CA Intermediate · Corporate and Other Laws · Preliminary
Kavya Textiles Ltd is a listed company. Its promoters, Mr Rao and his family, hold 38% of the voting power, and no other single shareholder holds more than 5%. Mr Rao claims that the company is a 'subsidiary' of Rao Holdings Pvt Ltd because Rao Holdings Pvt Ltd nominates 3 of the 7 directors on the board of Kavya Textiles Ltd. Rao Holdings holds only 20% of the voting power in Kavya Textiles Ltd. Is Kavya Textiles Ltd a subsidiary of Rao Holdings Pvt Ltd under the Companies Act, 2013?
Kavya Textiles Ltd is not a subsidiary of Rao Holdings Pvt Ltd. Subsidiary status requires control over the composition of the board, meaning power to appoint a majority of directors, or control of more than half of the voting power. Nominating 3 of 7 directors and holding 20% voting power satisfy neither test.
- AYes, because Rao Holdings controls more than 25% of the total voting power
- BYes, because it appoints 3 directors, which is a significant number
- CNo, because a holding company must control more than half of the total voting power or control the composition of the board, and appointing 3 of 7 directors is not control of the board compositionCorrect
- DNo, because a listed company can never be a subsidiary of a private company
Explanation
A company is a subsidiary if another company controls the composition of its board or exercises or controls more than half of the total voting power. Control of board composition means the power to appoint or remove a majority of the directors. Appointing 3 of 7 is a minority, and 20% is below 50% voting power. The 25% threshold relates to associate company or other concepts and is not the test for subsidiary status.
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