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TABLE OF CONTENTS
Acknowledgement .................................................................................................03
Introduction ............................................................................................................04
Objectives ...............................................................................................................05
Research Methodology ...........................................................................................06
Holding and Subsidiary Companies ...07
Control of composition of Board of Directors ....08
More than half in nominal value of equity share capital .09
Subsidiary of Multinational .10
Liability for Insolvent Subsidiary 11
Subsidiary Establishments ...12
Conclusion 13
Bibliography .14
ACKNOWLEGEMENT
At the outset, I would like to express my heartfelt gratitude and thank my teacher, _____ for
putting his trust in me and giving me a project topic such as this and for having the faith in
me to deliver.
My gratitude also goes out to the staff and administration of HNLU for the infrastructure in
the form of our library and IT Lab that was a source of great help for the completion of this
project.
INTRODUCTION
A company qualifies as a holding company when it has the power to control the
composition of the board of directors of another company or holds a majority of its shares.
It has been seen that a subsidiary company, even a 100 per cent subsidiary, is a separate
legal entity and its creator and controller is not to be held liable for its acts merely because
he is the creator and controller. Nor is the subsidiary to be held as an asset of the holding
company. The decision of the Delhi High Court in Freewheels (India) Ltd v Dr Veda
Mitra1 is an illustration in point: A fifty-two per cent subsidiary company proposed to issue
further capital which, following Section 81, was offered to the existing holders of equity
shares. The holding company requested the court that its subsidiary should be restrained
from going ahead with the issue as it would deprive its parent of their controlling interest
and would also depreciate the value of its shares. KAPUR J refused to issue the injunction
prayed for and said: Here the parent holds only a nominal majority in the share capital of
the subsidiary. With the meager majority alone I am not prepared to hold, even if it were
possible to do so for such a purpose, that the subsidiary company has lost its identity as a
separate legal entity.2A holding company was not allowed to interfere in the disinvestment
decision of a sub-subsidiary company (subsidiary of subsidiary) even if one of the effects
of the disinvestment could have been the loss of position as a holding company.3
1 AIR 1969 Del 258: [1969] 1 Comp LJ 138; Nandh Products Promoters (P) Ltd v District Forest
Officer, (2005) 123 Comp Cas 367 Mad, the dues of the company to the Forest
Department were not allowed to be adjusted against the Departments dues to a firm
only because some of the partners of the firm were also officers of the company.
2 See also State of U.P. v Renusagar Power Co, 1989 Supp (2) SCC 312: AIR 1989 SC 1737: (1991) 70 Comp
Cas 127, a subsidiary company was created for the purpose of generating and supplying power only to its parent
company and the two were treated as one for excise purposes. PNB v Bareja Knipping Fasteners Ltd, (2001)
103 Comp Cas 958 P&H, companies in a group are nevertheless distinct juristic personalities with different sets
of shareholders. A decree against one company cannot be executed against another company even if they are
being managed by the same set of persons.
3 BDA Breweries v Cruickshonk & Co Ltd, (19%) 85 Comp Cas 325 Bom: (1997) 25 Corpt LA 275.
OBJECTIVES
RESEARCH METHODOLOGY
The researcher has followed the non doctrinal method for research design. The research is
based on both primary and secondary sources. Books from the universitys library have been
used. Computer from the computer laboratory of the university has been used for the purpose
of secondary research and is the main source of project.
Holding' and subsidiary' companies are relative terms. A company is a holding company of
another if the other is its subsidiary. According to section 4 of the Act, a company shall be
deemed to be a subsidiary of another, if and only if :
(a) that other company controls the composition of its board of directors; or
(b) the other company holds more than half in nominal value of its equity share capital
(where a company had preference shareholders, before commencement of the Act, enjoying
voting rights with that of equity shareholders, for the purpose of control, holding company
should enjoy more than half of the total voting power); In the event of a company
bankruptcy, preferred stock shareholders have a right to be paid company assets first.
Preference shares typically pay a fixed dividend, whereas common stocks do not. And
unlike common shareholders, preference share shareholders usually do not have voting
rights.
Definition of 'Common Shareholder'
An individual, business or institution that holds common shares in a company, giving the
holder an ownership stake in the company. This will also give the holder the right to vote on
corporate issues such as board elections and corporate policy, along with the right to any
common dividend payments. In the case of bankruptcy, common shareholders are typically
the last to receive anything from liquidation. First, companies pay out all debtholders. If
there is anything remaining after that, then preferred shareholders are paid, followed by
common shareholders.
Shareholders' equity represents the amount by which a company is financed through
common and preferred shares.
However, shares held or power exercisable by any person as a nominee of that other
company shall be treated as held or exercisable by the said company. Thus, the shares held
or power exercisable by a subsidiary shall be treated as 'held' or 'exercisable' by the holding
company. For example in case 'B' and C the subsidiaries of company 'A', hold together
more than half of the equity share capital of company 'D', then 'D' shall be deemed to be a
subsidiary of 'A' although it has not made any direct investment nor 'B' or 'C' singly hold
more than 50% shares, in the company 'D.
That result did not follow in reference to the wholly owned foreign subsidiaries of a
multinational corporation. A group of oil companies in the United Kingdom owned and
controlled certain oil companies in Rhodesia. The English parent company was called upon
to produce certain documents relating to a pipeline contract which were in the possession
of its subsidiaries. The court rules empowered the court to require the disclosure of all
documents in the possession, custody or power of a party. The question was whether the
documents in the possession of a foreign subsidiary could be deemed to be in the
possession of the parent. The court of appeal answered the question in the negative. 12
Lord DENNING laid emphasis upon the position of the company in the setting of local
laws applicable to it and the degree of freedom from interference by the parent:
These South African and Rhodesian companies were very much self-controlled.
Their directors were local directorsrunning their own show, operating it with
comparatively little interference from London. They were subject, of course, to all local
laws and ordinances. That seems to be a different position from the concept of a oneman company, or a 100 per cent company, which is operating in this country with the
self-same directors, or a 100 per cent parent with various subsidiaries. It is important to
realise that subsidiaries of multinational companies have a great deal of autonomy in
the countries concerned.
A learned commentator explains in the following words the value of this decision to the
international community:13
The importance of this case lies in the fact that for the first time an English
court has held that, if a multinational finds itself in a conflict between the interest
of the home and the host country, the interests of the host country will prevail.
This rule which was also adopted in France in the Fruehauf case14 should now be
regarded as an established principle of international law.
13 Clive M. Schmitthoff, Lifting the Corporate Veil, 1980 JBL 158. Tecnion Investments Ltd, Re, 1985 BCLC
434 CA, a company would be the alter ego of an individual so as to regard his companys possession as his
possession if the company was under his unfettered control. Merely that he is a dominant figure in running the
companys business would not be enough.
Subsidiary Establishments
There is also the power in the Central Government as conferred by Section 8 to declare that
any establishment of a company carrying on the same or substantially the same activity as
that carried on by the head office of the company, shall not be treated as a branch office of the
company for any of the purposes of the Act. Where proceedings were initiated against a
company at the place of its branch office, it was held that notwithstanding the Explanation to
Section 20 of the Civil Procedure Code which confers jurisdiction on the courts at the place
of the companys branch office, it is also necessary that the cause of action should have arisen
there.17 A charge of interference in management of the complainants business could be
15 Southard & Co Ltd, Re, [1979] 1 WLR 1198, 1208, TEMPLETON LJ, noted 1908 JBL 160.
16 For comments upon the decision see, Clive M. Schmitthoff, The Wholly Owned and Controlled Subsidiary,
1979 JBL 218, 226, where it is suggested that the Companies Act, should provide for such liability.
alleged only against the head office of the company and not against the branch office unless it
can be shown that the branch office was used for the purpose of committing the wrong.18
CONCLUSION
A look at the path we have traversed indicates that what started as direct or indirect control,
be it shareholding or otherwise has inevitably resulted in having to rope in Subsidiary
Companies being increasingly set up by foreign companies. That these companies should, no
doubt, be brought within the regulatory provisions as applicable to Indian companies but the
matrix of Holding-Subsidiary Company relationship has become more complex and
complicated. This appears to be inevitable in the context of globalisation of Indian economy
and increasing flow of foreign exchange into our country through Foreign Direct Investment
(FDI) in joint ventures(A business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task. This task can be a new
project or any other business activity. In a joint venture (JV), each of the participants is
responsible for profits, losses and costs associated with it) or Subsidiary companies.
18 Bhankerpur Simbhaoli Beverages (P) Ltd v Sarabhjit Singh, (1996) 86 Comp Cas 842 P&H. See also B.B.
Verma v National Projects Construction Corpn Ltd, [1999] 4 Comp LJ 274 Del, the companys project site was
regarded as the place where the company was carrying on its business and coincidentally the company also had
its subordinate office there.
13
Bibliography
14