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Cross Holding

RITU BAJAJ (COMPANY SECRETARY) (158 Points)

29 June 2010

My query is :-

There are 4 NBFC Cos. A, B, C & D. All are private limited Companies. Can Company B, C & D hold 30% shares each in Company A together their holding will become 90% in Company A. Similarly can company A,C & D hold 30% shares each in Company B, and company A, B & D hold 30% shares each in Company C and Company A, B & C hold 30% shares each in Company D. Is this type of structuring possible? What can be the possible consequences of such structuring? What is to be taken care of while doing such a structuring?

Please advice on the above.

Thanks in Advance.

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24 Replies

Yogesh Bhatt (Company Secretary) (475 Points)
Replied 29 June 2010

Dear Ritu.

As per Sec :

42. MEMBERSHIP OF HOLDING COMPANY.

(1) Except in the cases mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void.

So.

as per my opinion a subsidiary company cannot acquire shares in its holding company, as it is possible only in the below exception that :

(2) Nothing in this section shall apply -

(a) where the subsidiary is concerned as the legal representative of a deceased member of the holding company; or

(b) where the subsidiary is concerned as trustee, unless the holding company or a subsidiary thereof is beneficially interested under the trust and is not so interested only by way of security for the purposes of a transaction entered into by it in the ordinary course of a business which includes the lending of money.

(3) This section shall not prevent a subsidiary from continuing to be a member of its holdings company if it was a member thereof either at the commencement of this Act or before becoming a subsidiary of the holding company, but except in the cases referred to in sub-section (2), the subsidiary shall have no right to vote at meetings of the holding company or of any class of members thereof.

So. Cross Holding is not possible.

Yogesh Bhatt (Company Secretary) (475 Points)
Replied 29 June 2010

Pls also read this forum :

/forum/cross-holding-60770.asp?1=1&offset=1

Regards.

RITU BAJAJ (COMPANY SECRETARY) (158 Points)
Replied 29 June 2010

Dear Yogesh.

Thanks for your reply. But in my case none is the subsidiary or holding of other because each is holding only 30% shares of the other Company together its comprising 90% but individually they are holding only 30%. So, plz clarify your point further.

Yogesh Bhatt (Company Secretary) (475 Points)
Replied 29 June 2010

Dear Ritu

Pls go through definiton of Holding company and Subsidy Company i.e Sec 4.

It will help to u.

boz ther is not only one criteria to become holding and subsidy. another is also to " Control " should be consider.

RITU BAJAJ (COMPANY SECRETARY) (158 Points)
Replied 29 June 2010

Dear Yogesh,

I have already gone through Section 4, and there is no controlling aspects between these companies. So in that case is this structuring possible?

RITU BAJAJ (COMPANY SECRETARY) (158 Points)
Replied 29 June 2010

Dear Learned Members,

Plz guide me and give your valuable advice on my query

Regards,

Ritu.

Deepak Maharishi (CS) (514 Points)
Replied 29 June 2010

Dear Ritu,

As per my understanding, such type of cross holding is possible.

Section 42 bars membership of a subsidiary in its holding company. But in present case, none of the companies can not be said to be in holding-subsidiary relationship, as advised by your goodself.

Regards

Deepak Maharishi

(Guest)

It will be more like the Money Laundering, You are just routing the Money..

It is not permissible as per the Money Laundering Act

In this kind of arrangement, Directors route their money from one hand to another hand..

There is no logic in this kind of arrangement other than Money Laundering.. Because your arrangement is such in nature that First I have purchased shares of You and then You have purchased shares of Mine.. My Money will not go anywhere else; it will come into my hand but by routing…

Beware Money Laundering is the Criminal Offence..

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Ankur Shah (Practicing Company Secretary)

Ahmedabad, Gujarat - 380015

Mobile: +91-90330 03922, 94276 33901

E-Mail: ankur @ csankur.com

Website: www.csankur.com

Blog: www.csankur.blogspot.com

Ashish Gupta (CS & Legal) (114 Points)
Replied 30 June 2010

Money Laundering is a serious nature crime, and mostly involved some foreign hand.

A group of companies in India can have cross holding, in compliance with the applicable provisions of companies act like 42, 372A, 292 etc.

Entire picture has to been in actual spirit and every cross holding can not be termed as Money Laundering.

Rgds,

Ashish

RITU BAJAJ (COMPANY SECRETARY) (158 Points)
Replied 30 June 2010

Thanks to all for your guidance but the picture is still a bit confusing for me. Whether to move ahead with such a structuring or not?

Regards,

Ritu.

Ashish Gupta (CS & Legal) (114 Points)
Replied 30 June 2010

Technically, you can as many of group companies in India have this structure But u will need to comply with applicable provisions of Companies Act.

Rgds,

Ashish

RITU BAJAJ (COMPANY SECRETARY) (158 Points)
Replied 30 June 2010

Thanks a lot Ashish.

(Guest)

@ Ashish

It is not compulsory to have foreign hand for the Money Laundering..

It is also be to be considered as Money Laundering, If they are all Indians and transaction takes place in India..

Money Laundering simply means the Conversion of Black Money into white, And I am expert of that, That’s why I can say with the guarantee that Its Money Laundering..

The Reason behind this is very simple,

All the four Companies are the NBFC Companies, Though everybody known that Set-Up cost for the one NBFC is almost about 3.75 Lacs…

Why the Promoters are Incorporating 4 NBFC’s, though there is SAME OBJECTIVE and SAME SUBSCRIBERS..

Why they Choose NBFC only, and not any other types of Company???

Reason is simple that Only NBFC Can Purchase and sell the Securities without any Restriction…

@ Ritu

If you don’t want to get in trouble, then do not take this assignment..

Because ROC Person may approve, But when you go to the RBI, they will definitely catch you.. RBI People understand their responsibility…

The Objective of promoters is nothing but Conversion of Black Money into white money..

That’s all

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Ankur Shah (Practicing Company Secretary)