Companies Rules - Restriction on Number of Layers

The Government of India (GoI) introduced the Companies Restriction on Number of Layers Rules in the year 2017. These rules were set to restrict the number of layers of subsidiaries of a holding company. The objective of the rule is to restrict the illegal fund flow among the companies. This article deals with the company rules regarding the restriction of the number of layers.

Provisions of the Rules

Every company in India cannot have more than two

Indian subsidiaries. The rules provide a facility where such provisions of the rules do not affect the company from obtaining a company incorporated outside India. It does not affect even with the subsidiaries that are more than two layers according to the law of that country. The rules also provide provisions on computing the number of layers. Whereas, it does not take into account one layer consisting of more than one fully owned subsidiary.

Non-Applicability

The provisions of these company rules regarding the restriction on the number of layers are not applicable for the following:

A banking company as under the Banking Regulation Act,1949. However, this relates to any company that can transact the business of the banking
The non-banking financial company as under the Reserve Bank of India Act, 1934. The companies which register itself with the Reserve Bank of India and the Reserve Bank of India considers such companies as a systematically important one
An Insurance company which takes the business of insurance. Such Insurance companies under the Insurance Act, 1938 and the Insurance Regulatory Development Authority Act, 1999
A Government company as under The Companies Act, 2013

Companies with Excess Number of Layers

The companies which have the excess of the number of layers of subsidiaries must do the following:

The company should file the return to the Registrar in Form CRL-1. They should disclose the specified details
There should not be any additional layer of subsidiaries
If the company reduces the number of layers after the commencement of the rules, then the company cannot have beyond the number of layers after reduction or beyond the maximum number of layers this rule allows.

Penalty

If the company does not oblige to the rules, then the company and the officers in default will be punishable. The company may have to pay an amount of Rs.10,000 as fine. If the company continues to default, then it will have to pay Rs.1,000 every day until it obliges to the rules.

Necessary Details

Form CRL-1 requires the following details:

Name of the company
Corporate Identity Number (CIN) of the company
Layer wise details of the subsidiary like the name of the subsidiary, CIN of the subsidiary company, name of holding company, CIN of holding company and the percentage of shares which each company hold

Declaration

The Director of the company should sign the declaration. The Director should sign digitally. It should also regard to the Digital Signature Certificates. Furthermore, there should also be the

Director Identification Number of the Director signing the declaration. The Form CRL-1 is below for reference: Form-CRL-1-Company-rules-Restriction-on-number- of-layers

Form CRL-1

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Frequently Asked Questions

Common questions about India Corporate Layer Rules 2017.

The objective of the Companies Restriction on Number of Layers Rules is to restrict the illegal flow of funds among companies by limiting the number of subsidiary layers a holding company can have.

As per the Companies Restriction on Number of Layers Rules, a company in India cannot have more than two Indian subsidiaries.

No, the rules do not affect companies from obtaining subsidiaries incorporated outside India, even if those subsidiaries have more than two layers according to the laws of that country.

The rules provide that one layer consisting of more than one fully owned subsidiary is not counted as an additional layer for the purpose of computing the number of layers.

Yes, the rules are not applicable to banking companies under the Banking Regulation Act, 1949, non-banking financial companies under the RBI Act, 1934, insurance companies under the Insurance Act, 1938 and IRDA Act, 1999, and government companies under the Companies Act, 2013.

Companies with excess number of layers must file a return to the Registrar in Form CRL-1, disclose the specified details, and ensure that they do not create additional layers beyond the permissible limit.

If a company fails to comply with these rules, it may have to pay a fine of Rs. 10,000 and an additional fine of Rs. 1,000 per day for continued non-compliance.

Form CRL-1 requires details such as the company's name, Corporate Identity Number (CIN), layer-wise details of subsidiaries, their CINs, the percentage of shares held, and a declaration signed by a director with their Director Identification Number.

Yes, if a company reduces the number of layers after the commencement of these rules, it cannot have more layers than the reduced number or the maximum permissible limit under these rules.

The declaration in Form CRL-1 must be signed digitally by a director of the company using their Digital Signature Certificate and mentioning their Director Identification Number.