A recent notification by the Ministry of Corporate Affairs restricts the ability of certain companies to create multiple layers of subsidiaries. The notification is being seen as the government’s attempt to address opaque fund-raising activities, and intensify the crackdown on black money and shell companies. But the carve-outs that come with this attempt may defeat the purpose, experts told BloombergQuint.
Rules & Carve-Outs
The new rules say that no company can have more than two layers of subsidiaries. Banking companies, systemically important non-banking financial companies, insurance companies and government companies are exempt from this restriction. To calculate the number of layers, the layer that consists of one or more wholly owned subsidiary or subsidiaries will not be taken into account, as per the guidelines.
Additionally, the restriction will not prohibit an Indian company from acquiring a foreign company that has more than two layers of subsidiaries.
Though existing structures – where more than two layers of subsidiaries exist – have been grandfathered, such companies are prohibited from creating additional layers and have to disclose the number of layers beyond two to Registrar of Companies within 150 days.
As carried in bq