In a move that would make it even tougher for companies to use the web of corporate structures to divert funds and circumvent regulations, the ministry of corporate affairs has mandated higher and more detailed disclosure norms for them.
Under a new set of rules to take effect from July 14, it would be mandatory for companies to furnish information on the number of subsidiaries under each layer, in addition to detailed information on each subsidiary and their corresponding holding company.
These norms would enable the Registrar of Companies to strictly monitor compliance with the layering restrictions notified in 2017, which stipulated that a company can’t have more than two layers of subsidiaries, subject to a few exemptions including for banking and insurance companies, and pubic-sector firms.
Under the new rules, the ministry has notified a revised form – CRL-1 – where more information on each subsidiary is required to be provided, including the type of registration, ownership structure, and corresponding holding company details.
“This enhanced reporting framework is a step towards greater transparency in corporate group structures. It is also expected to strengthen regulatory oversight, and ensure better compliance with the layering restrictions prescribed under the Companies Act, 2013,” said Sandeep Jhunjhunwala, partner at Nangia Andersen LLP. All companies having subsidiaries may be required to file fresh information in the event of change in the layer of subsidiaries, he added.
“In the previous form, the disclosure requirements were limited but the companies will now have to divulge more details, especially names of subsidiaries and percentage of shareholding at each level,” said Kalpit Khandelwal, partner at Aekom Legal.
The revised form has to be digitally signed by authorised signatories uch as director, CEO, CFO, manager, or company secretary, and must be endorsed by a board resolution authorising the filing. It has also been specified that a declaration attesting to the truthfulness, accuracy, and completeness of the information provided has to be made. Companies are warned against false statements or suppression of material information, and such practices would attract penalties under Sections 448 and 449 of the Companies Act, 2013.
The Companies (Restriction on number of layers) Rules, 2017, which were notified in September 2017, along with Section 2(87) of the Companies Act, prohibits companies to set up structures with more than two layers of subsidiaries, subject to the exemptions mentioned earlier. It means that a parent company can have a direct subsidiary and another step-down subsidiary, and no further layers. The rules are designed to prevent misuse of complex corporate structures for fund diversion and money laundering.
“The new rules will significantly reduce the chances of manipulation by companies in reporting their corporate structure,” said a senior corporate lawyer.
The government had in 2017 limited the “subsidiary layering” practice after a series of financial irregularities involving complex corporate structures came into light in high-profile cases such as IL&FS and DHFL. In IL&FS case, it was alleged that a complex web of subsidiaries and sub-subsidiaries were formed to divert funds.
Taking cue from the MCA’s 2017 layering rules, the Reserve Bank of India later linked ODI-FDI structures (round tripping transactions) with them by amending the the Foreign Exchange Management (Overseas Investment) Rules, 2022. These rules legalised round-tripping by recognising that ODI-FDI structures are legitimate, subject to compliance with the two-layer restriction.
Experts said that even though the revised form will be applicable for both listed and unlisted firms, the listed firms already disclose subsidiary details in their annual reports. In addition, the Regulation 30 of SEBI LODR (Listing Obligations and Disclosure Requirements) mandates listed companies to disclose events or information that are deemed “material” by its board of directors.