Companies Act Section 2(87) Subsidiary Company Or Subsidiary

Subsidiary Company or Subsidiary Section 2 (87)

A Subsidiary Company, as per the Companies Act, 2013, refers to a company in which the holding company:  

1. Controls the composition of the Board of Directors; or  

2. Exercises control over more than half of the total voting power either on its own or together with one or more of its subsidiary companies.

Key Aspects:

1. Control Criterion: 

Control is the determining factor in defining a Subsidiary. 

It can be exercised through ownership of shares, management rights, or voting power.

2. Types of Control:

Direct Control: When the holding company owns more than 50% of the shares or voting power in the subsidiary.

Indirect Control: When the holding company, along with other subsidiary companies, collectively holds more than 50% of the voting power in the subsidiary.

3. Legal and Financial Independence: 

While a subsidiary operates as a separate legal entity, it remains financially dependent on the holding company’s decisions and strategic direction.

4. Financial Reporting: 

The financial statements of a subsidiary are consolidated with those of the holding company for reporting purposes, providing a comprehensive view of the group's financial performance and position.

Importance:

Corporate Structure: 

Subsidiaries are crucial for corporate structuring, allowing companies to diversify operations, manage risks, and expand business activities.  

Risk Management: 

Holding companies can use subsidiaries to isolate and manage risks associated with specific business ventures or geographical locations.  

Financial Consolidation: 

Consolidation of subsidiary financials provides transparency and accountability to shareholders and investors about the overall performance of the group.