In todays globalized world, we every now and then come across the word “Subsidiary Company” or “Parent company”. As name presents Parent company is main company in this relation. Now as question may come as can subsidiary company invest in holding company ? Or Can subsidiary company own shares in Parent company ? what exactly these terms means, let us see in detail.
A parent company is also known as “Holding Company”. A holding company simply means a company which holds shares in its subsidiary company gaining ultimate control over the management of the subsidiary company. Lets have a look on following example to have more clarification.Example: If ABC Ltd holds more than 50% of shares in company XYZ Pvt Ltd then company ABC Ltd is a holding company of XYZ Pvt Ltd. In India the best example can be Coal India. The company Coal India is a parent company having subsidiaries as-
Sec 2(87) of the Companies Act, 2013 defines subsidiary company as a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
For the purposes of this clause,—
(a) 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;
(b) 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;
(c) the expression “company” includes anybody corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;Example: The ultimate example of subsidiary company of TATA Group can be as below-
It is clear that when a parent or holding company holds more than 50% stake in the shares of the other company then it becomes subsidiary of that holding company which clarifies that a parent company can hold shares in subsidiary company but if we reverse the question that can a subsidiary company hold shares in parent company? The simple answer is ”NO”.
No company shall, either by itself or through its nominees, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies.
Provided that nothing in this sub-section shall apply to a case—
(a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company:
Provided further that the subsidiary company referred to in the preceding proviso shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in clause (a) or clause (b) of the said proviso.
From the provisions of sec 19 of Companies Act, 2013 it is clear that a subsidiary company is not allowed to invest or hold shares in its Holding company, whereby a holding company is also prohibited to allot or transfer any kinds of shares to its subsidiary company.