Subsidiary Companies Act
Md Saddam Hussain
Md Saddam Hussain is a highly skilled and experienced Company Secretary specializing in corporate laws, regulatory compliance, and legal advisory. With expertise in the Companies Act, FEMA, LLP regulations, SEBI compliance, NCLT proceedings, and liaisoning with government authorities, he provides strategic guidance to businesses, ensuring seamless adherence to statutory obligations. Known for his meticulous approach and in-depth knowledge of corporate governance, he assists companies in mitigating risks, handling regulatory filings, and navigating complex legal frameworks. With a commitment to excellence and integrity, Md Saddam Hussain plays a crucial role in supporting businesses with compliance, litigation, and corporate structuring.
Introduction
In today’s globalized economy, businesses are rarely confined within the borders of a single nation. Large corporations expand through subsidiaries, joint ventures, and cross-border entities in order to tap into new markets and diversify their operations. The Companies Act, 2013, which governs corporate entities in India, provides a detailed framework to identify and regulate subsidiaries, foreign subsidiaries, and body corporates.
This article explores these concepts in depth, focusing on the definition of subsidiary under the Companies Act, 2013, the scope of foreign subsidiaries, the meaning of body corporate, and an important statutory provision — Section 2(42).
Subsidiary under the Companies Act, 2013
Definition
The Companies Act, 2013, defines a subsidiary company under Section 2(87). A subsidiary is a company in which another company, known as the holding company, either:
- controls the composition of its Board of Directors, or
- exercises or controls more than one-half of the total share capital, either on its own or together with one or more of its subsidiaries.
Example
Suppose Company A holds 60% equity shares in Company B. Company B is a subsidiary of Company A. Further, if Company B holds 70% shares in Company C, then Company C is also treated as a subsidiary of Company A, even though Company A does not directly hold any shares in C.
Foreign Subsidiary
Definition
A foreign subsidiary refers to a company incorporated outside India but controlled by an Indian company. Under Indian law, if an Indian holding company holds more than 50% of the share capital of a company incorporated in another country or controls its board composition, that company qualifies as a foreign subsidiary.
Regulatory Importance
- Foreign subsidiaries are required to comply with both Indian corporate laws and the laws of the host country.
- The financial statements of foreign subsidiaries must be consolidated with those of the Indian parent company, as per Section 129(3) of the Companies Act, 2013.
- They also attract provisions of the Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) guidelines.
Example
If an Indian IT company incorporates a unit in Singapore, holding 80% of its shares, that Singapore entity becomes a foreign subsidiary of the Indian company.
Meaning of Body Corporate
The expression “body corporate” is defined under Section 2(11) of the Companies Act, 2013.
Definition
A body corporate includes:
- A company incorporated outside India, and
- A company incorporated in India (other than a co-operative society or any other entity excluded by notification).
Thus, the term is broader than ‘company’ and covers all entities incorporated under any law in force in India or abroad, except for certain excluded categories.
Exclusions from Body Corporate
- Co-operative societies registered under the Co-operative Societies Act.
- Any entity notified by the Central Government as not being a body corporate.
Practical Implication
The definition of “body corporate” is critical because several provisions of the Companies Act, 2013 — such as restrictions on the number of directorships, related-party transactions, and rules on significant beneficial ownership — extend to body corporates, not just companies incorporated in India.
Section 2(42) – Foreign Company
Statutory Provision
Section 2(42) of the Companies Act, 2013 defines a foreign company as:
“Any company or body corporate incorporated outside India that:
(a) has a place of business in India, whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any manner.”
Key Elements of the Definition
- Incorporated Outside India: The company must be registered under the laws of a foreign jurisdiction.
- Place of Business in India: The business can be conducted directly, through an agent, or even through digital presence.
- Business Activity in India: Any commercial transaction or ongoing business operations in India bring the foreign entity under the scope of Indian corporate regulation.
Examples
- A US-based software company that sets up a liaison office in India will qualify as a foreign company.
- A Singapore-based e-commerce platform conducting business through its website targeting Indian customers will also be treated as a foreign company, as electronic mode is explicitly covered.
Interplay between Subsidiaries, Foreign Subsidiaries, and Section 2(42)
- A foreign subsidiary of an Indian company is regulated under Indian law, even though it remains incorporated outside India.
- If that foreign subsidiary opens a place of business in India, it may also qualify as a foreign company under Section 2(42).
- Thus, the Companies Act provides a comprehensive framework to regulate both domestic subsidiaries and international subsidiaries with Indian connections.
Compliance Requirements
For Subsidiaries in India
- Filing of annual returns and financial statements.
- Compliance with related-party transactions provisions.
- Board composition as per the Companies Act, 2013.
For Foreign Subsidiaries
- Consolidation of financials with the Indian parent.
- FEMA and RBI approvals for capital infusion.
- Adherence to host-country corporate and tax laws.
For Foreign Companies under Section 2(42)
- Filing with the Registrar of Companies (RoC) in India under Section 380.
- Compliance with provisions relating to accounts, audit, and disclosures.
- Maintenance of statutory records in India.
Conclusion
The concepts of subsidiary, foreign subsidiary, body corporate, and foreign company under Section 2(42) reflect the global orientation of Indian corporate law. As businesses expand beyond borders and operate digitally, the Companies Act, 2013, ensures that Indian stakeholders, regulators, and investors are safeguarded through transparent disclosure and compliance requirements.
In essence, a subsidiary denotes control, a foreign subsidiary reflects global presence, a body corporate broadens the scope of regulation, and Section 2(42) ensures accountability of foreign players operating in India.
These definitions and provisions together form the backbone of corporate governance in a cross-border environment, balancing the interests of companies, investors, and regulators.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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