These are what that seem to be the sunny days for companies. The department has issued yet another circular vide General Circular No. 24/ 2014, dated 25.06.2014. By way of this Circular, MCA clarifies on shares held in Fiduciary Capacity in associate companies. The provisions of the Companies Act, 2013 pertaining to the relationship between the subsidiary and the holding companies had undergone few pertinent changes in the form of introduction of the concept of Consolidated Financial Statements. 

What does Companies Act, 2013 say?

The definition of subsidiary Company as per Companies Act, 2013, did not expressly exclude shares held under fiduciary capacity. The Circular 20/2013 dated 27/12/2013, expressly provided that the shares held in fiduciary capacity will be excluded while determining whether a company is subsidiary or not.

Section 129 (3) of the Companies Act, 2013 pertaining to preparation of Financial statements is reproduced below:

“(3) Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2): 

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Explanation.—For the purposes of this sub-section, the word “subsidiary” shall include associate company and joint venture” 

What did Companies Act, 1956 say?

Under the Companies Act, 1956 (Act, 1956) shares or powers held in fiduciary capacity were specifically excluded from the purview of holding subsidiary relationships under section 4(3). The relevant extract of the Section is reproduced below:

“4. MEANING OF “HOLDING COMPANY” AND “SUBSIDIARY

(1) For the purposes of this Act, a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another if,

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(3) In determining whether one company is a subsidiary of another –

(a) any shares held or power exercisable by that other company in a fiduciary capacity shall be treated as not held or exercisable by it ;”

What is Fiduciary Relationship?

Fiduciary relationship is created when one holds the duty to another of trust, confidence and good faith. In such a situation, it is rationally incorrect to assume that the entity holding shares has the power to exercise influence as well. Instead in such cases, the shareholding must be counted as the shareholding of the beneficiary and not the shareholding of the trustee.

As per this recent circular, the definition of associate is reproduced as below:

(6) “associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty per cent. of total share capital, or of business decisions under an agreement;

Hence, we can safely conclude that hares held in fiduciary capacity shall not be counted for the purpose of determining the relationship of ‘associate company’.

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