# Holding & Subsidiary Companies

## Definitions

### Subsidiary Company [Section 2(87)]

Company X is a subsidiary of Company Y if any one of the following three conditions is satisfied:

(a) Board Control Test

Y controls the composition of X's Board of Directors — i.e., Y has the power, at its discretion, to appoint or remove all or a majority of X's directors without the consent of any other person.

(b) Voting Power Test

Y exercises or controls more than one-half (>50%) of the total voting power in X, either on its own or together with one or more of its subsidiaries.

(c) Chain / Step-Down Test

If X is a subsidiary of Z, and Z is itself a subsidiary of Y, then X is also a subsidiary of Y (step-down subsidiary).

### Holding Company [Section 2(46)]

A company is the holding company of another company if that other company is its subsidiary as per Section 2(87).

### Layers Restriction

Proviso: Prescribed classes of holding companies shall not have layers of subsidiaries beyond such numbers as may be prescribed. (Currently restricted to two layers for most companies under the Companies (Restriction on number of layers) Rules, 2017.)

## Key Conceptual Points

For this clause, 'company' includes any body corporate — so holding/subsidiary relationships can be established between an Indian company and a foreign body corporate.
Holding and subsidiary are separately incorporated, distinct legal entities — each has its own identity, assets, liabilities.

## Section 19 — Subsidiary Cannot Hold Shares in its Holding Company

General Rule: A subsidiary company shall not hold shares in its holding company; and a holding company shall not allot or transfer its shares to any of its subsidiary. Any such allotment/transfer is VOID.

### Three Exceptions

1. Subsidiary holds shares as legal representative of a deceased member of the holding company.

2. Subsidiary holds shares as a trustee.

3. Subsidiary held shares in the holding company even before becoming a subsidiary.

### Voting Rights in Exception Cases

In cases (1) and (2) only — i.e., when held as legal representative or trustee — the subsidiary has the right to vote at meetings of the holding company in respect of those shares. (Case (3) shares do NOT carry voting rights.)

Worked example

### Example 1

Example 1 – Board Control: A Ltd has the power to appoint 6 out of 10 directors of B Ltd, without anyone's consent. → B Ltd is a subsidiary of A Ltd (control of composition of Board, even though no shareholding mentioned).

### Example 2

Example 2 – Voting Power: P Ltd holds 30% voting power in Q Ltd directly, and its wholly owned subsidiary R Ltd holds another 25% in Q Ltd. Total voting power controlled by P Ltd group = 55%. → Q Ltd is subsidiary of P Ltd.

### Example 3

Example 3 – Step-Down: If C is subsidiary of B, and B is subsidiary of A, then C is also subsidiary of A. This is the step-down (chain) subsidiary rule.

### Example 4

Example 4 – Section 19 Trap: H Ltd holds 60% in S Ltd. S Ltd buys 1,000 shares of H Ltd in the open market. → Allotment/transfer is VOID under Section 19.

### Example 5

Example 5 – Exception: Before becoming a subsidiary, S Ltd already held 500 shares in H Ltd. After H Ltd acquired 60% in S Ltd, S Ltd's pre-existing shareholding in H Ltd is permitted, but those shares carry NO voting right.

### Example 6

Example 6 – Trustee Exception: S Ltd is a trustee for an employee welfare trust which holds shares in its holding company H Ltd. S Ltd may hold these shares and may exercise voting rights on them.

⚠️ Common exam mistakes

Treating shareholding test as >50% of paid-up capital instead of >50% of total voting power — only voting power matters under Section 2(87)(b).
Confusing 'control of composition of Board' (appointing majority directors) with 'mere right to nominate one or two directors'. Control requires power over majority appointment/removal.
Forgetting that 'company' includes a body corporate, hence foreign body corporates can be holding or subsidiary.
Believing that Section 19's exception (3) — pre-existing shareholding — also carries voting rights. Only legal-rep and trustee shareholdings under exceptions (1) and (2) carry voting rights.
Assuming holding–subsidiary share allotment is voidable. It is VOID (not voidable) under Section 19.
Ignoring the layers restriction (max 2 layers of subsidiaries for prescribed classes).

Bare-Act text Sections 2(46), 2(87) & Section 19 · Companies Act, 2013 · click to expand

Section 2(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 voting power either at its own or together with one or more of its subsidiary companies. Section 19: 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 and any such allotment or transfer of shares of a company to its subsidiary company shall be void. Exceptions: where the subsidiary holds shares as legal representative of a deceased member of the holding company; or as a trustee; or was a member of the holding company before it became its subsidiary.

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Holding and Subsidiary Company - Section 2(87), 2(46) & Section 19

Worked example

⚠️ Common exam mistakes