# Section 2(87) — Subsidiary Company

## Statutory Definition

> 'Subsidiary company' or 'subsidiary', in relation to any other company (i.e., 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:

> 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.

## Two Alternative Tests (either ONE is sufficient)

### Test 1: Control over Composition of Board of Directors

The holding company has the power to appoint or remove all or a majority of directors without the consent of any other person.

### Test 2: Control over Voting Power

The holding company holds, alone or together with its subsidiaries, more than 50% of the total voting power.

> Either test, if satisfied, makes the company a subsidiary. Voting power is computed including preference shareholders' voting rights only where they are entitled to vote on the matter.

## Important Clarifications

### (a) Treatment of shares held by a company in fiduciary capacity

Shares held by a company in a fiduciary capacity (e.g., as a trustee) shall NOT be counted for the purpose of determining the holding-subsidiary relationship.

### (b) Layers of Subsidiaries (Restriction)

Under Companies (Restriction on Number of Layers) Rules, 2017:

A holding company can have a maximum of 2 layers of subsidiaries.
Exceptions: One wholly-owned subsidiary is permitted at the lowermost layer beyond the two layers; subsidiaries acquired abroad are allowed under their local law; banking, NBFC, insurance and government companies are exempt.

## Holding-Subsidiary-Associate Diagram

```

Holding Co. (H)

+----------+----------+

| |

>50% voting Controls Board

power held composition

| |

Subsidiary 1 Subsidiary 2

```

## Associate Company [Section 2(6)] — Quick Comparison

Aspect	Subsidiary	Associate
Voting power threshold	> 50%	Between 20% and 50% (significant influence)
Section	2(87)	2(6)
Includes JV?	No	Yes

Worked example

### Example 1

Example 1 — Voting test: H Ltd. holds 55% of equity shares (with voting rights) in S Ltd. ✅ Test 2 satisfied — S is a subsidiary of H, regardless of who controls the Board.

### Example 2

Example 2 — Board control test: H Ltd. holds only 30% of S Ltd., but under a shareholders' agreement H has the right to appoint 5 out of 7 directors. ✅ Test 1 satisfied (controls composition of Board) — S is a subsidiary even though shareholding is below 50%.

### Example 3

Example 3 — Combined holding through chain: H Ltd. holds 60% in S1. S1 holds 55% in S2. Total voting in S2 controlled by H (via S1) is more than 50%. Hence S2 is ALSO a subsidiary of H. (S2 is a subsidiary of both S1 and H — H is the ultimate holding company.)

### Example 4

Example 4 — Fiduciary holding excluded: H Ltd. holds 60% in S Ltd., but 20% of that is held as a trustee for a private trust. For determining the holding-subsidiary relationship, only 40% (60% – 20%) is counted. Since this is less than 50%, S is NOT a subsidiary of H under the voting test.

⚠️ Common exam mistakes

Treating the two tests as cumulative — they are alternative. Either test, if satisfied, makes the company a subsidiary.
Counting shares held in a fiduciary capacity — these are expressly excluded.
Confusing 'control of Board composition' with merely 'nominating one director' — control requires power to appoint/remove MAJORITY of directors.
Forgetting that a subsidiary of a subsidiary is also a subsidiary of the ultimate holding company (chain rule).
Confusing 'subsidiary' with 'associate' — associate is between 20–50% influence; subsidiary is > 50% / Board control.
Ignoring the maximum-2-layers restriction under the Companies (Restriction on Number of Layers) Rules, 2017.

Bare-Act text Section 2(87) · 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: 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.

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Section 2(87) Subsidiary Company

Worked example

⚠️ Common exam mistakes