In view of reports of misuse of multiple layers of companies, where companies create shell companies for diversion of funds or money laundering, MCA vide its notification dated 20 September 2017 has notified the Companies (Restriction on the number of layers) Rules, 2017. Highlights:
- The restriction under sub-section (1) of section 186 on investment through not more than two layers of investment companies continue to apply and such investment companies are included in the count for the purposes of layer requirements.
- It allows a holding company to have up to two layers of subsidiaries (excluding one layer of wholly owned subsidiary).
- It does not restrict a holding company from acquiring a subsidiary incorporated in a country outside India if such subsidiary has subsidiaries in compliances with the laws of such country.
- The rule does not apply to Banking Company, Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India, Insurance Company, a Government company.
- Every company, which has number of layers of subsidiaries in excess of the layers shall file, with the Registrar of Companies (the RoC) a return in Form CRL-1 disclosing the details specified therein, within a period of one hundred and fifty days from the date of this notification and cannot add any additional layer of subsidiaries.
- If any company contravenes any provision of these rules the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.