A Ltd; B Ltd; C Ltd; and D Ltd; are group investment companies. A Ltd. has invested 52% of B Ltd's share capital and B Ltd. has invested 55% of share capital of C Ltd. Further C Ltd. has invested 51% of share capital of

A company shall, unless otherwise prescribed, make investment through not more than two layers of investment companies. [Sub-section (1) of section 186] However, the aforesaid provisions shall not affect- a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country; a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force. [Proviso to sub-section (1) of section 186] Therefore, Section 186 (1) restricts a company from making investment through more than 2 layers of investment companies. As stated above, for the purpose of Section 186 of the Act, Investment Company means a company whose principal business is the acquisition of shares, debentures or other securities and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income. The definition of Investment Company is exhaustive. Further, the restriction under section 186(1) is about investment through Investment Companies only. Therefore, investment through any company other than the Investment Company is not covered under sub-section (1) of Section 186 of the Act. A Ltd. is ultimate holding company of B Ltd., C Ltd., and D Ltd. Hence, investment of A Ltd. Into B Ltd. and B Ltd. into C Ltd. is allowed. But, investment of C Ltd. into D Ltd. shall not be allowed/valid as the investment will be beyond two layers.