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Cross Holding

rahul saraf (Chartered accountants) (89 Points)

24 December 2009

A Private Limited Co. Say "X" is 100% Subsidiary Of Private Limited Company Say "A" . Now there is no activity in Company "X"

It wants to invest all its Capital in Comany "A" . Should Co "X" give unsecured loan to "A" OR Should Co."X" Purchase shares of Co "A".

If X gives unsecured loan to A it will come under deemed dividend u/s 2(22)e under ITax Act. If X purchases shares of A there will be situation of CROSS HOLDING as per comanies act is there any provisions or rules applicable for Private Limited company.

Please enlighten me on this is urgent.

Regards

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10 Replies

rahul saraf (Chartered accountants) (89 Points)
Replied 28 December 2009

Hello fellow members this question is urgent to me I request the fellow members in the forum to enlighnten me in this regard thanks?

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Amir (Learner) (4016 Points)
Replied 28 December 2009

As u mentioned that there is no activity in Co X that means that Co. X is not having any Reserves, and my friend sec 2(22)(e) gets attracted ONLY TO THE EXTENT THE COMPANY (X in ur cae) IS HAVING RESERVES..

So question of 2(22)(e) does not arise.

Your intention is not clear...Pls clarify what you want to achieve by Making Co X buying all the shares in Co A..Then Why Co A has made a subsidary Co.(since X is not carrying on any business and further co A itself requires Funds)

1 Like

rahul saraf (Chartered accountants) (89 Points)
Replied 28 December 2009

Thanks Mr. Amir. Now X has no activity earlier it had earlier ,there are some reserve and surplus. Co A Holding is short of funds for its activities so need funds from its subsidiary . So my question is whether it should give loan or should invest in Holding Company by way of Investments in share(WILL LEAD TO CROSS HOLDING)? How the fund should be dumped into Holding Comany?

Amir (Learner) (4016 Points)
Replied 28 December 2009

rahul saraf (Chartered accountants) (89 Points)
Replied 28 December 2009

CO X (SUBSIDIARY)share holder Co A.thanks

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rahul saraf (Chartered accountants) (89 Points)
Replied 28 December 2009

CO X (SUBSIDIARY)share holder Co A.CO A (Holding)share holders say a,b,c,d,e,etc.Now A need back all the funds from X how can X dump it back to A.Can X Give Loan to A (I know sec. 2(22) e will be attracted ) OR Can X invest in A by way of investment in shares, both will become holding and subsidiary to each other(Cross Holding) is this permissible under comanies act.Its urgent thanks

Amir (Learner) (4016 Points)
Replied 28 December 2009

I think at that point i simply got confused you were rite that if Subsiary Co gives loan to Holding Co then 2(22)(e) will be attracted..

Secondly, practically I have not seen or heard that a Subsidary Co acquires Shares in Holding Co...However I don't think there is any restriction in the Companies Act as long as Subsidary Co Holds less than or equal to 50% of Share capital of Holding Company..The thing you are talking that Both will become Subsidary/ Holding Co of each other is practically impossible..

Shikha Sharma (Chartered Accountant) (311 Points)
Replied 29 December 2009

Sec 42(1) of the Companies Act lists out exceptions where a Subsidiary Company can hold shares in Holding Company, and it lists out only 2 exceptions ie: A subsidiary company can hold shares in the holding company if it acquires such shares before it became a subsidiary or before the act came into force..

Accordingly, I think that a subsidiary company cannot acquire shares in its holding company, as it is possible only in the above 2 cases.

1 Like

Amir (Learner) (4016 Points)
Replied 30 December 2009

Hi Rahul, I have confirmed that Shikha is rite..

JIJI MON K.V. (PRACTICE) (25 Points)
Replied 08 March 2010

There are 4 private limited companies and all the companies have common directors. Now the promoters wanted to create a holding company to control all the four. How to go about it