Can a Subsidiary own shares in a Parent Company?

According to MCA “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.”

Anyhow, in some cases subsidiary is allowed to hold shares of a parent company where the subsidiary acts as a legal representative of a deceased member of the holding company, or it has been appointed as a trustee

What is a Subsidiary?

When a company is controlled and managed by another company, the company that is being managed is termed as subsidiary while the controlling company can either be a parent company or holding company. If a parent company or holding company is the owner of 100% stocks of its subsidiary, then the subsidiary is known as a Wholly Owned Subsidiary.

A subsidiary is a separate legal entity established under the Act. Hence, it can acquire, buy, and alienate, property in its name and remains unaffected by the death or removal of any of its member

A subsidiary is allowed to have 100% Foreign Direct Investment (FDI) in many of the sectors through Company type business entity without taking any prior Government approval.

What is the difference between a holding company and subsidiary?

A company is a legal entity formed by an association of persons to carry on a commercial or an industrial Enterprise. It denotes a joint-stock enterprise, where a large number of people contributes to the capital. On the basis of control, companies can be divided into two parts

1) Holding company

A Holding Company is just like a Parent Company that holds a majority interest in several companies. A company owning one or more than one company as its sister company and holds more than 50% of its shares is known as a parent or holding company. A holding company has the power:

  • to make managerial decisions and
  • To influence or control the board of directors.
 

2) Subsidiary

Subsidiaries are controlled either partly or wholly by another company which can be a parent company or a holding company. According to sec 2(88)(i) a company in which the holding company controls the formation of the Board of Directors is called subsidiary.

Can a subsidiary hold shares in a holding company?

A holding Company can hold shares of the subsidiary, but a subsidiary can’t hold shares in its holding company. This restriction applies even if shares are held by a nominee of the subsidiary Company and not by the subsidiary company itself.

However, in certain cases subsidiary can be a member of its holding Company:-

  • When a subsidiary is a legal representative of a deceased member of the Holding Company.
  • When a subsidiary is appointed as the trustee for its parent or holding company.
  • Any investment held before the Company became a subsidiary can continue, but the subsidiary loses its voting rights in the company

According to Ministry of Corporate Affairs “The subsidiary company referred to in the preceding proviso shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in clause (a) or clause (b) of the said proviso.”


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