The Ministry of Corporate Affairs, Government of India notified the Companies (Restriction on number of layers) Rules, 2017 (Rules) on 20 September 2017. The Rules, from the date of their notification, prohibit a company, other than the classes of companies specified in paragraph (c) below, from having more than 2 (two) layers of subsidiaries (Restriction). The Rules assume importance in the backdrop of concerns around incorporating shell companies to channelize illicit funding activities and curbing black money.
Some of the key highlights of the Rules are:
1. The Restriction would not affect a company from acquiring another company incorporated outside India with subsidiaries beyond 2 (two) layers and governed as per the laws of such country.
2. For computing the number of layers of a company, in relation to the Restriction, one layer which consists of one or more wholly owned subsidiary(ies) would not be taken into account.
3. The Restriction does not apply to:
- a banking company;
- a non-banking financial company (NBFC) registered with the Reserve Bank of India (RBI) and considered as systematically important NBFC by the RBI;
- an insurance company; and
- a Government company.
4. All companies existing on or before the commencement of the Rules, other than the exempted companies as mentioned in paragraph (c) above, and having layers of subsidiaries in excess of the layers specified in the Restriction:
- would have to file a return in the form CRL-1 with the relevant registrar of companies, by 17 February 2018;
- should not, after the commencement of the Rules, have any additional layer of subsidiaries over and above the layers existing on 20 September 2017; and
- should not, in case one or more layers are reduced by it subsequent to the commencement of the Rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers as per the Restriction, whichever is more.
5. Every company which contravenes the provisions of the Rules and every officer of such company who is in default would be punishable with fine which may extend to INR 10,000 (Rupees ten thousand) and where the contravention is a continuing one, with a further fine which may extend to INR 1,000 (Rupees one thousand) for every day after the first day during which such contravention continues.
The Rules as published in the Gazette of India may be accessed through the following link: