The Companies (Restriction on number of layers) Rules notified

Ministry of Corporate Affairs (MCA) vide its notification dated September 20, 2017 notified the proviso Section 2(87) of the Companies Act, 2013 wef September 20, 2017. 

Section 2 (87) reads as under:

(87) “subsidiary company" or “subsidiary", in relation to any other company (that is to say the holding company), means 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.

Though, the sub-section was notified much earlier, the proviso was not notified till date. Now, on September 20, 2017. "the Central Government hereby appoints the 20th September, 2017 as the date on which proviso to clause (87) of section 2 of the said Act shall come into force". Said the notification.

Also, along with the proviso, the MCA also notified The Companies (Restriction on number of layers) Rules, 2017.

Salient features of the new Rules is as under:

Applicability: From the date of it publishing in Official Gazette viz. 20th September 2017

Major change: 

On and from the date of commencement of these rules, no company, other than a company belonging to a class specified in sub-rule (2), shall have more than two layers of subsidiaries.

The rule clarifies that for computing the number of layers under this rule, one layer which consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account.

Exclusion:

1. A company from acquiring a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country.
2. a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); 
3. a non-banking financial company as defined in clause (f) of Section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934) which is registered with the Reserve Bank of India and considered as systematically important non-banking financial company by the Reserve Bank of India; 
4. an insurance company being a company which carries on the business of insurance in accordance with provisions of the Insurance Act, 1938 (4 of 1938) and the Insurance Regulatory Development Authority Act, 1999 (41 of 1999);
5. a Government company referred to in clause (45) of section 2 of the Act.  

Immediate Action required?:

Every company, other than a company that is part of exempted list above, existing on or before the commencement of these rules, which has number of layers of subsidiaries in excess of the layers specified in sub-rule (1) - 

(i) shall file, with the Registrar a return in Form CRL-1 disclosing the details specified therein, within a period of one hundred and fifty days from the date of publication of these rules in the Official Gazette; 

(ii) 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 

(iii) 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 subrule (1), whichever is more

Penalty:

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.

Form CRL-1:

Though, currently eForm CRL-1 is not available, the draft of the same, as described in rule, is as below