In the context of global corporate structures, it is common to find multilayered subsidiaries operating across various jurisdictions. Each entity may follow different financial years based on local laws or global consolidation requirements. This situation often raises questions regarding whether an Indian company, being part of such a group, is required to align its financial year with that of its foreign parent.

Case Overview

In the present case, Company X is incorporated outside India. It has a wholly owned subsidiary in India, Company Y. Company Y, in turn, has a wholly owned subsidiary, Company Z, which is also incorporated in India. Company Y follows the calendar year (January to December) as its financial year, whereas Company Z follows the standard Indian financial year (April to March).

The issue to be addressed is whether Company Z is required under Indian law to change its financial year to align with that of Company Y or its ultimate holding company, X.

Relevant Legal Provisions

Section 2(41) of the Companies Act, 2013 defines a company’s financial year as:

“financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that where a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, on an application made by that company or body corporate in such form and manner as may be prescribed, allow any period as its financial year, whether or not that period is a year.

Section 2(87) of the Act defines a “subsidiary company” and includes an explanation which states:

For the purposes of this clause,
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company.
(c) the expression “company” includes any body corporate.

Interpretation and Analysis

Applying these provisions, Company Z, though directly a subsidiary of Company Y, would be deemed a subsidiary of Company X under clause (a) of the Explanation to Section 2(87), since Company Y is a subsidiary of Company X. Company X, being a body corporate incorporated outside India, would therefore be the ultimate holding company of Company Z.

While Company Z is deemed to be a subsidiary of a foreign body corporate, the proviso to Section 2(41) does not make it mandatory for such a company to change its financial year. Rather, it provides a mechanism whereby the company may apply to the Central Government for approval to follow a different financial year, only if it is required to do so for the purpose of consolidation of accounts outside India.

In this case, there is no indication that Company Z is required to align its financial year with that of Company X or Company Y. Moreover, Company Z is already following the statutory default financial year of April to March, as prescribed under Section 2(41).

Conclusion

There is no legal compulsion under the Companies Act, 2013 for Company Z to change its financial year to match that of its Indian parent (Company Y) or its foreign ultimate holding company (Company X). Unless there is a specific requirement for consolidation purposes, and unless such a requirement is approved through an application to the Central Government, Company Z may continue with its existing financial year ending on 31st March.