Understanding concept of subsidiary
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This document discusses the concept of a subsidiary company under the Companies Act 2013. It defines total share capital to include both paid-up equity share capital and convertible preference share capital. For a company to be considered a subsidiary, the group company must exercise control over more than half of the total share capital, either on its own or together with other subsidiaries. Total share capital includes both equity and convertible preference shares. However, if a company issues redeemable preference shares rather than convertible shares, it would be considered an associate company rather than a subsidiary regardless of who holds the preference shares.
Understanding concept of subsidiary
- 1. UNDERSTANDING CONCEPT OF SUBSIDIARY CS A Rengarajan Practising Company Secretary Chennai Let us understand how we can determine whether a particular company is a subsidiary or not The definition of share as per sub clause 84 under Section 2 of the Companies Act, 2013 includes a share in the share capital of a company and includes stock The Share capital of a company includes both Equity and Share capital of the Company. Some companies have allotted Preference Shares and the same has been more that of Equity share capital For example, the Company paid up share capital is Rs.5 crore as per detail below Equity share capital Rs.2 crore ( out of which 40% is held by one of the group company) Preference Share capital Rs.3 crores ( entire shares held by the same group company where it is held Equity shares as mentioned above) As per the Companies Act, 1956, the above company is an Associate company not a subsidiary company Now Present Companies Act 2013, we need to understand the implication of the same. As per the definition of Subsidiary company provides that sub clause (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: The above sub clause denotes total share capital either at its own or together with one or more of its subsidiary companies. Share capital is both Equity and Preference Share capital Please note that here is small interpretation about determining subsidiary . The above sub clause, it has been mentioned as Total Share capital
- 2. We need to understand what is the total share capital and how to see its clarification There is no definition of the total share capital in the Companies Act, 2013 whereas it has mentioned in the Rules r) “Total Share Capital”, for the purposes of clau se (6) and clause (87) of section 2, means the aggregate of the – a) Paid-up equity share capital; and (b) Convertible preference share capital Going by the Total share capital definition, if the company is having the convertible preference share capital , then only it will have taken into consideration for Total share capital Now we need to see how the companies issued Preference Share Capital. Many companies issued Preference Share Capital as Redeemable Preference Share Capital which means they need to maintain as an Associate compamy irrespective of Preference shares issued to their Group company or holding company Those companies which have issued convertible Prefenice Share capital will come under the subsidiary status.