Today in this article, we are going to discuss about section 186(1) of the Companies Act, 2013 only which puts restrictions to the Company to make investment through the not more than two layers of investment companies.
This Sub-section (1) of Section 186 was proposed to be omitted by the Companies (Amendment) Bill, 2016 as introduced in Lok Sabha.
However, as per the Companies (Amendment) Bill, 2016 which was passed in Lok Sabha, No such omission was there. Thereby the sub-section remaining intact.
Now the Sub-section says that:
Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies.
As per Explanation to section 2(87) of the Companies Act, 2013:
“Layer” in relation to a holding company means its subsidiary or subsidiaries;
As per explanation to Section 186 of the Companies Act, 2013:
The expression “investment company” means a company whose principal business is the acquisition of shares, debentures or other securities;
Let us understand the aforesaid provision through an example:
A Company ‘A’ can make investment in Company ‘B’ which is an investment Company and B Can further Make investment in Company ‘C’ which is again an Investment Company. Now Company ‘C’ cannot make further investment in any other Investment Company since Section 186(1) puts restrictions to the Company to make investment through not more than two layers of investment companies.
But if that other Company is not an investment Company but is an operating Company then C can further make investment in that Operating Company since Section 186(1) restriction is only for investment Companies.
However with the notification of the new Rules to Section 2(87) which restricts the Holding Company to have only two layers of subsidiaries (one layer of WOS is excluded), this layering restriction is imposed to both the Investment Companies and Non-Investment Companies. For details of these Rules Click here.
Proviso to section 186(1) states the exemption to the provisions of this sub-section. It says that:
Provided that the provisions of this sub-section shall not affect,—
(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.
Article by CS Harshita Kant (Owner at Stellar Law Classes)
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Disclaimer: The entire content of this document have been prepared as per the information existing at the time of the preparation. The blog is based on author’s personal views & interpretations and the author does not take any responsibility of the same.