Companies Bill may exclude a cap on subsidiaries

Real estate and infrastructure firms can breathe easy, with the government likely to exclude a Companies Bill proposal to cap the number of step-down subsidiaries that a parent company's subsidiary can have.

If implemented, the measure would have choked the availability of funds for real estate firms and infrastructure companies, which typically have several layered subsidiaries.

Industry sources welcomed any move to retain the status quo.

They explained that real estate firms often float subsidiaries to procure land for developers to overcome land conversion and acquisition rules at the state level.

Project-specific subsidiaries also help in raising funds, they pointed out.

The ministry of corporate affairs, which had earlier proposed a ban on the practice of companies setting up step-down subsidiaries, to check the diversion of funds, may relax its stand while tabling a revised Companies Bill in the Budget session of Parliament.

The Bill may allow such subsidiaries in sectors like real estate and infrastructure, where the ministry has veered around to the view that they are a practical necessity.

A senior ministry official said that a cap on step-down subsidiaries, if at all, would be sector specific and may not include real estate or infrastructure companies.

Ashish Puravankara, MD, Puravankara Projects, said there is no logic in limiting the number of subsidiaries.

"Are we questioning a company's ability to take on projects and complete them? A cap would potentially restrict my growth strategy," he said.

Echoing that view, Raheja Developers vice president Manoj Goyal said real estate firms need project-specific subsidiaries to overcome ceilings on land acquisition.

Also, after the tightening of banks' provisioning norms by Reserve Bank of India, developers rely on foreign direct investment, private equity and other sources for funds.

Since there is three-year lock-in for equity funds from abroad, investors prefer project-specific funding, Goyal said.

Similarly, infrastructure firms say special purpose vehicles are set up for each major project today and it is impossible to function without step-down subsidiaries.

"The relaxation is absolutely essential. Infrastructure companies are not like manufacturing. For legal or contractual reasons, we float different SPVs or subsidiaries.

"NHAI, the airport regulator or even state electricity boards insist that each concession agreement be housed under separate SPVs.

"Also, you may have a separate set of investors for each vertical, or even each project," explained A Subba Rao, Group CFO, GMR.

The ministry had earlier agreed to a suggestion by a parliamentary standing committee that looked into the draft Bill to stop subsidiary companies from setting up further subsidiaries and limit the number of investment companies to one.

The ministry had held that a surfeit of subsidiaries resulted in the diversion of funds. Under the Companies Act, there is no limit on the number of subsidiaries a holding company can have.

Companies have argued that diversification often depended on forming subsidiaries. They said diversion of funds could be stopped through better corporate governance practices, not by capping step-down subsidiaries.

Image: The Parliament house.