CRL-1 - NEW DANGER - Number - Layers of Investment in Subsidiaries

Number - Layers of Investment in Subsidiaries
MCA has issue [1]Notification on 20th September, 2017 in respect of “Numbers of Layers of Investment in Subsidiaries” of Company. These rules called as Companies (Restriction on number of layers) Rules, 2017.

In such notification MCA mentioned about which company shall be include or not in term “two Layers”. What are the compliances required to be done by Company in respect of “Subsidiaries”. What are the consequences of non compliances of same?

Recently “Registrar of Companies” has issued ‘Show Cause Notice’ many companies who have not made compliances as per these rules.

Language of Notice: As per information of your Company available on the MCA portal, it has been observed in the form MGT-7 for the financial year 2016-17, the Company has declared more than 2 (two) subsidiaries, has failed to file the form CRL-1.

This is article no. 342 of the series of editorials written by the author on corporate laws {Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Allowed Numbers - Layers of Investment

No Company other than below mentioned 4 categories of company shall have more than two layers of subsidiaries.
Companies on which rules above not applicable Companies:
    ·         Banking Company
    ·         Non-banking Financial Company
    ·         Insurance Company
    ·         Government Company

     A.     Meaning of Two Layers of Subsidiaries?
Situation: 1: Company “H” is having three Subsidiaries “S1”, ‘S2” and ‘S3”.
Situation: 2: Company ‘S1” Is having one Subsidiary “X1” and ‘S2’ having Subsidiary ‘P1’.
Situation: 3: Company ‘X1” having one Subsidiaries “Y1” and ‘P1’ having Subsidiary ‘Q1’.


Exemption to the Companies:

    B.     Whether an Indian company can acquire, a company incorporated outside India having more than two layers of subsidiary?
                   i.            Acquiring Company incorporated outside India: These provisions shall not affect a company from acquiring a Company incorporated outside India with subsidiaries beyond two layers as per the law of such Country.
Note: If a company incorporated outside India and having more than 2 layers of subsidiaries according to their law. An Indian company acquiring that foreign body corporate then these provisions shall not affect such transaction. Indian Company can acquire foreign company which has more than 2 layers of subsidiaries.

Whether an Indian company can acquire, a company incorporated outside India as 3rd layer of subsidiary? (in simple word Company ‘H’ having subsidiary ‘S”, ‘S’ having subsidiary ‘Q’ and ‘Q’ acquire ‘P’ a company incorporated outside India?

Before answering above situation, ‘A new question arises i.e. whether a Company incorporate outside india can be Subsidiary of Indian Company?’
As per Section 2(87)(c) of Companies Act, 2013, in definition the expression ‘Company’ includes ‘any Body Corporate’. However, company incorporated outside India shall be considered as Body Corporate. Therefore, it is clear that a Company/ Body corporate incorporated outside India shall be considered as subsidiary Company if company with definition.

As per Rule 2, a Company can’t have more than two layers of Subsidiary. Therefore, we can opine that w.e.f. 20th September, 2017 a Indian Company can’t acquire a Company incorporated outside India as 3rd Layer of Subsidiary. (As per above example Company ‘Q’ can’t acquire Company ‘P’).

\   A.    Whether a company having more than 2 subsidiaries on one layer shall fall under these rules or need to comply the provisions of these rules?

One Layer of Subsidiaries: For computing the numbers of layers, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.

Note: If a Company have more than 2 WOS or subsidiaries on one layer, such companies shall not taken into account while calculating the layers of subsidiaries. On one layer there may be more than 2 Subsidiaries or WOS’s.

    B.     If Company existing before 20th September, 2017 (commencement of these rules) having more than 2 layers of subsidiaries. In such situation what is the way out / Compliances?

                 i.            Such Company shall file, with the Registrar a return in Form CRL-1 disclosing the details specified therein, within a period of 150 (i.e. 17th February, 2018) days from the date of publication of these rules in the Official Gazette
Note: Companies have to file CRL -1 within 150 days.

               ii.            Such Company shall not, after the date of commencement of these rules, have any additional layer of subsidiaries over and above the layers existing on such date; and
Note: Companies can continue with no. of layers as on 20.09.2017 without any restriction. Even there is no need to dis-investment in such excess no. layers of subsidiaries.       
                  iii.            Such Company shall not, in case one or more layers are reduced by it subsequent to the commencement of these rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed in sub rule (1), whichever is more.
Note: If any time after 20.09.2017 Company made dis-investment in any of its subsidiary (which is on and above counting of 2 layers) in that situation company can’t make new investment until unless its having less than 2 layers of subsidiaries.

Example: Company “XYX” having 6 layers of subsidiaries as on 20.09.2017. Company made disinvestment in one of its layers on 15.11.2017. Therefore, as on 15.11.2017 Company XYZ having 5 layers of subsidiaries. In such situation Company can’t make investment in one more company to reach its limit of 6 Companies. Because as per rules the limit is 2 layers.

 C.    Penalty if Company fails to file CRL-1?
If any company contravenes any provision of these rules the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.

   D.    What shall be implications if Company fails to file e-form CRL-1?
       I.            Penalty as mentioned in question F shall be applicable on Company and Officer in Default.
    II.            Company can file application for condonation of delay with Central Government
 III.            Company can file application with NCLT / RD for compounding of offence.
 (Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION 


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