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Wholly Owned Subsidiary: Features and Functions

For a company that wishes to expand its business to larger horizons, a wholly-owned subsidiary company seems to be the most viable option. In this article, you will find an extensive explanation about wholly-owned subsidiaries.

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Wholly Owned Subsidiary: Features and Functions : With the relaxation of FDI norms, India is attracting a huge number of foreign companies to invest in India. Such investments can be in the form of a subsidiary company. A subsidiary company is a company whose shares are held by another organisation called the parent or holding company. Another beneficial form of investment is the establishment of a wholly-owned subsidiary.

What Is a Wholly-Owned Subsidiary?

Normally, a parent company holds 51% to 99% of a subsidiary. But when a company has 100% of its shares held by a parent company, it is said to be a wholly-owned subsidiary. A company becomes a wholly-owned subsidiary either by splitting up from the parent company or by the takeover of the subsidiary company by the parent company. A subsidiary company can be based in either the same country as the parent company or any other country.  A parent company can run its operations in any geographical location or market by owning a subsidiary company. As there are no minority shareholders, a wholly-owned subsidiary has to mostly seek permissions and approvals for its operations from the parent company, which could sometimes result in an unconsolidated subsidiary.

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 Wholly-Owned Subsidiary

  • 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. 

Key Features of a Wholly-Owned Subsidiary

  1. The funding of such subsidiaries is usually from pooled capital, and sometimes loans
  2. 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, 2013
  3. 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
  4. A wholly-owned subsidiary can take up all kinds of business activities including production, marketing, and services
  5. 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, the 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.

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