Introduction
While subsidiaries are recognized as separate legal entities under Indian law, their operations are subject to various regulatory limitations and controls under the Companies Act, 2013. These limitations are designed to promote transparency, prevent misuse of corporate structures, protect stakeholder interests, and ensure good governance. Subsidiaries—whether wholly-owned, partially-owned, domestic, or foreign—must comply with these restrictions to avoid legal consequences, penalties, or regulatory action.

Restriction on Number of Layers
According to the Companies (Restriction on Number of Layers) Rules, 2017, a company is not allowed to have more than two layers of subsidiaries, barring certain exceptions. This limitation curbs complex and opaque multi-layered ownership structures used for tax evasion or concealment of control.

Limitations on Loans and Investments (Section 186)
Subsidiaries are restricted in providing loans, guarantees, securities, or acquiring securities of other companies beyond 60% of their paid-up share capital, free reserves, and securities premium account without prior approval of shareholders through a special resolution.

Restriction on Related Party Transactions (Section 188)
Subsidiaries engaging in related party transactions with their parent or group companies must ensure such transactions are conducted at arm’s length and have board or shareholder approval when applicable. This is to prevent undue influence or exploitation of resources.

Prohibition on Holding Shares in Holding Company (Section 19)
A subsidiary is prohibited from holding shares in its holding company. Any allotment or transfer of shares in the holding company to its subsidiary is void, except in cases where the subsidiary acts as a legal representative or trustee.

Audit Committee and Internal Audit Requirements
Certain subsidiaries are mandated to constitute an Audit Committee under Section 177 and appoint internal auditors under Section 138, based on thresholds related to turnover, capital, and borrowings. These provisions are designed to enforce internal checks and enhance financial transparency.

Secretarial Audit for Material Unlisted Subsidiaries
As per SEBI regulations and the Companies Act, unlisted material subsidiaries (those contributing significantly to group turnover or net worth) are required to undergo secretarial audits to ensure corporate compliance and governance.

Restrictions on Managerial Remuneration
The remuneration paid to directors and key managerial personnel in subsidiaries must comply with Sections 197 and 198. If the subsidiary is not profitable or exceeds limits, it must obtain shareholder or Central Government approval to make excess payments.

Filing and Reporting Compliance
Subsidiaries must file forms such as MGT-7, AOC-4, DIR-12, and others within prescribed timelines. Non-compliance can attract penalties on both the company and its officers. In addition, foreign-owned subsidiaries must comply with FEMA and RBI reporting norms.

Limitations on Inter-Corporate Loans and Guarantees
Subsidiaries cannot give inter-corporate loans or guarantees without adhering to prescribed limits under the Act. They must ensure board and, where applicable, shareholder approval for such transactions, especially if involving group entities.

Board Composition and Resident Director Requirement
As per Section 149(3), every subsidiary must have at least one director who is a resident of India. Additionally, restrictions apply to the total number of directorships and the appointment of independent directors where required under law.

Conclusion
The Companies Act, 2013 lays down specific limitations for subsidiaries to ensure sound governance, protect minority interests, and maintain financial discipline. These limitations cover areas such as ownership, transactions, financial controls, and reporting obligations. Compliance with these provisions is critical for the legal standing, reputation, and operational continuity of subsidiaries in India.

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