Sunday, June 9, 2024

Navigating Corporate Hierarchy: Deciphering the Companies (Restriction on Number of Layers) Rules, 2017

"In the world of corporate governance, clarity breeds compliance."


Corporate governance thrives on transparency and adherence to regulatory frameworks. The Companies (Restriction on Number of Layers) Rules, 2017, stand as a testament to this ethos. Enacted by the Ministry of Corporate Affairs, these rules introduce vital limitations, particularly focusing on the restriction of subsidiary layers within holding companies.

Understanding the Rules:

Implemented on September 20, 2017, these rules establish stringent guidelines for specific entities like Banking Companies, Non-banking Financial Companies, Insurance Companies, and Government Companies. They are bound by a maximum cap of two layers of subsidiaries, emphasizing the need for streamlined corporate structures.

Exceptions and International Acquisitions:

The rules provide exceptions for companies engaging in acquisitions beyond national borders. Such entities have the leeway to surpass the two-layer threshold, provided they adhere to the legal framework of the respective foreign jurisdictions. Additionally, wholly-owned subsidiaries are exempt from the layer count, facilitating clarity in regulatory compliance.

Subsidiaries and Consolidation:

The definition of subsidiaries extends to encompass not just traditional companies but also Limited Liability Partnerships (LLPs). However, despite this inclusive definition, LLPs are not mandatorily consolidated with the holding company's accounts, as stipulated under the Companies Act, 2013.

Interpretation of Layering Provisions:

While the rules remain silent on a precise definition of layering, it's inferred that they primarily target vertical layering. This approach aims to prevent unnecessary complexities in corporate structures, allowing for horizontal expansion and investment within specified regulatory bounds.

Table at a Glance:

Entity TypeMaximum Layers of Subsidiaries AllowedExceptions
Banking Companies2Acquisitions outside India may exceed two layers
Non-banking Financial Companies2Acquisitions outside India may exceed two layers
Insurance Companies2Acquisitions outside India may exceed two layers
Government Companies2Acquisitions outside India may exceed two layers


The Companies (Restriction on Number of Layers) Rules, 2017, serve as a cornerstone in promoting clarity and compliance within the corporate landscape. By imposing limitations on subsidiary layers and providing exceptions for international ventures, these rules enhance transparency and ensure adherence to regulatory standards. Understanding the nuances of subsidiary definitions, consolidation requirements, and layering provisions is crucial for companies to navigate the regulatory framework effectively and uphold corporate governance principles.