Holding, Subsidiary and Associate Companies [Sec. 2(46), 2(87) & 2(6)]
# Holding, Subsidiary and Associate Companies (Companies Based on Control)
## 1. Holding Company — Sec. 2(46)
A company is a holding company in relation to one or more other companies, when those other companies are its subsidiary companies.
> The term 'company' here includes a body corporate.
## 2. Subsidiary Company — Sec. 2(87)
A company is a subsidiary of another (holding) company if the holding company:
1. Controls the composition of the Board of Directors; OR
2. Exercises / controls more than 50% of the total voting power —
At its own, OR
Together with one or more of its subsidiaries.
### Deemed Subsidiary
A company controlled indirectly through another subsidiary is also a subsidiary.
> Example: If A holds B, and B holds C, then C is also a subsidiary of A.
### Key Points
Layering Restriction: Holding companies cannot have layers of subsidiaries beyond a prescribed limit.
Control of Board Composition: A company controls the composition of the BOD of another if it can appoint or remove the majority of (or all) directors at its own discretion.
Fiduciary Shares Excluded: Shares held in a trustee or fiduciary capacity do NOT count toward determining the subsidiary relationship.
## 3. Associate Company — Sec. 2(6)
A company in which another company has significant influence, but which is NOT a subsidiary. It includes a Joint Venture.
### What is 'Significant Influence'?
Means control of:
At least 20% of total voting power, OR
Control or participation in business decisions under an agreement.
### Joint Venture
A joint arrangement where parties having joint control have rights to the net assets of the arrangement.
### Fiduciary Shares Excluded
Shares held in a fiduciary capacity are NOT considered for determining the associate relationship.
### Voting Power
Total Voting Power = Total number of votes that can be cast in a poll if all eligible members are present and vote.
Worked example
### Example 1
Example (Holding–Subsidiary): A Ltd. holds 60% voting power in B Ltd. B Ltd. holds 55% voting power in C Ltd. What is the relationship?
Answer: B Ltd. is a subsidiary of A Ltd. C Ltd. is a subsidiary of B Ltd. By the deemed subsidiary principle, C Ltd. is also a subsidiary of A Ltd. Therefore, A Ltd. is the holding company of both B and C.
### Example 2
Example (Control of Board): X Ltd. holds only 30% voting power in Y Ltd., but by virtue of an agreement it can appoint 7 out of 9 directors on Y Ltd.'s board. Is Y a subsidiary of X?
Answer: Yes. X Ltd. controls the composition of the BOD of Y Ltd. (majority of directors). Hence, Y Ltd. is a subsidiary of X Ltd., even though voting power held is only 30%.
### Example 3
Example (Associate): P Ltd. holds 25% voting power in Q Ltd. Is Q an associate of P?
Answer: Yes. 25% voting power exceeds the 20% threshold for significant influence, and Q is not a subsidiary. Hence, Q is an associate company of P.
### Example 4
Example (Fiduciary Shares): R Ltd. holds 55% shares in S Ltd. as a trustee for a third party. Is S a subsidiary of R?
Answer: No. Shares held in a fiduciary/trustee capacity are excluded. Hence, S is NOT a subsidiary of R.
⚠️ Common exam mistakes
Confusing the thresholds — Subsidiary requires more than 50% voting power; Associate requires at least 20%.
Ignoring the 'control of Board composition' test — a company may be a subsidiary even with low voting power.
Counting shares held in fiduciary/trustee capacity for determining subsidiary or associate relationship — these are excluded.
Forgetting that indirect (deemed) subsidiaries also count.
Forgetting that 'joint venture' is included within the definition of 'associate company'.
Bare-Act text Sec. 2(46), 2(87) & 2(6) · Companies Act, 2013 · click to expand
Section 2(46): 'Holding company', in relation to one or more other companies, means a company of which such companies are subsidiary companies.
Section 2(87): 'Subsidiary company' or 'subsidiary', in relation to any other company (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(6): 'Associate company', in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.