Escolar Documentos
Profissional Documentos
Cultura Documentos
2015-2016
CORPORATE LAW
[FINAL DRAFT]
ON
SUBMITTED BY-
NILESH YADAV
DR. R.M.L.N.L.U.
V SEMESTER
ROLL. NO- 80
CONTENTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
Introduction................................................................................................3
Holding Company vs. Subsidiary Company.........................................3 - 5
Subsidiary of Multinational...................................................................5 - 6
Liability for Insolvent Subsidiary.........................................................6 - 7
Subsidiary Establishments..........................................................................7
Holding Companies In Banking Groups...............................................7 - 8
Need for Holding Company Concept In Indian Banking Sector...............8
Conclusion.................................................................................................9
Bibliography.............................................................................................10
INTRODUCTION
Indian financial services sector has also been witnessing a rise in the emergence of financial
conglomerates. With the enlargement in the scope of the financial activities driven by the
need for diversification of business lines to control the enterprise-wide risk, some of the
players are also experimenting with structures hitherto unfamiliar in India. In this context, it
is considered timely to take a review of some of the conglomerate structures, assess their
suitability for the country given the prevailing legal, regulatory and accounting framework,
and highlight the regulatory and supervisory concerns for the Reserve Bank emanating from
such structures.
The subject of the type of corporate form embraced by financial groups in India for
undertaking a range of financial activities has gained significance from two distinctive, interrelated, perspectives. The first being efficient corporate management within the groups
meeting the growth and capital requirements of diverse entities. The second is the degree of
regulatory comfort with diverse models, especially about the concerns relating to contagion
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risks. Banks, at present, in India are organized under the Bank-Subsidiary Model (BSM) in
which the bank is the parent of all the subsidiaries of the group. The need and feasibility of
introducing a financial holding company model in the Indian context is necessitated from the
lessons drawn from the global financial crisis.
not an application of establishing a joint venture because a parent company and its subsidiary
are usually treated as one economic entity whereas a joint venture presupposes two
independent parties.4 A holding company cannot be made liable for dues of the subsidiary. In
this case the subsidiary owed certain sums to the Employees provident fund. The holding
company was held to be not liable in that respect, because it could not be supposed to be the
employer of workers of its subsidiary. The subsidiary was not a branch of the holding
company.
An English company created a foreign subsidiary for listing and tax advantages. The foreign
subsidiary was used for raising money on bonds through financial banks. The money thus
raised was loaned to the holding company. When the holding company became unable to pay
and was put under administration, the financial banks lodged their claims for the money
provided by them to the subsidiary and the subsidiary also lodged its claim for the same
money because it provided the loans for the holding company. The financial banks wanted the
claim of the subsidiary should be ignored because it was part of the same economic entity.
The court refused to do so and said that those two companies could not be regarded as one
and the same entity. All the companies in a group are separate legal entities and have to be so
regarded unless there are compelling circumstances. The court said that even if in certain
circumstances the court could go behind the veil to examine the real substance of the
transaction, it would still be looking at the legal substance and not the economic substance.
A subsidiary company may however lose its separate identity to a certain extent in two cases.
firstly, the legislature may brush aside the legal forms and require the companies in a group to
present a joint picture. Thus, Section 129 contain certain provisions "designed primarily to
give better information of the accounts and financial position of the group as a whole to the
creditors, shareholders and public."
Secondly, the court may, on the facts of a case, refuse to grant a subsidiary company an
independent status. "It may not be possible to put in a straight jacket of judicial definition as
to when he subsidiary company really be treated as a branch, or an agent, or a trustee of the
holding company. Circumstances such as profits of the subsidiary company being treated as
those of the parent company, the control and conduct of the business of the subsidiary
company resting completely in the nominees of the holding company ..may indicate that in
fact the subsidiary company is only a branch of the holding company."5 The result followed in
the case of a wholly of owned subsidiary whose parent company was allowed to recover
compensation when the land of its subsidiary on which it was carrying on business was
acquired. A change of majority shareholding between two companies associated with each
other being the subsidiaries of same company, did not have the effect of enabling the
statutory tenants of the company's flats to say the landlord had changed.6
SUBSIDIARY OF MULTINATONALThat result did not follow in reference to the wholly owned foreign subsidiaries of a
multinational corporation. A group of oil companies in the U.K owned and controlled certain
oil companies in Rhodesia. The English parent company was called upon to produce certain
documents relating to a pipeline contract which were in the possession of its subsidiaries. The
court rules empowered
"possession, custody or power" of a party. The question was whether the documents in the
possession of a foreign subsidiary could be deemed to be in the possession of the "parent".
The court of Appeal answered the question in the negative. 7 Lord Denning laid emphasis
upon the position of the company in the setting of local laws applicable to it and the degree of
freedom from interference by the parent.
"These South African and Rhodesian companies were very much self- controlled. Their
directors- running their own show, operating it with comparatively little interference from
London. They were subject, of course, to all local laws and ordinances. That seems to be
different position from the concept of a one- man company, or a 100 percent parent with
various subsidiaries. It is important to realize that subsidiaries of multinational companies
have a great deal of autonomy in the countries concerned."8
A learned commentator explains the value of the following words the value of this decision to
the international community.
"The importance of this case lies in the fact that for the first time an English court has held
that, if a multinational finds itself in a conflict between the interest of the home and the host
country, the interests of the host country will prevail. This rule which also adopted in France
in Fruehauf case9 should now be regulated as an establishment principle of international law."
Ina case before the House of lords,10 certain South African miners were employed by the local
subsidiary of a UK multinational company. They wished to sue the parent company for
compensation for industrial diseases contracted while working for the subsidiary. Their
Lordships found that there was likely to be a greater access to justice under the English law
because the english court was more appropriate forum for trial for a complex group action.
Their Lordships accordingly held in favour of the minors.
LIABILITY FOR INSOLVENT SUBSIDIARYThe question whether the parent company should be held liable for the debts of its insolvent
subsidiary involves a difficult problem. The difficulty has been indicated in a case which
exposes the legal inadequecy and which has been thus presented:11
English company law possesses some curious features, which may generate various results. A
parent company may spwan a number of subsidiary companies, all controlled directly or
indirectly by the shareholders of the parent company. If one of the subsidiary companies turns
out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the
parent company and the other subsidiary companies may prosper to the joy of the
shareholders without any liabilities for the debts of the insolvent subsidiary. It is not
surprising that when a subsidiary collapses, the unsecured creditors wish the finances of the
company and its relationships with other members of the group to be narrowly examined, to
ensure that no assets of the subsidiary company have leaked away; that no liabilities of the
9 Clive M Smitthoff "Multinationals in Court" (1972)
10 Lubbe v. Cape pl, (2000)
11 Southhard and co. ltd, re, (1979)
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subsidiary company ought to be laid at the door of the other members of the group and that
no indemnity from or right of action against any other company, or against any individual is
by some mischief overlooked12.
Transforming into a bank holding company makes it easier for the firm to raise capital than as
a traditional bank. The holding company can assume debt of shareholders on a tax-free basis,
borrow money, acquire other banks and non- bank entities more easily and issue stock with
greater regulatory ease. It also has a greater legal authority to conduct share repurchases of its
own stock.
CONCLUSION
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Financial conglomerates have evolved predominantly over the second half of the twentieth
century, and have become exceptionally significant in recent years. The major economic
benefits from conglomerates are the suitability to realize potential economies of scale and
scope and to gain synergies across complementary business lines. These economies result in
enhanced operational
efficiency and effectiveness owing to lesser costs, reduced prices, and enriched innovation in
products and services. Though the empirical benefits of such financial conglomerates are
uncertain, of late these organizations indeed have gained in prominence. Yet, there seems to
be a steady trend towards increasing conglomeration in several countries. Indian banking
sector is passing through another crucial phase in its evolution with the Reserve Bank of
India proposing the formation of holding companies in banking groups. RBI has suggested
that a financial holding company (FHC) or a banking holding company (BHC) will offer
considerable advantages as the banks will be much better protected against possible adverse
effects from the activities of their non-banking financial subsidiaries. In view of the above,
the financial holding company (FHC) model ought to be pursued as a preferred model for the
financial sector in India. In addition, the FHC model can be extended to all large financial
groups irrespective of whether they contain a bank or not. Therefore, there can be Banking
FHCs controlling a bank and Non-banking FHCs, which do not contain a bank in the group.
BIBLIOGRAPHY
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ONLINE SOURCES
http://www.icsi.edu/portals/32/Interpretation%20of%20Definitions.pdf
http://www.mca.gov.in/SearchableActs/Section2.htm
BOOKS
Taxmanns Master Guide to Companies act 2013 and Companies Rules, Taxmann
Publications Pvt. Ltd. , New Delhi, 2014.
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