Company Law

Holding and Subsidiary Companies in India Determining the True Character
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Holding and Subsidiary Companies in India
Determining the True Character
Project submitted to
Mr. Shyamtanu Pal
(Faculty of Company Law)

Project Submitted by
Vinay Kumar Sahu
(Sociology Major)
Semester Five
Roll No - 169

HIDAYATULLAH NATIONAL LAW UNIVERSITY
RAIPUR, C.G.

2

TABLE OF CONTENTS

Acknowledgement .................................................................................................03
Introduction ............................................................................................................04
Objectives ...............................................................................................................05
Research Methodology ...........................................................................................06
Holding and Subsidiary Companies ...07
Control of composition of Board of Directors ....08
More than half in nominal value of equity share capital .09
Subsidiary of Multinational .10
Liability for Insolvent Subsidiary 11
Subsidiary Establishments ...12

Conclusion 13

Bibliography .14


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ACKNOWLEGEMENT

At the outset, I would like to express my heartfelt gratitude and thank my teacher, Mr.
S SH HY YA AM MT TA AN NU U P PA AL L for putting his trust in me and giving me a project topic such as this and for
having the faith in me to deliver.
My gratitude also goes out to the staff and administration of HNLU for the infrastructure in
the form of our library and IT Lab that was a source of great help for the completion of this
project.

- Vinay Kumar Sahu


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INTRODUCTION
A company qualifies as a holding company when it has the power to control the
composition of the board of directors of another company or holds a majority of its shares.
It has been seen that a subsidiary company, even a 100 per cent subsidiary, is a separate
legal entity and its creator and controller is not to be held liable for its acts merely because
he is the creator and controller. Nor is the subsidiary to be held as an asset of the holding
company. The decision of the Delhi High Court in Freewheels (India) Ltd v Dr Veda
Mitra
1
is an illustration in point: A fifty-two per cent subsidiary company proposed to
issue further capital which, following Section 81, was offered to the existing holders of
equity shares. The holding company requested the court that its subsidiary should be
restrained from going ahead with the issue as it would deprive its parent of their controlling
interest and would also depreciate the value of its shares. KAPUR J refused to issue the
injunction prayed for and said: Here the parent holds only a nominal majority in the share
capital of the subsidiary. With the meager majority alone I am not prepared to hold, even if
it were possible to do so for such a purpose, that the subsidiary company has lost its
identity as a separate legal entity.
2
A holding company was not allowed to interfere in the
disinvestment decision of a sub-subsidiary company (subsidiary of subsidiary) even if one
of the effects of the disinvestment could have been the loss of position as a holding
company.
3

1
AIR 1969 Del 258: [1969] 1 Comp LJ 138; Nandh Products Promoters (P) Ltd v District Forest Officer, (2005)
123 Comp Cas 367 Mad, the dues of the company to the Forest Department were not allowed to be adjusted
against the Departments dues to a firm only because some of the partners of the firm were also officers of the
company.

2
See also State of U.P. v Renusagar Power Co, 1989 Supp (2) SCC 312: AIR 1989 SC 1737: (1991) 70 Comp
Cas 127, a subsidiary company was created for the purpose of generating and supplying power only to its
parent company and the two were treated as one for excise purposes. PNB v Bareja Knipping Fasteners Ltd,
(2001) 103 Comp Cas 958 P&H, companies in a group are nevertheless distinct juristic personalities with
different sets of shareholders. A decree against one company cannot be executed against another company even
if they are being managed by the same set of persons.

3
BDA Breweries v Cruickshonk & Co Ltd, (19%) 85 Comp Cas 325 Bom: (1997) 25 Corpt LA 275.


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OBJECTIVES

The objective of this project is to -
To discuss the concept of holding and subsidiaries companies in India.
To determine its true character.


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RESEARCH METHODOLOGY
The researcher has followed the non doctrinal method for research design. The research is
based on both primary and secondary sources. Books from the universitys library have been
used. Computer from the computer laboratory of the university has been used for the purpose
of secondary research and is the main source of project.

Vinay Kumar Sahu
Roll No.-169
Semester-5


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Holding and Subsidiary Companies[S. 4]
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Holding' and subsidiary' companies are relative terms. A company is a holding company of
another if the other is its subsidiary. According to section 4 of the Act, a company shall be
deemed to be a subsidiary of another, if and only if :
(a) that other company controls the composition of its board of directors; or
(b) the other company holds more than half in nominal value of its equity share capital
(where a company had preference shareholders, before commencement of the Act, enjoying
voting rights with that of equity shareholders, for the purpose of control, holding company
should enjoy more than half of the total voting power); In the event of a company bankruptcy,
preferred stock shareholders have a right to be paid company assets first. Preference shares
typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders,
preference share shareholders usually do not have voting rights.
Definition of 'Common Shareholder'
An individual, business or institution that holds common shares in a company, giving the holder
an ownership stake in the company. This will also give the holder the right to vote on corporate
issues such as board elections and corporate policy, along with the right to any common dividend
payments. In the case of bankruptcy, common shareholders are typically the last to receive
anything from liquidation. First, companies pay out all debtholders. If there is anything remaining
after that, then preferred shareholders are paid, followed by common shareholders.
Shareholders' equity represents the amount by which a company is financed through common
and preferred shares.
However, shares held or power exercisable by any person as a nominee of that other
company shall be treated as held or exercisable by the said company. Thus, the shares held
or power exercisable by a subsidiary shall be treated as 'held' or 'exercisable' by the holding
company. For example in case 'B' and C the subsidiaries of company 'A', hold together
more than half of the equity share capital of company 'D', then 'D' shall be deemed to be a
subsidiary of 'A' although it has not made any direct investment nor 'B' or 'C' singly hold
more than 50% shares, in the company 'D.
(c). it is a subsidiary of a third company which itself is a subsidiary , of the controlling
company. For example , where Company B is a subsidiary of Company A and Company C is a
subsidiary of Company B then Company C shall be a subsidiary of Company A. the

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Companys Act, 1956.

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Company D is a subsidiary of Company C, then Company D shall also be a subsidiary of
Company B and consequently also of Company A.
A holding company cannot be made liable for dues of the subsidiary. In this case, the
subsidiary owed certain sums to the Employees Provident Fund. The holding company was
held to be not liable in that respect, because it could not be supposed to be the employer of
workers of its subsidiary. The subsidiary was not a branch of the holding company.
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A subsidiary company may lose its separate identity to a certain extent in two
cases. Firstly, the Legislature may brush aside the legal forms and require the companies in
a group to present a joint picture. Thus, Sections 212-214
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contain provisions designed
primarily to give better information of the accounts and financial position of the group as a
whole to the creditors, shareholders and public.
Secondly, the court may, on facts of a case, refuse to grant a subsidiary company an
independent status. It may not be possible to put in a straitjacket of judicial definition as
to when the subsidiary company can really be treated as a branch, or an agent, or a trustee
of the holding company. Circumstances such as the profits of the subsidiary company
being treated as those of the parent company, the control and conduct of business of the
subsidiary company resting completely in the nominees of the holding company... may
indicate that in fact the subsidiary company is only a branch of the holding company.
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Control of composition of Board of Directors
The composition of the Board of Directors of a company shall be deemed to be controlled by
the other if the latter has the power, without the consent or concurrence of the other persons
to appoint or remove all or majority of the directors.

5
Industrial Development Corpn, Orissa Ltd v Regional PF Commr, (2002) 112 Comp Cas 527 Ori; Alembic
Glass Industries Lid v Collector of Central Excise Customs, (2002) 9 SCC 463: (2002) 112 Comp Cas 379, two
public limited companies holding shares in each other, not allowed to be regarded as related persons. The court
also said that a shareholder does not have any interest in the business of the company.

6
Companys Act, 1956.
7
KAPUR J in Freewheels (India) Ltd v Dr Veda Mitra, AIR 1969 Del 258: [1969] 1 Comp LJ 138 142-143. See
also Smith, Stone & Knight Ltd v Birmingham Corpn, [1939] 4 All ER 116 KB where all such cases have been
reviewed.


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The company shall be deemed to have the power to appoint a person as a director in the
other company in the following cases :
(1) where a person cannot be appointed thereto without the exercise in his favour by the
company of such a power of appointment;
(2) where a person's appointment or directorship follows necessarily from his
appointment as director or manager of, or to any other office or employment in the
company;
(3) where a directorship is held by an individual nominated by the company or a
subsidiary thereof.
Control over composition of a subsidiary company's Board of directors can arise from
provisions in subsidiary's memorandum or articles or from a contract with subsidiary
empowering holding company to appoint directors to subsidiary's Board.
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More than half in nominal value of equity share capital
The expression 'nominal value' is used to denote the face value of the shares so as to
distinguish it from their 'market value'. The words 'holds more than half in nominal value
of its equity share capital' obviously mean 'holds more than half the face value of its equity
share capital and not of its authorised equity share capital. Thus, were both fully paid
and partially paid equity shares have been issued and allotted by a company, it is more than
half of the total of equity shares held that will make the company holding such shares, the
holding company of the company issuing and allotting the shares.
In determining whether one company is a subsidiary of another, following shall be
disregarded
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:
(1) Any shares held or power exercisable by the other company in a fiduciary
capacity shall be treated as not held or exercisable by it.
(2) Any shares held or power exercisable in a company by any person under
provisions of its debentures of the first mentioned company or of a trust deed for
securing any issue of such debentures shall be disregarded.
(3) or power exercisable by, or by a nominee for a company, or its subsidiary, other
than as in clause (2) above, shall be treated as not held or exercisable by it if the

8
Oriental Industrial Investment Corporation Ltd v. Union of India [1981] 51 Comp. Cas. 487 (Delhi).
9
Majumdar A.K and Dr. Kapoor. G.K, Taxmanns Company Law, Sixteenth Edition.

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ordinary business of that other company is lending money and the shares are held
or power is exercisable only by way of security in the ordinary course of
business.
The position regarding holding subsidiary relationship was impressively summarised in the
case of M. Velayudhan v. Registrar of Companies
10
as follows :
Section 4 envisages the existence of subsidiary companies in different situations. It may be
that by acquiring sufficient share capital of a company, sufficient control may be obtained
over that company to enable control in the composition of board of directors. But, it is also
possible to obtain such control in regard to the composition of the board of directors
without making such an investment in equity capital of the company. Such a control may
be by reason of an agreement such as where one company may agree to advance funds to
another company and in return may, under the terms of an agreement, gain control over the
right to appoint all or a majority of the Board of directors. The first of the cases envisaged
in section 4 is the case where a control is obtained by a company in the matter of
composition of the Board of directors of another company. That would be sufficient to
constitute the former as holding company and the other as subsidiary. The second type of
cases is where more than half of the nominal value of the equity share capital is held by
another company. By virtue of such holding that other company becomes a holding
company and the one whose shares are so held becomes a subsidiary company. The third
case envisaged is where a subsidiary company of a holding company may be a holding
company in relation to another company. That other company is also a subsidiary of the
holding company of the subsidiary. Questions as to whether a company was subsidiary of
other company cannot be decided merely on basis of fact that one of directors was
common to said companies but it has to be decided in context of section 4.
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Subsidiary of Multinational

That result did not follow in reference to the wholly owned foreign subsidiaries of a
multinational corporation. A group of oil companies in the United Kingdom owned and
controlled certain oil companies in Rhodesia. The English parent company was called upon
to produce certain documents relating to a pipeline contract which were in the possession

10
[1980] 50 Comp. Cas. 33 (Ker.)
11
Whale Stationery Products Ltd. v. UOl [2007] 75 SCL 351 (Delhi).

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of its subsidiaries. The court rules empowered the court to require the disclosure of all
documents in the possession, custody or power of a party. The question was whether the
documents in the possession of a foreign subsidiary could be deemed to be in the
possession of the parent. The court of appeal answered the question in the negative.
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Lord DENNING laid emphasis upon the position of the company in the setting of local
laws applicable to it and the degree of freedom from interference by the parent:
These South African and Rhodesian companies were very much self-controlled.
Their directors were local directorsrunning their own show, operating it with
comparatively little interference from London. They were subject, of course, to all local
laws and ordinances. That seems to be a different position from the concept of a one-
man company, or a 100 per cent company, which is operating in this country with the
self-same directors, or a 100 per cent parent with various subsidiaries. It is important to
realise that subsidiaries of multinational companies have a great deal of autonomy in
the countries concerned.
A learned commentator explains in the following words the value of this decision to the
international community:
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The importance of this case lies in the fact that for the first time an English
court has held that, if a multinational finds itself in a conflict between the interest
of the home and the host country, the interests of the host country will prevail.
This rule which was also adopted in France in the Fruehauf case
14
should now be
regarded as an established principle of international law.

Liability for Insolvent Subsidiary
The question whether the parent company should be held liable for the debts of its insolvent
subsidiary involves a difficult problem. The difficulty has been indicated in a case which
exposes the legal inadequacy and which has been thus presented:
15

12
Lonrho Ltd v Shell Petroleum Co Ltd, [1980] 2 WLR 367 CA.

13
Clive M. Schmitthoff, Lifting the Corporate Veil, 1980 JBL 158. Tecnion Investments Ltd, Re, 1985 BCLC
434 CA, a company would be the alter ego of an individual so as to regard his companys possession as his
possession if the company was under his unfettered control. Merely that he is a dominant figure in running the
companys business would not be enough.

14
Clive M. Schmitthoff, Multinationals in court, 1972 JBL 103,106.
15
Southard & Co Ltd, Re, [1979] 1 WLR 1198, 1208, TEMPLETON LJ, noted 1908 JBL 160.


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English company law possesses some curious features, which may generate various results. A
parent company may spawn a number of subsidiary companies, all controlled directly or
indirectly by the shareholders of the parent company. If one of the subsidiary companies
turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors,
the parent company and the other subsidiary companies may prosper to the joy of the
shareholders without any liability for the debts of the insolvent subsidiary. It is not surprising
that when a subsidiary collapses, the unsecured creditors wish the finances of the company
and its relationship with other members of the group to be narrowly examined, to ensure that
no assets of the subsidiary company have leaked away; that no liabilities of the subsidiary
company ought to be laid at the door of the other members of the group and that no indemnity
from or right of action against any other company, or against any individual is by some
mischief overlooked.
16

Subsidiary Establishments
There is also the power in the Central Government as conferred by Section 8 to declare that
any establishment of a company carrying on the same or substantially the same activity as
that carried on by the head office of the company, shall not be treated as a branch office of
the company for any of the purposes of the Act. Where proceedings were initiated against a
company at the place of its branch office, it was held that notwithstanding the Explanation to
Section 20 of the Civil Procedure Code which confers jurisdiction on the courts at the place
of the companys branch office, it is also necessary that the cause of action should have
arisen there.
17
A charge of interference in management of the complainants business could
be alleged only against the head office of the company and not against the branch office
unless it can be shown that the branch office was used for the purpose of committing the
wrong.
18

16
For comments upon the decision see, Clive M. Schmitthoff, The Wholly Owned and Controlled
Subsidiary, 1979 JBL 218, 226, where it is suggested that the Companies Act, should provide for such
liability.

17
Singh Avtar, Company Law, Eastern Book Company, Fifteenth Edition.
18
Bhankerpur Simbhaoli Beverages (P) Ltd v Sarabhjit Singh, (1996) 86 Comp Cas 842 P&H. See also B.B.
Verma v National Projects Construction Corpn Ltd, [1999] 4 Comp LJ 274 Del, the companys project site was
regarded as the place where the company was carrying on its business and coincidentally the company also had
its subordinate office there.


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CONCLUSION

A look at the path we have traversed indicates that what started as direct or indirect control,
be it shareholding or otherwise has inevitably resulted in having to rope in Subsidiary
Companies being increasingly set up by foreign companies. That these companies should, no
doubt, be brought within the regulatory provisions as applicable to Indian companies but the
matrix of Holding-Subsidiary Company relationship has become more complex and
complicated. This appears to be inevitable in the context of globalisation of Indian economy
and increasing flow of foreign exchange into our country through Foreign Direct Investment
(FDI) in joint ventures(A business arrangement in which two or more parties agree to pool their
resources for the purpose of accomplishing a specific task. This task can be a new project or any
other business activity. In a joint venture (JV), each of the participants is responsible for profits,
losses and costs associated with it) or Subsidiary companies.


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Bibliography

Singh Avtar, Company Law, Eastern Book Company, Fifteenth Edition.
Majumdar A.K and Dr. Kapoor. G.K, Taxmanns Company Law, Sixteenth Edition.

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Holding and Subsidiary Companies in India Determining the True Character

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