# Subsidiary Company — Section 2(87)

A company C is a subsidiary of company H (the holding) if H satisfies either of the two control tests:

## The two control tests

Test	What it means
(i) Board Composition Test	H controls the composition of the Board of Directors of C — i.e., H can, in its discretion, appoint or remove all or a majority of the directors of C.
(ii) Voting Power Test	H exercises or controls more than 1/2 of the total voting power in C — alone, or together with one or more of its subsidiaries.

Either test is sufficient. Both are independently enough.

## Layering restriction

> Prescribed class(es) of holding companies shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Under Rules, holding companies are generally restricted to not more than 2 layers of subsidiaries (subject to specified exceptions — wholly owned subsidiary outside India, banking, insurance, NBFCs, government companies).

## Key clarifications (Explanation)

(a) Indirect control counts. If C controls D, and H controls C, then D is also a subsidiary of H — even though H doesn't directly hold D.
(b) Board control is deemed where H 'by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors'.
(c) 'Company' includes body corporate. So subsidiary chains may include LLPs and foreign body corporates.
(d) 'Layer' in relation to a holding company means its subsidiary or subsidiaries.

## Crucial carve-out — fiduciary capacity

> Shares held by a company, or power exercisable by it in another company, in a fiduciary capacity shall NOT be counted for the purpose of determining the holding-subsidiary relationship.

So if H is a custodian/trustee holding 60% in C on behalf of some other entity, those shares don't count for the >50% voting power test.

## Practical visual

```

H (Holding)

| (>50% voting power OR Board composition control)

C (Subsidiary)

| (>50% control)

D (deemed subsidiary of H also, by Explanation (a))

```

## Why this matters

Triggers consolidation under Sec 129.
Triggers restrictions under Sec 19 (subsidiary cannot hold shares in holding).
Triggers RPT treatment under Sec 2(76).
Triggers public-company deeming under Sec 2(71) proviso.

Worked example

### Example 1

Example 1 — Voting power test. H Ltd holds 35% of voting power in C Ltd. H's wholly-owned subsidiary S Ltd holds another 20% in C. Combined = 55%. Is C a subsidiary of H? Yes — Sec 2(87)(ii) permits aggregation with H's subsidiaries.

### Example 2

Example 2 — Fiduciary holding. H Ltd holds 60% of C Ltd, but 30% is held as trustee on behalf of XYZ Pension Fund. Effective non-fiduciary holding = 30% — not >50%. So C is not a subsidiary of H, despite the apparent majority.

### Example 3

Example 3 — Board composition. H holds only 10% in C but, by a shareholders' agreement, has the right to appoint 5 of the 7 directors. H controls the Board's composition -> C is a subsidiary under test (i), regardless of voting power.

⚠️ Common exam mistakes

Thinking subsidiary status requires majority shareholding — board composition control alone is enough.
Forgetting the fiduciary capacity carve-out — shares held as trustee don't count.
Missing that 'subsidiary of subsidiary' is also a subsidiary of the ultimate holding (Explanation (a)).
Ignoring the layering restriction — companies cannot freely create unlimited layers of subsidiaries.
Confusing >1/2 (more than 50%) with >=50% — the threshold is strictly MORE than half.

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

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. Explanation: For the purposes of this clause: (a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company; (b) the composition of a company's Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors; (c) the expression 'company' includes any body corporate; (d) 'layer' in relation to a holding company means its subsidiary or subsidiaries. Note: Shares held by a company or power exercisable by it in another company in a fiduciary capacity shall not be counted for the purpose of determining the holding-subsidiary relationship.

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Subsidiary Company [Sec 2(87)]

Worked example

⚠️ Common exam mistakes