 50% of the total voting powers of the company whether singly or through one or more subsidiaries.

Significance of total voting power in determining control of holding company

As per Section 2 (89) “total voting power”, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes. 

Some important definitions

Holding company

As per Section 2 (46) of the Companies Act, 2013, “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies. Here it is very important to note that for this clause, the Act has specifically provided that the “term company shall include a body corporate.” 

That means a holding company can either be a company incorporated in India or a company incorporated/ registered outside India.

The company includes Body Corporate

“company” means a company incorporated under this Act or any previous company law. That means company means a company incorporated in India. 

On the other hand, the definition of Body Corporate or Corporation as provided under Section 2 (11) of the Act, includes a *company incorporated outside India but does not include

  1. a co-operative society registered under any law relating to co-operative societies; and
  2. any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf.

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