Subsidiary Company Section:
If you’ve ever looked at a business group structure and thought,
“Who owns this company?”
“How much control does the parent company have?”
“Does a subsidiary always mean a fully owned company?”
You’re asking exactly the right questions.
Under Indian company law, a subsidiary company is not just a business term—it’s a legal relationship, clearly defined under the Companies Act, 2013.
And that definition matters a lot.
For compliance.
For reporting.
For governance.
For tax and fund movement.
Which Section Defines a Subsidiary Company?
The concept of a subsidiary company comes from
👉 Section 2(87) of the Companies Act, 2013
So whenever someone says,
- “subsidiary company section”
- “subsidiary company as per Companies Act”
- “holding and subsidiary company section”
They are referring to Section 2(87).
What Is a Subsidiary Company? (Plain English)
In very simple terms:
A subsidiary company is a company controlled by another company, called the holding (or parent) company.
The key word here is control.
Ownership alone is not enough.
Control is what creates a subsidiary relationship.
Legal Definition Under Section 2(87)
Under Section 2(87) of the Companies Act, 2013, a company is a subsidiary if the holding company:
1. Controls the Composition of the Board
OR
2. Exercises or controls more than half of the total voting power
If either condition is satisfied, the company becomes a subsidiary company.
This definition applies:
- directly, or
- indirectly through another subsidiary
What Does “Control of Board” Mean in Real Life?
This is often misunderstood.
Control of board composition means:
- the holding company has the power to appoint or remove majority of directors
It does not require:
- 100% shareholding
Even with lower shareholding, if board control exists, a subsidiary relationship exists.
Voting Power: The 50% Rule
The second test is simpler.
If Company A:
- controls more than 50% voting power in Company B
Then:
- Company B is a subsidiary company
- Company A becomes the holding company
This includes:
- equity shares with voting rights
- indirect voting control through layers
Subsidiary Company Is a Separate Legal Entity
This is extremely important.
Even though it is controlled, a subsidiary:
- is a distinct legal entity
- has its own PAN, CIN, bank accounts
- enters into contracts independently
So legally:
Parent ≠ Subsidiary
But from a governance and reporting perspective, they are tightly linked.
Subsidiary vs Holding Company (Simple Comparison)
|
Aspect |
Holding Company |
Subsidiary Company |
|
Control |
Exercises control |
Is controlled |
|
Legal status |
Separate entity |
Separate entity |
|
Board influence |
Dominant |
Dependent |
|
Reporting |
Consolidates |
Gets consolidated |
Types of Subsidiary Companies
Based on structure, subsidiaries can be:
1. Wholly-Owned Subsidiary
- 100% shareholding held by parent
2. Partly-Owned Subsidiary
- Parent holds >50% but <100%
3. Step-Down Subsidiary
- Subsidiary of a subsidiary
All are covered under Section 2(87).
Why the Law Regulates Subsidiary Companies So Strictly
Because group structures can be misused.
Without regulation:
- funds can be diverted
- losses can be hidden
- liabilities can be parked
- minority shareholders can be harmed
That’s why the subsidiary company section also connects to:
- consolidation rules
- related party transactions
- limits on layers of subsidiaries
All aimed at better corporate governance.
Restriction on Layers of Subsidiaries
Under Companies Act rules:
- companies cannot create unlimited layers of subsidiaries
- this prevents complex structures used for fund diversion
This is directly linked to the subsidiary definition under Section 2(87).
Reporting & Compliance Impact of Being a Subsidiary
Once a company becomes a subsidiary, several compliances kick in:
- consolidated financial statements
- related party transaction disclosures
- audit scrutiny
- board and management disclosures
That’s why identifying subsidiary status correctly is critical.
Practical Example (Very Common)
Let’s take a simple example.
- Company A holds 60% voting power in Company B
- Company A appoints 3 out of 5 directors in Company B
Result:
- Company B is a subsidiary company
- Company A is the holding company
Even if Company B runs independently day-to-day, legally the relationship exists.
Subsidiary Company vs Associate Company (Quick Clarity)
People often confuse these two.
- Subsidiary → control (>50% voting power or board control)
- Associate → significant influence (usually 20–50%)
Control creates a subsidiary.
Influence creates associates.
Why Businesses Create Subsidiary Companies
In practice, subsidiaries are used for:
- risk segregation
- tax efficiency (within legal limits)
- geographic expansion
- regulatory separation
- investor structuring
But once created, law expects transparency and discipline.
Common Mistakes Companies Make
From real-world cases, these mistakes are frequent:
- assuming minority shareholding avoids subsidiary status
- ignoring board control aspect
- missing consolidation requirements
- improper related party approvals
- creating excessive layers
Most compliance issues start with misunderstanding Section 2(87).
Subsidiary Company Section in One Simple Line
If you remember only one thing, remember this:
Under Section 2(87) of the Companies Act, 2013, a subsidiary company is one that is controlled by another company through board control or majority voting power.
Quick Human-Friendly Summary
- Subsidiary company defined under Section 2(87)
- Control is the key factor
- Control can be through board or voting power
- A subsidiary is a separate legal entity
- Relationships affect reporting, audit, and governance
- Misunderstanding leads to compliance risks
Final Thoughts
A subsidiary company is not just “another company in the group.”
It is a legally recognized relationship that comes with:
- responsibilities
- disclosures
- restrictions
Understanding the subsidiary company section helps businesses:
- structure groups correctly
- avoid regulatory trouble
- maintain transparency
- build long-term credibility
If you’re planning a group structure, acquiring control in another company, or unsure whether a company qualifies as a subsidiary, getting clarity at the start saves a lot of pain later.
For expert guidance on holding subsidiary structures, compliance, and corporate governance under the Companies Act, visit callmyca.com.
