Look into the characteristics and operational roles of a wholly owned subsidiary, gaining insights into how this corporate structure functions within strategic business frameworks. Understanding its features is crucial for businesses aiming to establish complete ownership and control over subsidiaries for effective management and operational purposes.
Introduction
In the wake of eased FDI norms, India has become a magnet for foreign investments, prompting numerous companies to explore opportunities. Among the investment structures gaining prominence is the subsidiary company, where shares are held by a parent or holding company. A particularly advantageous avenue in this landscape is the establishment of a wholly-owned subsidiary. This form of investment allows for complete ownership, providing foreign companies with a strategic means to navigate the Indian market and leverage the nation’s economic potential. In this context, exploring the features and functions of a wholly owned subsidiary becomes paramount for those seeking comprehensive control and operational autonomy in their ventures.
What Is a Wholly-Owned Subsidiary?
Typically, a parent company holds 51% to 99% ownership of a subsidiary. However, when a parent company possesses 100% of a subsidiary’s shares, it becomes a wholly owned subsidiary. This status is achieved through either the separation of the subsidiary from the parent or the parent’s acquisition of the entire subsidiary. Whether located in the same or a different country, a subsidiary allows the parent company to operate in various markets. As there are no minority shareholders, a wholly-owned subsidiary must primarily seek permissions and approvals from the parent company, occasionally leading to an unconsolidated subsidiary.
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A wholly-owned subsidiary could choose any company structure like a private company, share limited, liability company, etc., However, the most compatible choice is a private limited company, owing to its large number of exceptions.
Requirements to Set Up
- A minimum of two directors are required
- Of the two directors, one must be a resident director ((someone who has stayed in India for 182 days in the previous year)
- All the directors must acquire a Director Identification Number (DIN) and a Digital Signature Certificate (DSC)
- Within a month of the incorporation of the subsidiary, it must introduce a paid-up share capital of a minimum of ₹1 Lakh.
Benefits of a Wholly-Owned Subsidiary
- The parent country can assume full strategic and operational control over the subsidiary company
- Parent companies can use subsidiary companies as a liability shield against losses
- Having a common financial system, sharing the administrative expenses and costs between the parent and the subsidiary companies can create a cost synergy
- The parent company can function in various locations with its brand name
- The parent company can safeguard its trade secrets, technological know-how, and expertise.
Disadvantages of a Wholly-Owned Subsidiary
- A parent company is liable for the inactions of its subsidiary company
- The local legalities may be different from that of the parent company’ countries. This could create complications
- Especially when a parent company holds multiple subsidiaries, organising and consolidating finances with the subsidiaries gets difficult.
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Key Features
- The funding of such subsidiaries is usually from pooled capital, and sometimes loans
- Even if the parent company is a foreign company, the subsidiary has to follow the law of India and is governed by the Companies Act, of 2013
- It is considered to be a domestic company, which means it can enjoy all the deductions and allowances ad per the tax law of India
- A wholly-owned subsidiary can take up all kinds of business activities including production, marketing, and services
- Where 100 % FDI is permitted, no prior approval is required.
Conclusion
A wholly-owned subsidiary is a means to an end for a parent company. The holding company can retain 100% control over its subsidiaries, including the production process, marketing strategy, administration, etc. It serves as a beneficial option for companies that desire to expand to more than one geographical location and market. For business advice on the subsidiary company or its registration in India, you could reach out to Vakilsearch whose expert business advisory panel can help you with all your queries.
