Subsidiary company is any company whose interests are held and controlled or held by another company. Paid up equity share capital and preference share capital of the subsidiary company can be used to determine the holding company – subsidiary company relationship between two companies. In this article, we look at some of the basics of a subsidiary company – holding company relationship.
Subsidiary Company Definition
According to the Companies Act, if a company is holding more than half in the nominal value of equity share capital of another company, then such company is considered a subsidiary of first mentioned company. Further, a subsidiary company – holding company relationship can also be established by the composition of a company’s Board of Directors. A company will be deemed to be controlled by another company, even if he same is not essentially so controlled, if that other company by exercise of some power exercisable by it at its discretion is able to appoint or remove all or a majority of the directors.
Hence, as per the Companies Act, 2013, the right to appoint majority of the directors or to be able to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, as well as by high merit of their shareholding or management rights or shareholders agreements or voting agreements or in any other method – is deemed to create a subsidiary company relationship.
Control by Shareholding
The following methodology is used to determine if a subsidiary company – holding company relationship is established by shareholding. The term ‘total share capital’ is not defined under the terms of Companies Act, 2013.
Nevertheless, the term ‘share’ is defined to mean a share in share capital of a company and is inclusive of stock. Hence, both equity share capital and preference share capital are considered during the calculation.
Hence, if more than 50% of paid-up equity share capital, and convertible preference share capital related to a company inclusive of a body corporate that is exercised or controlled by another company, the former company therefore becomes subsidiary company.
Control by Board of Directors
The composition related to a company’s Board of Directors will be deemed to be controlled by another company, even if the same is not essentially so controlled, if that other company by exercise of some power exercisable by it at its discretion can employ or remove all or a majority of the directors.
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