Section - 186(1) of companies act, 2013

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bhavya (Querist)
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18 April 2017 Dear All,

As Per Sec-186(1) Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies. Whether it means Company can invest through only two Investment subsidiaries ?? Or it means investment in subsidiary AND Subsidiary of subsidiary ??

Regards,
Bhavya Shah

CS Divesh Goyal

CS Divesh Goyal (Expert)
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19 April 2017 Hi Bhavya,

Its means investment in the Subsidiary or Subsidiary.

bhavya

bhavya (Querist)
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21 April 2017 Hi Divyesh,

Thanks a lot.

One More Question. For Example, Co. A (Holding Co), Co B (Subsidiary of Co. A) & Co C (Subsidiary of Co. B), Co D (Subsidiary of Co. C). Co B, Co. C & Co D are investment companies. Then Co. A can invest through only Co. B & Co. C & can not invest through Co. D. Am I Correct ??

Regards,
Bhavya Shah

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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23 July 2025 Yes, you're on the right track! Let's break down Section 186(1) of the Companies Act, 2013, and address your query step by step.

Understanding Section 186(1) – Investment through Layers of Companies:
Section 186(1) of the Companies Act, 2013, lays down a restriction on the number of layers of investment companies through which a company can make its investments. This is primarily to ensure transparency and prevent excessive layers of subsidiaries being used to hide investments or to bypass the legal restrictions.

Key provisions of Section 186(1):

Investment in subsidiary companies is allowed but there’s a restriction on the number of layers of such companies.

Investments can only be made through two layers of investment companies, unless otherwise prescribed by the Act or regulations.

What Does This Mean?
The provision essentially means that a company can only make investments through two layers of subsidiaries (whether directly or indirectly). This implies Company A can invest through its subsidiary (Co. B), and Co. B can, in turn, invest through its subsidiary Co. C, but Co. A cannot invest through a third layer, such as Co. D (which would be a subsidiary of Co. C).

To clarify your example:

Your Example:
Co. A (Holding Company) → Co. B (Subsidiary of Co. A) → Co. C (Subsidiary of Co. B) → Co. D (Subsidiary of Co. C)

Here, Co. A is the parent, Co. B is its subsidiary, Co. C is the subsidiary of Co. B, and Co. D is the subsidiary of Co. C.

Now, according to Section 186(1):

Co. A (Holding Co.) can invest through Co. B (its subsidiary).

Co. A can also invest through Co. C (if Co. B makes an investment through Co. C).

However, Co. A cannot invest through Co. D (since Co. D would be three layers down and Section 186(1) limits investments to only two layers of subsidiaries).

Interpretation of the Law:
Investment through two layers means:

A company can make an investment in its subsidiary (1st layer), and that subsidiary can, in turn, invest in another subsidiary (2nd layer).

But the law does not allow a company to make an investment through a third-layer subsidiary, such as Co. D in your example.

In Simple Terms:
Co. A can invest through Co. B (1st layer).

Co. A can invest through Co. C (2nd layer, because Co. C is the subsidiary of Co. B).

Co. A cannot invest through Co. D (3rd layer) because that would violate the rule in Section 186(1), which limits investments to two layers.

Summary:
Yes, you are correct! As per Section 186(1) of the Companies Act, 2013, the law restricts investments to only two layers of subsidiaries. Therefore, Co. A (the holding company) can invest through Co. B and Co. C (its 1st and 2nd-layer subsidiaries), but it cannot invest through Co. D (which would be a 3rd-layer subsidiary).

This restriction was introduced to curb the possibility of excessive layering of subsidiaries and to maintain transparency in corporate investments.

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