A new Companies Act is proposed to replace the existing Companies Act of 1956. The new legislation aims to simplify and be more responsive to current situations, but some aspects of the concept paper are unlikely to be conducive to corporate and commercial expectations.
The Bill bars Indian companies from having a multi-layered structure of subsidiaries. No Indian company that is a subsidiary of another company (either Indian or offshore) can become a holding company of another Indian company. Corporate groups will not be allowed a pyramid structure of holding companies and subsidiaries. However, an Indian company or an offshore company may have an Indian subsidiary, which in turn may have an offshore subsidiary.
Because an Indian subsidiary would be prohibited from acquiring another Indian company, the multi-national corporations' common route of acquiring Indian companies through an existing Indian subsidiary would not be possible. These corporations would have to settle their acquisitions by amalgamating their Indian subsidiaries with the target company through a cumbersome court process.
The upside logic is that an offshore company must acquire the target company through fresh direct investment into India and not from the resources of its Indian subsidiary. This would impact the indirect acquisition of Indian target companies, which has been on the rise over the past five years, due to global mergers and acquisitions.
This restriction on structuring has little purpose. Effective good corporate governance could be achieved by making the directors of the holding company accountable for the operations of the subsidiaries.