The proposed amendments in the Companies Act, which would force companies to have only one investment subsidiary, were misdirected and would limit the ability of companies to grow "laterally and horizontally", accounting sources said.
Corporate India has always had a fascination for investment subsidiaries, partly driven by regulatory pressure and partly to contain the risks in the parent company's balance sheet, sources in chartered accountancy firms in Mumbai said.
However, they said the penchant for setting up a web of investment companies was not specific to India. "Other countries have had a long tradition of legally recognised special purpose vehicles, which have only recently come of age in India. In the absence of such a tax-recognised entity, domestic companies have had no option but to set up investment companies," a source said.
"There can be a multitude of reasons for setting up investment companies. For one, companies may wish to house collaboration agreements outside the parent company. They may also wish to set up a new company to increase the leverage available without putting the parent company's balance sheet at risk.
Lastly, it could cut the risk exposure of the parent company," a source in Bombay House, the Tata group headquarters, told Business Standard. The last reason is especially true in businesses that are cash-intensive and have a long gestation period.
Accounting sources said part of the move towards setting up subsidiaries was simply to avoid too many "disturbing disclosures" in the main balance sheet. The absence of a transparent lending regime and too many restrictions on the businesses banks could lend to forced Indian companies to set up shell companies, which could borrow through legitimate means to invest in the equity of a third company.
"The subsidiary could own the third company fully without the parent having to disclose the ownership in its books," an accounting source said, adding that "the devious means had to be employed because no bank would lend money to invest in a start-up equity of another company".
PricewaterhouseCoopers partner Deepak Kapoor said by consolidating accounts, steps had already been taken to bring into picture the accounts of subsidiaries of subsidiaries. "Information sharing has been taken care of with consolidation," he said.
Walker Chandiok & Co Managing Director Vinod Chandiok said the legislation could restrict investments in downstream companies by overseas subsidiaries of Indian companies. "If there funds have to be monitored, it is for the bankers to do it. It shouldn't stop business," he said.
A Business Standard Research Bureau study reveals India's top 10 corporate houses have several subsidiaries each, but largely to route their investments to other businesses.
The Reliance group, for instance, has eight subsidiaries listed in its balance sheet, with the parent having invested Rs 166.52 crore (Rs 1.66 billion) in them. Each of these companies houses a separate business area.
The Tatas have a mix of investment companies. Tata Steel has Kalimati Investment company listed in its balance sheet, whereas Tata Engineering has eight subsidiaries, of which only one is an investment company, while others house separate businesses.
© 2025