Functioning of Wholly Owned Indian Subsidiary
A wholly-owned subsidiary is a corporation with all its shares held by another corporation, known as the parent company. This type of subsidiary can be established through a takeover or split-off from the parent company. Typically, the parent company holds ownership ranging from 51% to 99%. However, if the parent company desires lower costs and risks, it may create a subsidiary, associate, or joint venture where it owns a minority stake. This approach is also applicable when the parent company cannot obtain complete or majority ownership. In this article, we will explore the features and functions of an subsidiary company in INDIA.
How does Wholly owned Indian Subsidiary work?
In a wholly-owned Indian subsidiary, the parent company owns all the shares, eliminating the presence of minority shareholders. The subsidiary operates with the approval of the parent company and may or may not have direct input into all activities and management decisions. This arrangement could result in an unconsolidated subsidiary.
A wholly-owned subsidiary is typically established in a country different from that of the parent company. The subsidiary often has its own executive structure, products, and customers. Having a wholly-owned subsidiary enables the parent company to sustain operations in different geographic areas and markets. These factors help the parent company adapt to market changes, geopolitical factors, and trade practices.
Basic Features of a Wholly Owned Indian Subsidiary
A wholly-owned subsidiary can be formed as a private limited company, share-limited company, guarantee-limited company, or a liability company. The Indian Companies Act of 2013 offers numerous exemptions for private limited companies, making it recommended to establish a private company with a wholly-owned subsidiary.
Key Features of Wholly Owned Indian Subsidiary
1. The wholly-owned subsidiary is subject to Indian law, specifically the Companies Act of 2013.
2. It is permitted to engage in various business practices, including production, marketing, and service industries.
3. When 100% Foreign Direct Investment (FDI) is allowed, no prior approval from the Reserve Bank of India (RBI) is required.
4. It is considered a domestic company under tax laws, allowing it to avail deductions and allowances applicable to other Indian companies.
5. Funding can be sourced from pooled capital and loans.
Functioning of a Wholly Owned Subsidiary
While the parent corporation exercises analytical and tactical control over its wholly-owned subsidiaries, the subsidiary's operational autonomy is generally lower than that of the parent company, especially if the subsidiary has a long operational history abroad. When a company uses its own employees to run the subsidiary, it becomes easier to develop standard operating procedures compared to taking over an existing company and running it.
The parent company can utilize its access to data and protection guidelines to safeguard the acquired subsidiary's intellectual property. Additionally, implementing similar financial structures and sharing administrative and marketing programs can lead to cost savings for all businesses. The parent corporation guides the invested assets of the wholly-owned subsidiary.
However, establishing a wholly-owned subsidiary may result in overpayment for assets, particularly if other companies are competing for the same business. Building relationships with local sellers and buyers can also cause delays in the company's operations. Cultural differences can pose challenges when recruiting workers from an outside affiliate.
The parent company assumes all the risks associated with owning a subsidiary, which may increase if the local legislation significantly differs from the laws in the parent company's country.
Examples of wholly-owned subsidiary systems include Volkswagen AG, which is wholly owned by the Volkswagen Group of America, Inc., and its leading brands: Audi, Bentley, Bugatti, Lamborghini (wholly owned by Audi AG), and Volkswagen. Marvel Entertainment and EDL Holding Company LLC are wholly owned by the Walt Disney Company subsidiaries. Starbucks India, a coffee giant, is a wholly-owned subsidiary of Tata Private Limited.
Minimum Criteria to Start a Wholly Owned Subsidiary
To start a wholly owned subsidiary in India, the following criteria must be met:
1. At least 2 directors.
2. At least 2 shareholders.
3. Paid-up capital of at least 1 lakh rupees.
4. Directors of the Indian business can be NRIs, PIOs, foreign nationals, or foreign citizens, as permitted by the Companies Act of 2013. To become a director of an Indian company, the individual must obtain a Digital Signature Certificate and Director Identification Number (DIN).
Conclusion
The formation of a wholly-owned foreign company subsidiary in India requires approval for 100% Foreign Direct Investment (FDI), and prior approval from the Reserve Bank of India is no longer necessary. Nowadays, FDI is permitted under the Automatic Route without the government's prior consent and RBI registration.
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