Subsidiary company not to hold shares in its holding company
📚 Law Minded summary
A subsidiary is not allowed to hold shares in its own holding company, and the holding company cannot allot or transfer shares to it. Any such allotment or transfer is void.
The reason is circularity: a parent funding itself through a company it already controls would let the same money count twice.
There are three narrow exceptions — where the subsidiary holds the shares as a legal representative of a dead member, where it holds them as a trustee, and where it was already a shareholder before it became a subsidiary. Even then it usually cannot vote those shares.
(1) No company shall, either by itself or through its nominees, hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void: Provided that nothing in this sub-section shall apply to a case—
(a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or (b) where the subsidiary company holds such shares as a trustee; or (c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company: Provided further that the subsidiary company referred to in the preceding proviso shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in clause (a) or clause (b) of the said proviso.
(2) The reference in this section to the shares of a holding company which is a company limited by guarantee or an unlimited company, not having a share capital, shall be construed as a reference to the interest of its members, whatever be the form of interest.
All sections in Chapter II — Incorporation of Company and Matters Incidental Thereto