What are the shareholding rights of a subsidiary company in its parent company?

Introduction

In this corporate world, a subsidiary company is referred to as an entity that is owned and controlled by its parent company. The parent companies hold more than 50% of stocks and also control the operations of a subsidiary company. However, when the 100 per cent shares of an Indian subsidiary are owned by another company, then such a company is known as a wholly owned subsidiary. According to the Companies Act, 2013 a subsidiary company has no right to hold or own the shares of its holding company. In this blog, we will discuss the shareholding rights of a subsidiary company in its holding company under section 19.

What is a subsidiary company?

A subsidiary company is a company that is controlled and managed by another company, and the controlling company can either be a parent company or a holding company. It is a separate legal entity governed under the Companies Act, 2013. However, it can acquire, alienate, and buy, property in its name and the existence of the company is unaffected by the death or removal of any members.

What is a parent company?

A Parent Company is a company that owns more than half of the Indian Subsidiary stocks and hence can control its operations. A parent company is a holding company that owns a significant number of voting shares of another company.

Shareholding rights of a subsidiary company in its parent company

According to the provision of section 19 of the Companies Act, 2013 a subsidiary company is prohibited from holding any shares in its parent company, either by itself or by its nominees. In other words, there are no shareholding rights of an Indian subsidiary in its holding company. The provision of the Act also prohibits a holding company from making any share allotment in its Indian subsidiary.

However, there are certain cases where the subsidiary company can hold shares in its parent company. The cases are as follows:

1. The subsidiary company can hold shares in its parent company as the legal representative of a deceased member of the holding company.
2. The Indian subsidiary can own shares of the parent company as a trustee.
3. When an Indian subsidiary is performing as a shareholder in its holding company before the establishment of that holding company.
4. The Indian subsidiary has the right to vote at the meeting of the holding company only in relation to the shares owned by such a company as a legal representative or as a trustee, as mentioned in (a) and (b).

What will be the impact if the subsidiary company can hold the shares in its parent company?

• There would be an overlapping of interest of the members of the holding company as well as the subsidiary company.
• The control of the holding company over its Indian subsidiary will be affected.
• For the parent company, the purpose of resolving critical issues and risk diversification will no longer exist.
• The holding company will not be able to enjoy various tax benefits.
• Dividend distribution will become a matter of conflict between the parent and subsidiary companies.

Final thoughts

There are no shareholding rights of a subsidiary company in its parent company as per the provision of section 19. Such allotment or transfer of shares is prohibited under Companies Law. However, there are few legal conditions where the subsidiary company can own a share of the holding company. In the case of the holding company being limited by guarantee or an unlimited company not having a share capital, then the shares will be converted in the interest of the members and then it will determine that such company is the holding company of the Indian Subsidiary.