Also, companies would be required to spell out the movement of funds, if
any, from one subsidiary to the other. This would give investors and
government agencies a clear picture of the overall financial health of
such group firms.

Layered subsidiaries refer to subsidiaries of subsidiaries, which makes
it practically impossible for the government and its inspection agencies
to detect the source of funds. As per the extant Companies Act there is
no restriction on the number of such layered subsidiaries making it
easier for companies to route funds from tax havens such as Mauritius
and Cayman Islands. “Often investors are not in the loop as to how many
layered subsidiaries companies have. As per current practice, companies
often list out their various subsidiaries, but investors would not know
how many of those are layered subsidiaries,” a government source said.

Legal experts and industry captains welcomed the government’s move.
President of CII B Muthuraman told FE that the ministry’s step would
create transparency in the operations of companies and benefit all
stakeholders.

Expressing a similar view, company law expert Pavan K
Vijay who is also managing director of Corporate Professionals, said
that the move would be the surest way to ensure transparency in
operations from the promoter firm down to its remotest subsidiary. “It
is a very smart move. Companies can’t argue with this since all that the
government is asking for is transparency. It would restrict rampant
intra-group activities,” he said.

The MCA is also hoping that once the eXtensible Business Reporting
Language (XBRL) comes into effect keeping a tab on such layered
subsidiaries would also become easier. XBRL is a company software
language that reads and analyses company data in a systematic way.

Earlier this month , the MCA issued a circular mandating companies to
start reporting their balance sheets and profit and loss account in this
format by September 30 this year. “Once companies start reporting in
XBRL format it would easily analayse the number of layered subsidiaries.
It would be a good step,” the government source said.

The issue of layered subsidiaries first came to light when the Rs
8,000-crore Satyam scam erupted in January 2009. Its tainted chairman B
Ramalinga Raju set up a multitude of layered subsidiaries to route funds
from overseas destinations. The Enforcement Directorate (ED) and the
Serious Fraud Investigations Office (SFIO) are still trying to locate
the source of funds. Apart from that investigative agencies are
currently investigating how some telecom firms had raised funds through
their chain of subsidiaries overseas and routed them back to the country
to buy spectrum. “The issue of a multiple chain of subsidiaries is very
worrying. A system is required where investors would know exactly the
number of such layered subsidiaries,” the government source added.

The parliamentary standing committee on finance headed by Yashwat Sinha
had earlier proposed that the number of such layered subsidiaries should
be capped. However, the MCA did not accept the recommendation fearing
that it could impinge upon companies’ freedom to structure their
operations for financial purposes. The ministry is trying to find a
common ground between the PSC’s proposal and industry’s concerns.

MCA’s solution of a ‘family tree’ format for listing out layered
subsidiaries comes at the backdrop of the North Block working on set of
measures to curb the menace of black money. Last week the government set
up a panel headed by chairman of Central Board of Direct Taxes Sudhir
Chandra to examine ways to tighten regulations surrounding black money.
The panel would submit its recommendations within six months. “Issues of
black money laundering, beneficial ownership and money laundering are
all inter-connected,” the source said.