Chapter 1: Preliminary - Test 1: answer key

Question 1 · 2 marks · Chapter 1: Preliminary · medium

Scenario. Anekta Garments Private Limited is engaged in the manufacture and export of garments. During the financial year 2025-26, its paid-up share capital was ₹3.80 crore and its turnover, as disclosed in the profit and loss account for that year, was ₹39.60 crore. The company has not issued any securities carrying differential voting rights. Its promoters believe that the company qualifies as a small company under the Companies Act, 2013. During April 2026, the company proposed to acquire a 60% voting interest in Zenith Textiles Private Limited, which has a paid-up share capital of ₹2 crore and turnover of ₹15 crore. Zenith also satisfies the prescribed financial thresholds applicable to small companies. Anekta's directors proposed that Zenith should continue to enjoy small-company status because its independent financial figures remain within the prescribed limits. Separately, Anekta holds 18% of the total voting power in Vardhan Fibres Limited. Under a shareholders' agreement, Anekta is entitled to participate in and exercise control over specified strategic business decisions of Vardhan. The remaining shareholders are independent investors. Vardhan is not a subsidiary of Anekta. Anekta also holds 5% of the shares of another company, Prisha Logistics Limited, entirely in a fiduciary capacity on behalf of its clients. At a board meeting held on 15th September 2026, the directors examined whether the proposed acquisition would affect the small-company classification of Anekta and Zenith, whether Vardhan would qualify as an associate company, and whether the fiduciary shareholding in Prisha should be considered while determining corporate relationships. The company secretary was instructed to prepare a legal note applying the definitions under section 2 of the Companies Act, 2013 and the applicable rules.

Considering Anekta Garments Private Limited's financial position for FY 2025-26, determine whether it qualifies as a small company before its proposed acquisition of Zenith Textiles Private Limited.

1. Yes, since both paid-up share capital and turnover are within the prescribed limits. (correct answer)
2. No, because its paid-up share capital must be below ₹2 crore.
3. No, because the prescribed turnover limit is ₹30 crore.
4. Yes, but only if the Registrar grants specific approval.

Answer: A — Yes, since both paid-up share capital and turnover are within the prescribed limits.

Explanation. Under section 2(85), a small company must be a company other than a public company and satisfy both prescribed financial thresholds. Rule 2(1)(t) prescribes paid-up share capital not exceeding ₹4 crore and turnover not exceeding ₹40 crore. Anekta has paid-up capital of ₹3.80 crore and turnover of ₹39.60 crore. Both conditions are satisfied. The important trap is treating the two thresholds as alternatives; they are cumulative requirements.

Where it goes wrong. Treating paid-up capital and turnover as alternative rather than cumulative conditions.

Authority. Section 2(85) of the Companies Act, 2013; Rule 2(1)(t) of the Companies (Specification of Definitions Details) Rules, 2014

Question 2 · 2 marks · Chapter 1: Preliminary · medium

After acquiring 60% of Zenith Textiles Private Limited, the directors contend that Zenith should continue to qualify as a small company because its own paid-up capital and turnover remain within the prescribed limits. Which conclusion is legally correct?

1. Zenith remains a small company because its individual financial thresholds are satisfied.
2. Zenith loses small-company eligibility because it becomes a subsidiary company. (correct answer)
3. Zenith remains a small company because both companies are privately incorporated.
4. Zenith loses eligibility only when its turnover exceeds ₹40 crore.

Answer: B — Zenith loses small-company eligibility because it becomes a subsidiary company.

Explanation. Section 2(85) expressly excludes a holding company and a subsidiary company from the definition of a small company. Anekta's acquisition of 60% voting power makes Zenith its subsidiary under section 2(87), since the holding company exercises more than one-half of the total voting power. Consequently, Zenith cannot claim small-company status even though its individual financial figures satisfy the prescribed limits. The financial thresholds do not override the statutory exclusion.

Where it goes wrong. Assuming that satisfying financial thresholds automatically overrides the holding-subsidiary exclusion.

Authority. Section 2(85), proviso (A), of the Companies Act, 2013; Section 2(87) of the Companies Act, 2013

Question 3 · 2 marks · Chapter 1: Preliminary · hard

Anekta holds 18% voting power in Vardhan Fibres Limited but has contractual control over specified strategic business decisions. Vardhan is not its subsidiary. Determine the appropriate classification under the Companies Act, 2013.

1. Vardhan is a subsidiary because contractual participation automatically constitutes majority voting control.
2. Vardhan cannot be an associate because Anekta holds less than 20% voting power.
3. Vardhan qualifies as an associate company because control or participation in business decisions under an agreement independently establishes significant influence. (correct answer)
4. Vardhan qualifies as an associate only if Anekta acquires more than 50% voting power.

Answer: C — Vardhan qualifies as an associate company because control or participation in business decisions under an agreement independently establishes significant influence.

Explanation. Section 2(6) defines an associate company as a company in which another company has significant influence but which is not its subsidiary. The explanation provides two alternative routes to significant influence: control of at least 20% of total voting power, or control of or participation in business decisions under an agreement. Anekta satisfies the second route despite holding only 18%. The 20% voting threshold is not an indispensable requirement where contractual influence independently exists.

Where it goes wrong. Treating the 20% voting-power threshold as the only method of establishing significant influence.

Authority. Section 2(6) of the Companies Act, 2013

Question 4 · 2 marks · Chapter 1: Preliminary · hard

Anekta also holds 5% shares in Prisha Logistics Limited in a fiduciary capacity on behalf of its clients. While determining whether Prisha has an associate or subsidiary relationship with Anekta, how should this holding be treated?

1. It must always be included because legal ownership is sufficient.
2. It must be included for associate relationships but excluded for subsidiary relationships.
3. It must be included only if the fiduciary arrangement is approved by the Board.
4. It should not be counted for determining the relevant holding-subsidiary or associate-company relationship. (correct answer)

Answer: D — It should not be counted for determining the relevant holding-subsidiary or associate-company relationship.

Explanation. The MCA clarification dated 25 June 2014 states that shares held by a company in another company in a fiduciary capacity are not counted for determining an associate-company relationship. Similarly, the clarification dated 27 December 2013 excludes fiduciary shareholdings and corresponding powers when determining holding-subsidiary relationships under section 2(87). Therefore, Anekta's fiduciary holding of 5% in Prisha is excluded for these determinations. Mere legal holding in a fiduciary capacity does not establish the relevant corporate influence.

Where it goes wrong. Counting shares held in a fiduciary capacity as beneficial corporate voting power.

Authority. Section 2(6) of the Companies Act, 2013; Section 2(87) of the Companies Act, 2013; MCA Circular dated 25 June 2014; MCA Notification dated 27 December 2013

Question 5 · 2 marks · Chapter 1: Preliminary · hard

Scenario. Vayu Renewables Limited, a public company, operates renewable energy projects across India. It has incorporated several subsidiary companies to manage individual solar and wind projects. Its corporate structure is as follows: Vayu Renewables Limited holds 48% of the total voting power in Surya Energy Private Limited. The remaining voting power is held by Vayu's wholly owned subsidiary, Vayu Projects Limited, which holds 4%, and independent investors holding 48%. Vayu also has the contractual right to appoint four out of seven directors of Surya's board at its discretion. Surya Energy Private Limited holds 60% of the voting power in Tejas Infrastructure Limited. Tejas Infrastructure Limited, in turn, holds 55% of the voting power in Aakash Storage Private Limited. All four companies are incorporated in India. The companies are examining whether the relationships between them satisfy the statutory definitions of holding company and subsidiary company and whether their corporate structure complies with the applicable restriction on subsidiary layers. In a separate transaction, Vayu Renewables Limited acquired 22% of the total voting power in Megha Components Limited. The acquisition agreement gives Vayu the right to participate in important business decisions of Megha, but Vayu cannot appoint or remove a majority of Megha's directors. Megha is not a subsidiary of Vayu. Vayu also entered into a joint arrangement with another investor through which both parties exercise joint control and have rights to the net assets of the arrangement. The company secretary has additionally been asked to examine the classification of Vayu's wholly owned subsidiary, Vayu Projects Limited. Although its articles contain restrictions on share transfers, limit membership to 200 and prohibit public invitations to subscribe for securities, it is wholly owned by Vayu Renewables Limited. The Board requires a consolidated legal opinion on subsidiary relationships, associate relationships, the effect of indirect voting rights, and the distinction between private and public companies.

Vayu Renewables Limited holds 48% voting power in Surya Energy Private Limited, while its wholly owned subsidiary holds another 4%. The remaining 48% belongs to independent investors. Which statement correctly determines the subsidiary relationship?

1. Surya is a subsidiary because Vayu and its subsidiary together control 52% of total voting power. (correct answer)
2. Surya is not a subsidiary because Vayu directly holds less than 50%.
3. Surya is an associate because Vayu directly holds less than 20% above the majority threshold.
4. Surya is a subsidiary only if independent investors approve the arrangement.

Answer: A — Surya is a subsidiary because Vayu and its subsidiary together control 52% of total voting power.

Explanation. Section 2(87)(ii) provides that a company is a subsidiary where its holding company exercises or controls more than one-half of total voting power, either individually or together with one or more of its subsidiary companies. Vayu's direct 48% and its wholly owned subsidiary's 4% aggregate to 52%. This exceeds one-half. The provision expressly recognises combined voting power, so restricting the examination to Vayu's direct shareholding would produce an incorrect conclusion.

Where it goes wrong. Ignoring voting power exercised through an existing subsidiary.

Authority. Section 2(87)(ii) of the Companies Act, 2013

Question 6 · 2 marks · Chapter 1: Preliminary · hard

Vayu has the discretionary contractual right to appoint four out of seven directors of Surya Energy Private Limited. Even if Vayu's voting-power calculation were below 50%, which statutory test would independently establish a subsidiary relationship?

1. Holding at least 20% of the total voting power.
2. Having the ability to appoint or remove all or a majority of the directors through a discretionary power. (correct answer)
3. Having the right to nominate one independent director.
4. Participating in ordinary business decisions without board-composition rights.

Answer: B — Having the ability to appoint or remove all or a majority of the directors through a discretionary power.

Explanation. Section 2(87)(i) recognises control over the composition of the Board of Directors as an independent basis for a subsidiary relationship. Under Explanation (b), board composition is deemed controlled where another company can, by exercising a discretionary power, appoint or remove all or a majority of the directors. Vayu can appoint four of Surya's seven directors. Four constitutes a majority. Therefore, the board-composition test is satisfied independently of the voting-power test.

Where it goes wrong. Confusing the majority-board-control test with the separate voting-power test.

Authority. Section 2(87)(i) of the Companies Act, 2013; Explanation (b) to Section 2(87) of the Companies Act, 2013

Question 7 · 2 marks · Chapter 1: Preliminary · hard

Surya holds 60% voting power in Tejas Infrastructure Limited, which holds 55% voting power in Aakash Storage Private Limited. Assuming the statutory control tests are satisfied at each level, which statement correctly describes Aakash's relationship with Vayu?

1. Aakash cannot be Vayu's subsidiary because Vayu has no direct shares in it.
2. Aakash can only be an associate of Vayu because it is two companies removed.
3. Aakash is necessarily independent because subsidiary relationships cannot extend through intermediate subsidiaries.
4. Aakash may be deemed a subsidiary of Vayu through the intermediate subsidiary relationships. (correct answer)

Answer: D — Aakash may be deemed a subsidiary of Vayu through the intermediate subsidiary relationships.

Explanation. Explanation (a) to section 2(87) provides that a company is deemed to be a subsidiary of a holding company even where the control referred to in section 2(87)(i) or (ii) is exercised through another subsidiary company of that holding company. Accordingly, the indirect chain of control can establish the subsidiary relationship between Vayu and Aakash. Direct shareholding by the ultimate holding company is not mandatory. However, the statutory restriction on the number of subsidiary layers must be examined separately.

Where it goes wrong. Assuming that indirect subsidiary relationships are legally impossible without direct shareholding.

Authority. Section 2(87) of the Companies Act, 2013; Explanation (a) to Section 2(87) of the Companies Act, 2013

Question 8 · 2 marks · Chapter 1: Preliminary · medium

Vayu acquired 22% voting power in Megha Components Limited. Under a separate agreement, it also participates in important business decisions. Megha is not a subsidiary. Which statement most suitable applies section 2(6)?

1. Megha is a subsidiary because any holding above 20% creates majority control.
2. Megha is neither an associate nor a subsidiary because 22% is below 50%.
3. Megha is an associate because Vayu controls at least 20% of total voting power and Megha is not its subsidiary. (correct answer)
4. Megha is a public company because Vayu is a public company.

Answer: C — Megha is an associate because Vayu controls at least 20% of total voting power and Megha is not its subsidiary.

Explanation. Section 2(6) requires significant influence without a subsidiary relationship. Significant influence includes control of at least 20% of total voting power. Vayu holds 22%, satisfying the threshold. Since Megha is expressly stated not to be a subsidiary, it qualifies as an associate company. A 20% holding is not equivalent to majority voting control, and therefore does not automatically create a subsidiary relationship.

Where it goes wrong. Confusing the 20% associate threshold with the more-than-one-half subsidiary threshold.

Authority. Section 2(6) of the Companies Act, 2013

Question 9 · 2 marks · Chapter 1: Preliminary · medium

Scenario. Rudra Foods Private Limited has paid-up share capital of ₹4 crore and turnover of ₹40 crore according to the profit and loss account for the immediately preceding financial year. It is neither a holding company nor a subsidiary company, is not registered under section 8 and is not governed by a special Act. The directors argue that the company fails the small-company test because both figures must be strictly below the prescribed thresholds. Determine the correct legal position.

Rudra Foods Private Limited has paid-up share capital of ₹4 crore and turnover of ₹40 crore according to the profit and loss account for the immediately preceding financial year. It is neither a holding company nor a subsidiary company, is not registered under section 8 and is not governed by a special Act. The directors argue that the company fails the small-company test because both figures must be strictly below the prescribed thresholds. Determine the correct legal position.

1. It qualifies because both prescribed limits include the precise threshold amounts. (correct answer)
2. It fails because the paid-up share capital must be below ₹4 crore.
3. It fails because turnover must be below ₹40 crore.
4. It qualifies only if both figures are reduced in the next financial year.

Answer: A — It qualifies because both prescribed limits include the precise threshold amounts.

Explanation. The prescribed wording is 'does not exceed' ₹4 crore and 'does not exceed' ₹40 crore. Consequently, equality with either threshold is permissible. Rudra satisfies both financial conditions and none of the statutory exclusions applies. The directors' interpretation incorrectly converts inclusive maximum limits into strictly lower limits. Both the prescribed limits and the requirement that the company must not be a public company must be considered together.

Where it goes wrong. Interpreting 'does not exceed' as 'must be less than'.

Authority. Section 2(85) of the Companies Act, 2013; Rule 2(1)(t) of the Companies (Specification of Definitions Details) Rules, 2014

Question 10 · 2 marks · Chapter 1: Preliminary · medium

Scenario. Prerna Technologies Private Limited has paid-up share capital of ₹2 crore and turnover of ₹20 crore. It is incorporated as a private company and satisfies the financial conditions prescribed for a small company. However, it is registered under section 8 of the Companies Act, 2013 for charitable purposes. Its promoters contend that its private-company incorporation and financial figures make it eligible for small-company classification. Which conclusion is correct?

Prerna Technologies Private Limited has paid-up share capital of ₹2 crore and turnover of ₹20 crore. It is incorporated as a private company and satisfies the financial conditions prescribed for a small company. However, it is registered under section 8 of the Companies Act, 2013 for charitable purposes. Its promoters contend that its private-company incorporation and financial figures make it eligible for small-company classification. Which conclusion is correct?

1. It qualifies because section 8 companies incorporated as private companies are eligible.
2. It qualifies if the Registrar grants written permission.
3. It qualifies because section 8 registration does not affect financial thresholds.
4. It cannot qualify because a company registered under section 8 is expressly excluded. (correct answer)

Answer: D — It cannot qualify because a company registered under section 8 is expressly excluded.

Explanation. Section 2(85) expressly excludes companies registered under section 8 from the definition of a small company. The exclusion operates independently of the company's paid-up capital, turnover or private-company status. Prerna therefore cannot claim small-company classification merely because its financial figures satisfy the prescribed limits. There is no general provision permitting the Registrar to waive this statutory exclusion through an individual approval.

Where it goes wrong. Assuming that financial eligibility overrides the express section 8 exclusion.

Authority. Section 2(85), proviso (B), of the Companies Act, 2013

Question 11 · 2 marks · Chapter 1: Preliminary · hard

Scenario. A public company proposes to convert into a private company. Its membership register shows 218 persons, including 12 persons currently employed by the company, 8 former employees who became members during their employment and continued holding shares after leaving, and 6 couples holding shares jointly. The remaining shareholders hold shares individually. For determining the maximum membership under section 2(68), what is the relevant number?

A public company proposes to convert into a private company. Its membership register shows 218 persons, including 12 persons currently employed by the company, 8 former employees who became members during their employment and continued holding shares after leaving, and 6 couples holding shares jointly. The remaining shareholders hold shares individually. For determining the maximum membership under section 2(68), what is the relevant number?

1. 190 members
2. 192 members (correct answer)
3. 195 members
4. 205 members

Answer: B — 192 members

Explanation. Under Section 2(68) of the Companies Act, 2013, for determining the maximum limit of 200 members in a private company: (1) persons who are in the employment of the company are not counted (12 employees excluded); (2) persons who were formerly in employment and continue to be members are not counted (8 former employees excluded); and (3) joint holders of shares are treated as a single member (6 joint shareholding pairs reduce member count by 6). Thus, total members for Section 2(68) = 218 − 12 − 8 − 6 = 192 members. Since 192 does not exceed 200, the company does not exceed the limit.

Where it goes wrong. Students often forget to exclude former employees or miscount joint holders.

Authority. Section 2(68)(ii) of the Companies Act, 2013

Question 12 · 2 marks · Chapter 1: Preliminary · hard

Scenario. Sapphire Industries Limited holds all of the shares in Sapphire Components Private Limited. The subsidiary's articles restrict transfer of shares, limit membership to 200 and prohibit invitations to the public to subscribe for securities. The subsidiary argues that it must remain a private company for every purpose because its articles satisfy section 2(68). Which statement is correct?

Sapphire Industries Limited holds all of the shares in Sapphire Components Private Limited. The subsidiary's articles restrict transfer of shares, limit membership to 200 and prohibit invitations to the public to subscribe for securities. The subsidiary argues that it must remain a private company for every purpose because its articles satisfy section 2(68). Which statement is correct?

1. It remains a private company for every purpose because its articles determine its classification conclusively.
2. It becomes a public company only if it independently invites the public to subscribe.
3. It is deemed to be a public company under the Act because it is a subsidiary of a company that is not a private company. (correct answer)
4. It becomes a public company only when its membership exceeds 200.

Answer: C — It is deemed to be a public company under the Act because it is a subsidiary of a company that is not a private company.

Explanation. The proviso to section 2(71) states that a company which is a subsidiary of a company that is not a private company is deemed to be a public company for the purposes of the Companies Act, 2013, even where the subsidiary continues to be a private company in its articles. Sapphire Components is wholly owned by a public company. Therefore, its private-company articles do not prevent the statutory deemed-public classification.

Where it goes wrong. Giving overriding effect to the subsidiary's articles despite the statutory deemed-public provision.

Authority. Section 2(71), proviso, of the Companies Act, 2013

Question 13 · 2 marks · Chapter 1: Preliminary · hard

Scenario. A company incorporated in India is considering acquiring an overseas company whose corporate structure contains four layers of subsidiaries under the laws of its country of incorporation. The Indian company already has two layers of subsidiaries. Its legal adviser argues that the acquisition is automatically prohibited because the Indian restriction permits no more than two layers in any circumstances. Which statement correctly applies the Companies (Restriction on Number of Layers) Rules, 2017?

A company incorporated in India is considering acquiring an overseas company whose corporate structure contains four layers of subsidiaries under the laws of its country of incorporation. The Indian company already has two layers of subsidiaries. Its legal adviser argues that the acquisition is automatically prohibited because the Indian restriction permits no more than two layers in any circumstances. Which statement correctly applies the Companies (Restriction on Number of Layers) Rules, 2017?

1. The acquisition is prohibited because the two-layer restriction applies without exception.
2. The acquisition may proceed under the express exception permitting acquisition of a foreign company having more than two subsidiary layers under its country's laws. (correct answer)
3. The acquisition is permitted only if the foreign company first reduces its structure to two layers.
4. The acquisition is permitted only when the Indian company is registered under section 8.

Answer: B — The acquisition may proceed under the express exception permitting acquisition of a foreign company having more than two subsidiary layers under its country's laws.

Explanation. Rule 2(1) generally restricts companies from having more than two layers of subsidiaries. However, its first proviso expressly states that the restriction does not affect a company's acquisition of a company incorporated outside India that has subsidiaries beyond two layers according to the laws of that country. Thus, the foreign acquisition exception applies. It is not necessary for the foreign company to restructure its subsidiaries merely to satisfy the Indian two-layer restriction.

Where it goes wrong. Applying the general two-layer restriction without considering the express foreign-acquisition exception.

Authority. Rule 2(1) of the Companies (Restriction on Number of Layers) Rules, 2017

Question 14 · 2 marks · Chapter 1: Preliminary · hard

Scenario. A company that is neither a banking company, an eligible systematically important registered NBFC, an insurance company nor a Government company proposes to maintain three layers of subsidiaries. It argues that one of those layers consists entirely of wholly owned subsidiaries. Under Rule 2 of the Companies (Restriction on Number of Layers) Rules, 2017, how should the layer consisting entirely of wholly owned subsidiaries be treated?

A company that is neither a banking company, an eligible systematically important registered NBFC, an insurance company nor a Government company proposes to maintain three layers of subsidiaries. It argues that one of those layers consists entirely of wholly owned subsidiaries. Under Rule 2 of the Companies (Restriction on Number of Layers) Rules, 2017, how should the layer consisting entirely of wholly owned subsidiaries be treated?

1. It is counted as two layers because all wholly owned subsidiaries require separate counting.
2. It is counted only when the holding company owns exactly all of every subsidiary.
3. It is excluded only for Government companies and banking companies.
4. One layer consisting of one or more wholly owned subsidiaries is not taken into account while computing the number of layers. (correct answer)

Answer: D — One layer consisting of one or more wholly owned subsidiaries is not taken into account while computing the number of layers.

Explanation. The second proviso to Rule 2(1) provides that one layer consisting of one or more wholly owned subsidiary companies shall not be taken into account when computing the number of layers. This exclusion is separate from the exemptions granted to specified classes of companies under Rule 2(2). Therefore, a qualifying wholly owned subsidiary layer is excluded in the computation even when the holding company is not a banking company, eligible NBFC, insurance company or Government company.

Where it goes wrong. Confusing the wholly owned subsidiary layer exclusion with the exemptions available to specified classes of companies.

Authority. Rule 2(1), second proviso, of the Companies (Restriction on Number of Layers) Rules, 2017; Rule 2(2) of the Companies (Restriction on Number of Layers) Rules, 2017

Question 15 · 2 marks · Chapter 1: Preliminary · hard

Scenario. An ordinary Indian holding company, not belonging to any class exempted under Rule 2(2), contravenes the Companies (Restriction on Number of Layers) Rules, 2017. The contravention continues for several days. The compliance officer argues that only the company can be penalised and that no additional daily penalty is contemplated. Which statement correctly describes the prescribed consequence under Rule 2(5)?

An ordinary Indian holding company, not belonging to any class exempted under Rule 2(2), contravenes the Companies (Restriction on Number of Layers) Rules, 2017. The contravention continues for several days. The compliance officer argues that only the company can be penalised and that no additional daily penalty is contemplated. Which statement correctly describes the prescribed consequence under Rule 2(5)?

1. The company and every officer in default may be fined up to ₹10,000, with a further fine up to ₹1,000 for every day after the first during which the contravention continues. (correct answer)
2. Only the company may be fined up to ₹1,00,000, without any additional daily fine.
3. Every officer in default is automatically liable to imprisonment for six months.
4. The company may be fined up to ₹10,000 only once, irrespective of the duration of the contravention.

Answer: A — The company and every officer in default may be fined up to ₹10,000, with a further fine up to ₹1,000 for every day after the first during which the contravention continues.

Explanation. Rule 2(5) provides that where a company contravenes any provision of these Rules, the company and every officer of the company who is in default shall be punishable with a fine extending up to ₹10,000. In the case of a continuing contravention, an additional fine extending up to ₹1,000 for every day after the first during which the contravention continues may be imposed. The provision expressly covers both the company and officers in default and recognises a continuing default.

Where it goes wrong. Ignoring the liability of officers in default and the additional daily fine for continuing contraventions.

Authority. Rule 2(5) of the Companies (Restriction on Number of Layers) Rules, 2017