# Holding & Subsidiary Company

## Concept Overview

The holding-subsidiary relationship establishes control of one company over another. Each company remains a separate legal entity with independent rights and obligations, but they form a corporate group for various legal and regulatory purposes.

## Definition of Subsidiary – Section 2(87)

A company (Company B) is a subsidiary of another company (Company A) if any one of the following conditions is satisfied:

### Test (a): Control of Board Composition

"Company A controls the composition of B's Board of Directors."

Meaning: Company A has the power, at its discretion, to appoint or remove all (or a majority of) directors of Company B without the consent of any other person.

### Test (b): Voting Power Control

Company A exercises or controls more than one-half of the total voting power in B —

on its own, OR
together with one or more of its other subsidiary companies.

### Test (c): Step-Subsidiary (Chain Rule)

If Company B is a subsidiary of Company X, and Company X is itself a subsidiary of Company A, then Company B is also a subsidiary of Company A.

## Layering Restriction

Certain prescribed classes of holding companies cannot have layers of subsidiaries beyond the number prescribed by the Central Government. This prevents endless chains used to obscure ownership.

## Definition of Holding Company – Section 2(46)

"Holding Company," in relation to one or more other companies, means a company of which such other companies are subsidiary companies. (It is simply the reverse-mirror definition of subsidiary.)

## Inclusion of Body Corporate

For the purposes of Section 2(87), the term "company" includes any body corporate. Therefore, the holding-subsidiary relationship can exist between an Indian company and a foreign company.

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

### General Rule

A subsidiary company shall not hold shares in its holding company.
A holding company shall not allot or transfer its shares to any of its subsidiaries.
Any such allotment or transfer is VOID.

### Exceptions (Three)

The subsidiary may hold shares of the holding company where:

#	Exception
(a)	Subsidiary holds shares as legal representative of a deceased member of the holding company.
(b)	Subsidiary holds shares as a trustee.
(c)	Subsidiary was already a shareholder of the holding company before it became its subsidiary.

### Voting Rights in Exception Cases

In cases (a) and (b) — i.e., legal representative or trustee — the subsidiary has the right to vote at the holding company's meeting only in respect of those shares. (No voting right in case (c) shares.)

Worked example

### Example 1

Example 1 (Test a): A Ltd has the power, under B Ltd's articles, to appoint 7 out of 11 directors of B Ltd without anyone else's consent. → B Ltd is a subsidiary of A Ltd (majority Board control).

### Example 2

Example 2 (Test b – aggregation): A Ltd holds 30% voting power in C Ltd. A Ltd's subsidiary, X Ltd, holds another 25% in C Ltd. Combined: 55%. → C Ltd is a subsidiary of A Ltd (more than half of total voting power, together with subsidiary).

### Example 3

Example 3 (Test c – chain): A Ltd has subsidiary X Ltd. X Ltd has subsidiary Y Ltd. → Y Ltd is also a subsidiary of A Ltd, even if A Ltd directly holds no shares in Y Ltd.

### Example 4

Example 4 (Section 19): B Ltd is the subsidiary of A Ltd. B Ltd held 5% of A Ltd's shares before becoming a subsidiary. → B Ltd can continue to hold those shares (Exception c). However, B Ltd CANNOT vote on those shares at A Ltd's general meeting.

### Example 5

Example 5 (Section 19): C Ltd, subsidiary of D Ltd, holds shares of D Ltd as trustee of a charitable trust. → Allowed under Exception (b). C Ltd has voting rights on those shares as trustee.

⚠️ Common exam mistakes

Confusing "control of board composition" with mere ability to nominate some directors — the test requires power to appoint/remove all or majority without anyone else's consent.
Forgetting to aggregate the holding company's own voting power with the voting power of its subsidiaries when applying Test (b).
Missing that the chain rule (Test c) makes a sub-subsidiary automatically a subsidiary of the ultimate holding company.
Assuming the three exceptions under Section 19 carry voting rights — only the legal representative and trustee exceptions [(a) and (b)] do.
Forgetting that holding-subsidiary relationship can be cross-border (Indian company can be holding of a foreign body corporate).

Bare-Act text Sections 2(87), 2(46), 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 2(46): "holding company", in relation to one or more other companies, means a company of which such companies are 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.

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →

Holding and Subsidiary Company [Sections 2(87), 2(46), Section 19]

Worked example

⚠️ Common exam mistakes