A Critical Analysis of Sections 2(46) and 2(87) of the Companies Act, 2013: Examining the Possibility of Dual Holding-Subsidiary Relationships

Abstract

The concept of "holding" and "subsidiary" companies under the Companies Act, 2013 serves as the cornerstone of corporate group structures, financial consolidation, related party regulation, and governance control. However, complex corporate arrangements frequently give rise to a nuanced question: Can a company simultaneously be a subsidiary of more than one holding company?

This article undertakes a critical examination of the statutory language embedded in Sections 2(46) and 2(87), analyzes the independent limbs of control recognized under the Act, and evaluates both the legal validity and practical implications of dual holding-subsidiary relationships. Through illustrative structural diagrams and case analyses, this paper demonstrates how such arrangements may arise and remain sustainable within the existing statutory framework.

I. Introduction

The modern corporate landscape is characterized by increasingly complex ownership structures, cross-holdings, and intricate control mechanisms. Within this evolving ecosystem, the traditional understanding of holding-subsidiary relationships—once presumed to be strictly hierarchical and exclusive—merits reexamination. The Companies Act, 2013, through its carefully crafted definitions, provides a sophisticated framework that potentially accommodates multiple holding companies over a single subsidiary.

This article proceeds in nine parts: the statutory framework, analytical structure of Section 2(87), the core jurisprudential question, illustrative structures with diagrams, legislative intent, legal sustainability, practical implications, substantive versus formal control considerations, and conclusions.

II. Statutory Framework

1. Section 2(46): Holding Company

Section 2(46) of the Companies Act, 2013 defines a holding company through a relational construct:

"Holding company", in relation to one or more other companies, means a company of which such companies are subsidiary companies.

Explanation.—For the purposes of this clause, the expression "company" includes any body corporate.

The definition operates derivatively: a company attains the status of a holding company only if another company qualifies as its subsidiary under the criteria established in Section 2(87).

2. Section 2(87): Subsidiary Company

Section 2(87) provides the substantive test for determining subsidiary status:

"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.

III. Analytical Structure of Section 2(87)

Section 2(87) establishes two independent mechanisms through which corporate control may be established:

Key Interpretative Principles

The statutory use of the disjunctive "or" between clauses (i) and (ii) is of decisive significance. This linguistic choice establishes that:

1. Independent Operation: Each limb operates as a self-sufficient basis for establishing a subsidiary relationship.

2. No Cumulative Requirement: Satisfaction of both limbs is not mandatory.

3. No Exclusivity Mandate: The provision does not require that control be exercised by a single entity exclusively.

IV. The Core Jurisprudential Question

The central inquiry of this article can be framed as follows:

If Company A controls more than 50% of the voting power in Company X, and Company B controls the composition of Company X's Board of Directors, does Company X become a subsidiary of both companies?

This question tests whether Section 2(87) contemplates singular or plural holding structures. The answer requires examination of:

• The text and structure of Section 2(87)

• The legislative intent behind the dual-control formulation

• Practical implications of recognizing multiple holding companies

V. Illustrative Structures with Diagrams

Illustration 1: Voting Control vs. Board Control Split

This illustration demonstrates the core scenario where control mechanisms are bifurcated between two entities.

                        CONTROL SPLIT STRUCTURE
                    
                     [ABC Ltd]                  [DEF Ltd]
                         |                            |
                         | 51% Voting Power           | Appoints Majority
                         | (Clause ii)                 | of Directors
                         |                            | (Clause i)
                         ↓                            ↓
                      +-----------------------------------+
                      |                                   |
                      |            [XYZ Ltd]              |
                      |                                   |
                      +-----------------------------------+
                                      ↓
                           Dual Subsidiary Status:
                           • Subsidiary of ABC Ltd (Voting Control)
                           • Subsidiary of DEF Ltd (Board Control)

Legal Application:

Result: XYZ Ltd becomes a subsidiary of both ABC Ltd and DEF Ltd. The statute contains no prohibition against this outcome.

Illustration 2: Indirect Control via Subsidiary (Layered Structure)

Explanation (a) to Section 2(87) extends the concept of control to include indirect control through subsidiaries.

                   INDIRECT CONTROL STRUCTURE
                         
                         [ABC Ltd]
                             |
                             | 60% Voting Power
                             ↓
                         [PQR Ltd]
                             |
                             | 55% Voting Power
                             ↓
                         [XYZ Ltd]
                             
        Analysis:
        • XYZ Ltd is direct subsidiary of PQR Ltd [Section 2(87)(ii)]
        • XYZ Ltd is ALSO subsidiary of ABC Ltd [Explanation (a)]
        • ABC Ltd holds indirectly what it does not hold directly

Legal Application:

• PQR Ltd holds 55% voting power in XYZ Ltd → XYZ Ltd is subsidiary of PQR Ltd

• ABC Ltd holds 60% in PQR Ltd → By virtue of Explanation (a), ABC Ltd is deemed to control XYZ Ltd through its subsidiary

• Result: XYZ Ltd is subsidiary of both PQR Ltd (direct) and ABC Ltd (indirect)

Illustration 3: Combined Control Scenarios

This illustration demonstrates how multiple holding relationships can arise through combination of direct and indirect control mechanisms.

                COMBINED CONTROL STRUCTURE
                         
                    [ABC Ltd]    [DEF Ltd]
                         \          /
                          \        /
                           \ 40%  / 60% Voting Power
                            \    /    in PQR Ltd
                             \  /
                              ↓
                          [PQR Ltd]
                              |
                              | Appoints All Directors
                              | of XYZ Ltd
                              ↓
                          [XYZ Ltd]
                              
        Analysis:
        • PQR Ltd controls board of XYZ Ltd → Clause (i) applies
        • ABC Ltd + DEF Ltd together control PQR Ltd (both >50% holders)
        • Through PQR Ltd, both ABC Ltd and DEF Ltd indirectly control XYZ Ltd

Illustration 4: Fiduciary Exclusion Scenario

The Ministry of Corporate Affairs has clarified through General Circular No. 20/2013 that fiduciary holdings are excluded from computation.

                   FIDUCIARY HOLDING STRUCTURE
                         
                     [ABC Ltd]               [DEF Ltd]
                         |                         |
                         | 51% Shares              | 49% Shares
                         | (as Trustee             | (Beneficial
                         |  for DEF Ltd)            |  Ownership)
                         |                         |
                         ↓                         ↓
                      +-----------------------------------+
                      |                                   |
                      |            [XYZ Ltd]              |
                      |                                   |
                      +-----------------------------------+
                         
        Analysis:
        • ABC Ltd holds 51% but as trustee for DEF Ltd
        • Shares held in fiduciary capacity are excluded
        • DEF Ltd deemed to hold beneficial ownership
        • Only DEF Ltd qualifies as holding company

VI. Legislative Intent and Corporate Control Philosophy

The Dual-Control Framework

The architecture of Section 2(87) reflects a deliberate legislative choice to recognize that corporate dominance may manifest through two distinct channels:

1. Economic Control (ownership of voting power)

2. Managerial Control (board appointment authority)

Policy Objectives

The separation of ownership from governance power in the statutory framework serves several policy goals:

Legislative History Context

The Companies Act, 2013 expanded the definition of subsidiary compared to its predecessor (Companies Act, 1956) by:

• Explicitly including board control as an independent test

• Recognizing indirect control through subsidiaries

• Providing detailed explanations to prevent narrow interpretations

VII. Dual Subsidiary Status: Legal Sustainability Analysis

Textual Analysis

A strict textual reading of Section 2(87) reveals:

Interpretation Principles

Applying established principles of statutory interpretation:

1. Plain Meaning Rule: The ordinary meaning of the text permits multiple holding companies where different entities satisfy different statutory limbs.

2. Expressio Unius Est Exclusio Alterius: Where the statute specifies certain exclusivity requirements (e.g., layer restrictions), the absence of exclusivity requirements for holding companies suggests none were intended.

3. Purposive Construction: The legislative purpose of capturing all forms of control supports recognizing all entities that independently satisfy statutory criteria.

Comparative Jurisprudence

While Indian courts have not directly addressed dual holding scenarios, principles from related contexts support the possibility:

VIII. Practical Implications and Compliance Consequences

While legally valid, dual holding-subsidiary structures produce significant compliance consequences that require careful navigation.

1. Financial Consolidation

              CONSOLIDATION REQUIREMENTS
              
    [Holding Co. A]                  [Holding Co. B]
         |                                   |
         | Must consolidate?                  | Must consolidate?
         | Based on voting control            | Based on board control
         ↓                                   ↓
    +---------------------------------------------+
    |              [Subsidiary XYZ]                |
    +---------------------------------------------+
    
    Key Question: Must both holding companies consolidate?
    
    Answer: Depends on applicable accounting standards:
    • Ind AS 110 (IFRS 10) requires consolidation based on "control"
    • Control defined as power over investee, exposure to variable returns,
      and ability to use power to affect returns
    • Both companies may meet control definition under different paths

Accounting Complexity: Under Indian Accounting Standards (Ind AS 110), an entity consolidates another when it has:

• Power over the investee

• Exposure to variable returns

• Ability to use power to affect returns

Both ABC Ltd (through voting control) and DEF Ltd (through board control) may satisfy this definition, potentially requiring both to consolidate the same subsidiary—an unusual but not impossible scenario.

2. Related Party Transactions

               RELATED PARTY IMPLICATIONS
    
    [ABC Ltd]══════════════════════════[DEF Ltd]
        ║                                   ║
        ║ (Holding)                         ║ (Holding)
        ║                                   ║
        ║       [XYZ Ltd]                    ║
        ║           ║                         ║
        ║           ║ (Subsidiary of both)    ║
        ║           ║                         ║
        ╚═══════════╬═════════════════════════╝
                    ↓
            Transactions between
            ABC Ltd and DEF Ltd?

Under Section 188 read with applicable accounting standards:

• XYZ Ltd becomes a related party of both ABC Ltd and DEF Ltd

• Transactions between ABC Ltd and DEF Ltd may require special scrutiny as they are related through their common subsidiary

• Disclosure requirements under Schedule V of the Listing Regulations may be triggered

3. Governance and Operational Risks

Dual holding structures introduce significant governance challenges:

4. Layer Restrictions

The proviso to Section 2(87) restricts the number of layers of subsidiaries, but importantly:

         HORIZONTAL vs. VERTICAL LAYERS
         
    [Holding Co. A]    [Holding Co. B]    [Holding Co. C]
           \                 |                 /
            \                |                /
             \               |               /
              \              |              /
               \             |             /
                ↓            ↓            ↓
                 [Subsidiary XYZ Ltd]
                         |
                         | (Layer 1)
                         ↓
                   [Sub-sub Co.]
                         |
                         | (Layer 2)
                         ↓
                    [Layer 3 Co.]
                         
    Layer Restrictions Apply VERTICALLY:
    • XYZ → Sub-sub → Layer 3: Subject to layer limits
    • ABC, DEF, GHI as HOLDING COMPANIES: Not subject to horizontal restrictions

Key Point: The proviso limits vertical layers (subsidiaries of subsidiaries) but does not restrict horizontal multiplicity (multiple holding companies at the same level).

IX. Substantive Control vs. Formal Control

Judicial Approach

Courts and regulators may apply substance-over-form principles to determine:

1. Who exercises real decision-making authority?

2. Whether contractual arrangements undermine apparent voting control?

3. Whether board control is genuinely independent or merely nominal?

Control Assessment Framework

The following diagram illustrates the multi-factor analysis that may be applied:

            SUBSTANTIVE CONTROL ASSESSMENT
                         
    Formal Tests                      Substantive Tests
    (Section 2(87))                   (Judicial/Regulatory)
         │                                    │
         ▼                                    ▼
    ┌─────────────┐                  ┌─────────────────┐
    │Voting Power │                  │Actual Decision- │
    │>50%?        │                  │making Authority?│
    └─────────────┘                  └─────────────────┘
           │                                    │
    ┌─────────────┐                  ┌─────────────────┐
    │Board Control│◄────────────────►│Contractual      │
    │Ability?     │                  │Arrangements?    │
    └─────────────┘                  └─────────────────┘
           │                                    │
    ┌─────────────┐                  ┌─────────────────┐
    │Indirect     │                  │De facto Control?│
    │Control?     │                  │                 │
    └─────────────┘                  └─────────────────┘
           │                                    │
           └──────────────┬─────────────────────┘
                          ▼
              ┌─────────────────────┐
              │ Ultimate Control    │
              │ Determination       │
              └─────────────────────┘

Regulatory Scrutiny

The Ministry of Corporate Affairs and other regulators may examine:

X. Conclusions and Recommendations

Principal Findings

Based on the foregoing analysis, the following conclusions emerge:

Summary Legal Position

A careful reading of Sections 2(46) and 2(87) of the Companies Act, 2013 reveals that subsidiary status may arise through either board control or voting power control. The two tests operate independently, and the Act does not mandate exclusive control by a single entity. Consequently, a company may legally become a subsidiary of more than one holding company where separate statutory limbs are satisfied by different entities. Such structures, though uncommon, are legally tenable and reflect the Act's expansive understanding of corporate control.

Recommendations for Stakeholders

For Companies Considering Dual Holding Structures:

1. Document Control Relationships Clearly: Maintain detailed records of how each holding company satisfies statutory criteria

2. Address Conflicts in Governing Documents: Shareholders' agreements should address potential conflicts between holding companies

3. Implement Robust Governance Mechanisms: Establish clear protocols for board appointments, decision-making, and conflict resolution

4. Plan for Consolidated Reporting: Prepare for potential consolidation by multiple holding companies

5. Monitor Regulatory Developments: Stay informed about MCA guidance on complex control structures

For Regulators and Policymakers:

1. Consider Clarifying Guidance: Issue circulars addressing dual holding scenarios

2. Evaluate Disclosure Requirements: Consider enhanced disclosures for companies with multiple holding companies

3. Monitor for Avoidance Structures: Remain vigilant against artificial arrangements designed to circumvent regulation

References

1. Companies Act, 2013 

2. Ministry of Corporate Affairs General Circular No. 20/2013

3. Indian Accounting Standard (Ind AS) 110 - Consolidated Financial Statements