In India, there is a lot of interest among foreign companies for the purpose of investing in the country due to the relaxation of its regulations on FDI. Among the favourable investment structures is the establishment of a wholly owned subsidiary. This setup entails a company that is entirely owned and controlled by another single parent company. In this blog, we shall see the features and functions of this entity.
Understanding Wholly Owned Subsidiaries
A wholly owned subsidiary is a unique corporate setup where a parent company maintains complete ownership of the subsidiary.
Creating a Wholly owned Subsidiary
The establishment of wholly owned subsidiaries can take place in following ways:
1. Separation from the Parent Company: One way for a company to establish wholly owned subsidiaries is through a process of separation or division from the parent company. In this scenario, the parent company maintains complete control over the subsidiary’s operations.
2. Acquisition by the Parent Company: Another method involves the parent company acquiring all the shares of the subsidiary, thereby converting it into wholly owned subsidiaries. This acquisition can take place through mergers, takeovers, or similar methods.
Management of Wholly owned Subsidiaries
As a result of 100% ownership, wholly owned subsidiaries typically don’t have any minority shareholders. This absence of minority shareholders means that the subsidiary is primarily dependent on the parent company for approvals and permissions to conduct its operations. This centralised decision-making can occasionally lead to the subsidiary being characterised as an unconsolidated subsidiary.
So, wholly owned subsidiaries are corporate entities where the parent company possesses full ownership. Its formation can occur through splitting from the parent company or by the parent company taking over the subsidiary. The geographical location of the subsidiary can be anywhere, allowing the parent company to expand its market presence. However, the complete control by the parent company can result in centralised decision-making and potential classification as an unconsolidated subsidiary.
Requirements for Setting Up a Wholly Owned Subsidiary in India
Establishing a subsidiary in India involves meeting specific legal requirements. Mentioned below are the essential prerequisites for setting up a subsidiary in the country:
1. Director Requirements:
Minimum of Two Directors: To form a subsidiary, a minimum of two directors is mandated by Indian company law. These directors play a critical role in the management and decision-making of the subsidiary.
Resident Director: Among the two directors, at least one must be a resident director. A resident director is an individual who has spent at least 182 days in India during the previous financial year. This requirement ensures that there is a locally-based director with a vested interest in the subsidiary’s operations.
2. Director Identification Number and Digital Signature Certificate:
DIN: All directors, whether resident or non-resident, must obtain a Director Identification Number from the Ministry of Corporate Affairs. The DIN serves as a unique identification for directors and is required for various legal and financial transactions.
DSC: Additionally, each director must acquire a Digital Signature Certificate. This electronic certificate is used for digitally signing documents and filings with government authorities, making it an essential component of the registration process.
3. Paid-Up Share Capital:
Within one month of incorporating the subsidiary, it is mandatory to introduce a paid-up share capital of at least Rs. 1 Lakh. This capital infusion demonstrates the financial commitment to the subsidiary and ensures it has the necessary financial resources to operate.
Meeting these requirements is crucial for a smooth and legally compliant establishment of a subsidiary in India. It’s advisable to seek legal counsel or consult with experts well-versed in Indian corporate laws to navigate this process effectively.
Benefits and Drawbacks of a Wholly owned Subsidiary
The key benefits and drawbacks associated with this corporate structure are mentioned below.
Benefits of a Wholly owned Subsidiary
The key benefits of wholly owned subsidiaries are:
1. Complete Control: The parent company can exercise full strategic and operational control over the subsidiary. This enables the parent company to implement its vision, policies, and strategies without external interference.
2. Liability Shield: Subsidiary companies can act as a protective barrier against financial losses. This separation of liabilities ensures that the parent company’s assets are safeguarded from the subsidiary’s financial challenges.
3. Cost Synergy: By sharing a common financial system and pooling administrative expenses and costs between the parent and subsidiary companies, cost synergies can be achieved. This can lead to more efficient financial management and resource utilisation.
4. Geographical Expansion: The parent company can expand its operations into various locations using its established brand name. This promotes brand recognition and trust across different markets, potentially increasing market share.
5. Protection of Intellectual Property: Wholly owned subsidiaries provide a secure environment for safeguarding trade secrets, technological know-how, and expertise. This reduces the risk of intellectual property theft or unauthorised use.
Drawbacks of a Wholly owned Subsidiary
The major drawbacks of wholly owned subsidiaries are:
1. Liability for Subsidiary Actions: The parent company is held liable for the actions and obligations of its subsidiary company. This can include legal, financial, or regulatory liabilities, which may affect the parent company’s overall financial health.
2. Diverse Legalities: Local legal requirements and regulations in the subsidiary’s operating country may differ significantly from those in the parent company’s home country. Navigating these variations can be complex and pose legal challenges.
3. Financial Complexity: Managing finances and consolidation becomes intricate, particularly when a parent company oversees multiple subsidiaries. Coordinating financial activities and reporting among various subsidiaries can be time-consuming and require extensive resources.
So, a wholly owned subsidiary offers advantages such as control, liability protection, cost synergies, brand expansion, and intellectual property security. However, it comes with challenges, including potential liability for subsidiary actions, diverse legal requirements, and financial complexities. Careful consideration of these factors is essential when deciding to establish and manage a wholly owned subsidiary.
Key Features of Wholly owned Subsidiaries
Understanding the fundamental characteristics that define wholly owned subsidiaries is crucial for potential investors and entrepreneurs. Mentioned below are the key features that distinguish these corporate entities:
1. Funding Sources:
Wholly owned subsidiaries are typically funded through a combination of pooled capital from the parent company and, at times, loans from financial institutions. This capital structure provides the necessary financial resources for the subsidiary’s operations and expansion.
2. Domestic Company Status:
A wholly owned subsidiary is considered a domestic company under Indian law. This classification grants the subsidiary the privilege of enjoying various tax deductions and allowances prescribed by Indian tax laws, enhancing its financial competitiveness.
3. Versatile Business Activities:
Wholly owned subsidiaries possess the flexibility to participate in a broad spectrum of business activities, encompassing production, marketing, and service-oriented operations. This adaptability empowers them to adjust and broaden their offerings to meet the dynamic demands of the market.
4. Foreign Direct Investment Approval:
In sectors where India permits 100% Foreign Direct Investment, wholly owned subsidiaries can be established without the need for prior approval. This streamlined process facilitates foreign investors‘ entry into the Indian market, promoting ease of doing business.
Final Thoughts
A wholly owned subsidiary presents a powerful corporate structure that allows a parent company to maintain full control over its operations, while enjoying legal and financial advantages in the host country. Key features include flexible funding sources, compliance with local laws, the status of a domestic company with associated tax benefits, and the ability to engage in diverse business activities. This structure also serves as a liability shield, protecting the parent company’s assets. Furthermore, in sectors where 100% Foreign Direct Investment is permitted, the simplified approval process promotes foreign investment and market entry. By harnessing these features, wholly owned subsidiaries become a strategic choice for global expansion, risk management, and achieving operational excellence in the international business sector.
