Also, companies would be required to spell out the movement of funds, if any, from one subsidiary to the other. This would give investors and government agencies a clear picture of the overall financial health of such group firms.
Layered subsidiaries refer to subsidiaries of subsidiaries, which makes it practically impossible for the government and its inspection agencies to detect the source of funds. As per the extant Companies Act there is no restriction on the number of such layered subsidiaries making it easier for companies to route funds from tax havens such as Mauritius and Cayman Islands. Often investors are not in the loop as to how many layered subsidiaries companies have. As per current practice, companies often list out their various subsidiaries, but investors would not know how many of those are layered subsidiaries, a government source said.
Legal experts and industry captains welcomed the governments move. President of CII B Muthuraman told FE that the ministrys step would create transparency in the operations of companies and benefit all stakeholders. Expressing a similar view, company law expert Pavan K Vijay who is also managing director of Corporate Professionals, said that the move would be the surest way to ensure transparency in operations from the promoter firm down to its remotest subsidiary. It is a very smart move. Companies cant argue with this since all that the government is asking for is transparency. It would restrict rampant intra-group activities, he said.
The MCA is also hoping that once the eXtensible Business Reporting Language (XBRL) comes into effect keeping a tab on such layered subsidiaries would also become easier. XBRL is a company software language that reads and analyses company data in a systematic way.
Earlier this month , the MCA issued a circular mandating companies to start reporting their balance sheets and profit and loss account in this format by September 30 this year. Once companies start reporting in XBRL format it would easily analayse the number of layered subsidiaries. It would be a good step, the government source said.
The issue of layered subsidiaries first came to light when the Rs 8,000-crore Satyam scam erupted in January 2009. Its tainted chairman B Ramalinga Raju set up a multitude of layered subsidiaries to route funds from overseas destinations. The Enforcement Directorate (ED) and the Serious Fraud Investigations Office (SFIO) are still trying to locate the source of funds. Apart from that investigative agencies are currently investigating how some telecom firms had raised funds through their chain of subsidiaries overseas and routed them back to the country to buy spectrum. The issue of a multiple chain of subsidiaries is very worrying. A system is required where investors would know exactly the number of such layered subsidiaries, the government source added.
The parliamentary standing committee on finance headed by Yashwat Sinha had earlier proposed that the number of such layered subsidiaries should be capped. However, the MCA did not accept the recommendation fearing that it could impinge upon companies freedom to structure their operations for financial purposes. The ministry is trying to find a common ground between the PSCs proposal and industrys concerns.
MCAs solution of a family tree format for listing out layered subsidiaries comes at the backdrop of the North Block working on set of measures to curb the menace of black money. Last week the government set up a panel headed by chairman of Central Board of Direct Taxes Sudhir Chandra to examine ways to tighten regulations surrounding black money. The panel would submit its recommendations within six months. Issues of black money laundering, beneficial ownership and money laundering are all inter-connected, the source said.