One Transaction, Many Legal Identities: Rethinking the Parent — Subsidiary Inter-Corporate Deposit

An analysis of parent-subsidiary inter-corporate deposits (ICDs), examining how their legal character changes across the IBC, Companies Act, deposit rules, tax law and governance frameworks, and why substance must prevail over contractual nomenclature.

A parent-subsidiary inter-corporate deposit (ICD) does not possess a single, fixed legal identity. The same transaction is interpreted differently — as debt, investment, deposit, or taxable arrangement — depending on the statutory regime examining it. In each case, the outcome hinges on the economic substance and commercial reality, not the label chosen by the parties.

This principle is powerfully illustrated by Ansal Housing Ltd. v. Samyak Projects (P) Ltd.¹ The dispute arose when Ansal Housing sought recognition as a financial creditor under the Insolvency and Bankruptcy Code, 2016 (IBC), on the strength of an ICD advanced to Samyak Projects under joint venture agreements for real estate development. The parties had documented the advance as an ICD carrying 24 per cent interest, with a 24-month repayment term and security over project receivables. Despite these formal attributes, the National Company Law Appellate Tribunal (NCLAT) rejected the characterisation. It held that the transaction was fundamentally an investment for profit-sharing in the joint development venture rather than a disbursement primarily for the time value of money. Consequently, it did not constitute “financial debt” within Section 5(8) IBC, rendering the Section 7 application non-maintainable.

The Tribunal’s reasoning was not confined to technicalities of the IBC. It looked beyond the contractual nomenclature to the surrounding commercial arrangement: the parties’ joint participation, revenue-sharing mechanism, and the integrated nature of the funding within the overall project development. This judicial preference for substance over form has profound implications. If a label does not settle the transaction’s character under the IBC, there is no reason to assume it settles anything under the Companies Act, 2013, tax statutes, or deposit regulations either. The decision serves as proof-of-concept for a broader principle: Intra-group funding must be analysed holistically, with courts and regulators increasingly willing to pierce formal descriptions to ascertain true economic purpose.

Section 186: Necessary but insufficient

Section 186, Companies Act, remains the primary framework for corporate lending, guarantees, securities, and investments. It imposes quantitative limits (generally 60 per cent of paid-up capital plus free reserves and securities premium, or 100 per cent of free reserves and securities premium, whichever is higher) and procedural requirements. Loans exceeding these thresholds require a special resolution from shareholders, while all such decisions need unanimous Board approval. Interest rates must meet the prescribed minimum under Section 186(7).

Compliance with Section 186 is essential, but it addresses only lending discipline and shareholder protection against excessive fund deployment. It does not immunise the transaction from scrutiny elsewhere.

Consider a hypothetical: A holding company advances Rs 50 crores to its wholly owned subsidiary for developing a logistics park during the initial phase. The loan carries market interest, documented repayment terms, and satisfies Section 186 limits and disclosures. The commercial rationale is straightforward — efficient capital allocation within a controlled structure.

The widely relied-upon exemption for loans to wholly owned subsidiaries supports this. The proviso to Section 186(3), read with Rule 11, Companies (Meetings of Board and its Powers) Rules, 2014, exempts such loans from the special resolution requirement. The rationale is practical: Groups should move capital freely between entities under complete common control without repeated shareholder approvals.

Yet this exemption is temporary and ownership-dependent. It lasts only as long as the subsidiary remains wholly owned. Later, a strategic investor or private equity (PE) fund acquires a 30 per cent stake, diluting the parent below 100 per cent ownership.

The loan’s economic substance — amount, purpose, terms, and risk — remains unchanged. Only the ownership label has shifted. Nevertheless, the exemption evaporates instantly. The parent must now seek shareholder approval for what was previously exempt, or restructure the arrangement. Treasury planning cannot be siloed from equity documentation; advisers must anticipate dilution scenarios upfront. The transaction’s legal identity under Section 186 has changed because the statute ties relief to corporate structure, not the loan’s intrinsic characteristics. The loan’s substance has not moved a rupee — only its ownership label has, and that’s enough to change the compliance answer.

The deposit rules: Identity of the lender matters

Practitioners often assume ICDs automatically fall outside the Companies (Acceptance of Deposits) Rules, 2014. Rule 2(1)(c)(vi) excludes amounts received by a company from any other company from the definition of “deposit”. This carve-out enables efficient intra-group funding without triggering public deposit compliances such as credit ratings, advertisements, or repayment reserves.

The exemption, however, is narrow and formalistic. It turns on the lender’s legal identity as a “company”, not the transaction’s commercial purpose.

Consider a hypothetical: A parent company structures treasury funding for an operating subsidiary’s working capital needs (Rs 30 crores for bridge financing during project ramp-up) by routing it through a group limited liability partnership (LLP) established for tax and operational flexibility. The commercial purpose, amount, intended use for liquidity management, and expected repayment profile mirror a direct parent-to-subsidiary ICD. The funds move intra-group with documentation reflecting a loan.

Because the immediate lender is an LLP rather than a “company”, the Rule 2(1)(c)(vi) exclusion arguably does not apply to the receipt in the subsidiary’s hands. The transaction risks being tested against deposit regulations — triggering ceilings, repayment timelines, reporting, and potential auditor/ Registrar of Companies (ROC) scrutiny — despite identical economic substance to an exempt corporate-to-corporate ICD. Once again, the underlying arrangement has not changed; only the legal identity of the entity advancing the funds has, and that alone determines which regime governs the receipt. Nomenclature cannot override the statutory identity requirement.

Tax dimensions: Genuineness and direction of flow

Tax law introduces yet another lens. Downstream loans from parent to subsidiary generally avoid recharacterisation as deemed dividends under Section 2(22)(e), Income-tax Act, 1961, particularly where properly documented with interest. Upstream or lateral funding, interest-free arrangements, or those lacking commercial substance face greater risk of recharacterisation as equity, disguised dividends, or other taxable events. The courts examine factors such as repayment history, documentation, interest rates, and overall commercial rationale.

Again, substance prevails. An ICD that functions like permanent capital or lacks arm’s-length attributes weakens the taxpayer’s position, regardless of its corporate law compliance. Tax law asks the same question a third time — not what you called it, but what it actually is.

Governance, accounting, and overlapping regimes

Corporate lending within a group also engages broader governance obligations. Board disclosures under Section 186(4), disclosure of Directors’ interests under Section 184², accounting standards (Ind AS), and, where applicable, Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, continue to apply independently. Here too, the answer depends on what the arrangement actually is, not what it’s called in the board minutes. These provisions pursue objectives entirely different from lending regulation — transparency, conflict mitigation, faithful reporting. Each framework addresses distinct regulatory concerns. Consequently, satisfying one regime does not eliminate obligations arising under another.

This split is not accidental. Each statutory regime was enacted to address a distinct regulatory concern: Section 186 restrains excessive deployment of corporate assets; the deposit provisions protect creditors and depositors; tax law prevents disguised distributions of profit; governance provisions promote transparency. The difficulty arises because these objectives converge upon the same commercial transaction without offering an integrated framework for analysing it.

Conclusion: Multiple identities, one transaction

An ICD, in other words, does not have one legal identity; it has as many as there are regimes asking the question. Section 186 compliance answers only one. Ansal Housing and the emerging judicial trend remind us that labels consistently yield to economic reality across statutes. The fragmentation of regulation — each statute pursuing its own legitimate objective — creates a complex but navigable landscape for corporate groups. Practitioners who stop at Section 186 address only part of the picture and risk incomplete advice in an era of heightened scrutiny of intra-group transactions.

As Indian corporate groups adopt increasingly sophisticated treasury structures and centralised cash management, the traditional tendency to treat ICDs as straightforward intra-group loans governed principally by Section 186 has become inadequate. The more important inquiry is whether the transaction, viewed in its entirety through every applicable statutory lens, satisfies the substance-over-form tests that courts and regulators now routinely apply. Greater regulatory guidance from the Ministry of Corporate Affairs on intra-group treasury arrangements —particularly regarding post-dilution funding structures and genuine commercial cash management — would significantly reduce compliance uncertainty without compromising creditor or shareholder protection. Until such clarification emerges, legal advisers must resist the temptation of single-statute analysis. The law no longer permits such simplicity, and commercial practice should not assume it does.