India: Layering Rules: An Overzealous Regulation?


The Companies Act, 2013 (Act) sought to regulate the number of layers of subsidiaries used by companies vide sections 2(87) and 186(1). On 20 September 2017, the Central Government has notified proviso to Section 2(87) of the Act and the Companies (Restriction on number of layers) Rules, 2017 (Layering Rules). Prior to the notification of the Layering Rules, the restriction on number of subsidiaries specified in Section 2(87) was not in force. The limitation on use of investment companies under Section 186(1) has been applicable since 1 April 2014.

Ever since, stakeholders have made requests to re-look restricting the number of subsidiaries to avoid unnecessary regulation on business activities. The Companies Law Committee (which was mandated to suggest amendments to the Act) had recommended the removal of the layering restrictions specified in proviso to Section 2(87) and Section 186(1) in its report issued in February 2016. Having said that, in sync with the drive of the Government against shell companies, the recommendations of the Companies Law Committee were not accepted. On 28 June 2017, the Ministry of Corporate Affairs issued a public notice seeking comments, with a draft of the rules seeking to notify the layering restrictions. The said notice has finally culminated into the Layering Rules.

De-coding the law

Section 186(1) of the Act, states that a company cannot make investments through more than two layers of investment companies (ie, a company whose principal business is the acquisition of shares, debentures or other securities).

In addition to this, the Layering Rules stipulate as follows:

  • Applicability: Other than exempted companies (as specified below), all companies (including both operating and investment companies) are not allowed to have more than two layers of subsidiaries. In this regard, similar to proviso to Section 186(1), the Layering Rules do not restrict a company from having investments of more than two layers outside India if so permitted under the laws of that country.
  • Filing of return: The restriction on number of layers of subsidiaries will only apply prospectively and companies, presently, with more than two layers of subsidiaries have been grandfathered. These companies are required to file a return in a specified form (Form CRL-1) within a period of 150 days from the notification of the Layering Rules, i.e., by 17 February 2018. It has been clarified that additional layers cannot be added post notification of the Layering Rules and if a company reduces a layer of a subsidiary, it cannot again increase its layer of subsidiaries to more than two layers.
  • Counting of layers: The intention of the Layering Rules appears to exclude layers comprising of wholly-owned subsidiaries. Accordingly, investments through a wholly-owned subsidiary(ies) would be excluded while computing the limitation of two layers.
  • Exempted companies: (i) a banking company, (ii) a systemically important non-banking financial companies, (iii) an insurance company and (iv) a government company, are permitted to have more than two layers of subsidiaries under the Layering Rules.
  • Other exceptions: Interestingly, the Layering Rules clearly state that they shall not be in derogation of exceptions stated in proviso to Section 186(1). Accordingly, in addition to offshore investments with multiple layers, an investment subsidiary for the purpose of meeting requirements under any law would also not be restricted under the Layering Rules.
  • Penalties: For failure to comply with the requirements, every officer who is in default shall be punishable with a fine which may extend to INR 10,000 and for continuing contravention, further fine of up to INR 1,000 per day is stipulated. Further, for incorrect information filed in Form CRL-1, the concerned director may face penalties for fraud under the Act.

Assessing way forward

The Layering Rules are likely to cause changes in the way companies carry out business in India. Although the government has tried to minimize the impact on existing businesses through prospective application of and exemptions under the Layering Rules, the impact on doing business going forward needs to be considered closely.

Prima facie, it appears that the Layering Rules and the original prohibition under section 186(1) operate in different compartments. Unlike Section 186(1) which imposes a layer restriction only on investment companies, the Layering Rules apply to all companies alike – the two-layer restriction would also apply to genuine operating companies. Effectively, under the Layering Rules, large conglomerates would be able to grow their businesses vertically, only up to two layers of subsidiaries.

Further, under Section 186(1) it is not clear if the rule of discounting a wholly-owned subsidiary as a layer would extend to layers with investment companies. The status of exempted companies under the Layering Rules in relation to the requirements of Section 186(1) would need to be assessed.

The Layering Restrictions have been introduced in line with the recent crackdown on shell companies to prevent money laundering activities. However, it appears to have created an additional compliance burden even on genuine operating companies. One hopes that the regulator, will come out with appropriate clarifications to avoid unnecessary hassles in doing business in India.

As an immediate next step, all companies with more than two layers of subsidiaries would be required to file Form CRL-1, by 17 February 2018. The disclosures required in this form are fairly robust - the basic details of all companies and the percentage owned in each company, up to the last layer are required to be disclosed. Large Indian conglomerates would need to closely examine their corporate structures in light of the Layering Rules. The way the rules presently read - every company within a group with more than two layers of subsidiaries would be required to make a filing, even though it leads to multiplicity of disclosures by several companies within the same group and the same corporate lineage.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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