Understanding Subsidiary Companies in-depth

A subsidiary company is a distinct legal entity that is controlled by another company, known as the parent or holding company. This relationship allows the parent company to exert significant influence over the subsidiary’s operations and governance. In this article, we will explore the subsidiary company section of the Companies Act 2013. We will dive into the definition of a subsidiary company, the process of setting it up, and the implications of FDI policy in India.

Definition of a Subsidiary Company

According to the Companies Act 2013, a subsidiary company definition states that a subsidiary is a company in which another company (the holding company) holds more than 50% of its total share capital. They can exercise this control either directly or indirectly through other subsidiaries. The relationship between the parent and subsidiary companies allows for strategic alignment and operational efficiency. Thus making it an attractive structure for many businesses.

Key Features of a Subsidiary Company

1. Ownership: A Parent company generally owns a subsidiary company. The parent company holds a majority stake (more than 50%) in its equity shares.
2. Separate Legal Entity: A subsidiary operates as a separate legal entity from its parent. Meaning it can enter into contracts, sue or be sued, and own assets independently.
3. Limited Liability: The liabilities of a subsidiary are distinct from those of its parent company. This separation protects the parent company’s assets from any financial difficulties faced by the subsidiary.
4. Control and Influence: The parent company has significant control over the subsidiary’s operations. Such as appointing directors and influencing major business decisions.

Setting Up a Subsidiary Company

Steps to Register an Indian Subsidiary

Starting an Indian subsidiary company involves several steps that you must follow to ensure compliance with local laws:

1. Determine the Type of Subsidiary: Decide whether you want to establish a wholly-owned subsidiary or a partially-owned one. A wholly-owned subsidiary is 100% owned by the parent company, while a partially-owned one has multiple shareholders.
2. Obtain Digital Signature Certificate (DSC): As part of the registration process, all proposed directors must obtain a DSC for signing electronic documents.
3. Apply for Director Identification Number (DIN): Each director must apply for and obtain a DIN from the Ministry of Corporate Affairs (MCA).
4. Name Approval: Choose a unique name for your subsidiary and apply for approval through the MCA portal. The name must comply with naming regulations stipulated by Indian law.
5. Prepare Required Documents: Gather all necessary documents, including:
   • Certificate of incorporation of the parent company.
   • Memorandum of Association (MoA) and Articles of Association (AoA) for the subsidiary.
   • Board resolution approving the establishment of the subsidiary.
   • Identity and address proofs of directors.
6. File Incorporation Documents: Submit all required documents along with Form SPICe+ on the MCA portal to register an Indian subsidiary.
7. Obtain Certificate of Incorporation: Upon successful submission and approval, you will receive a Certificate of Incorporation from the RoC (Registrar of Companies). This will officially establish your subsidiary.

Foreign Company Registration in India

When establishing an Indian subsidiary as a foreign entity, it is essential to comply with specific Foreign Company Registration regulations:

1. Foreign Direct Investment (FDI) Policy: The FDI policy outlines how much foreign ownership is permitted in various sectors. Certain sectors allow 100% foreign ownership, while others may have restrictions.
2. Approval from Reserve Bank of India (RBI): Foreign companies must obtain approval from RBI before making investments in India, ensuring compliance with foreign exchange management regulations.
3. Registration Process: The process for foreign company registration in India is similar to that for domestic companies but requires additional documentation related to foreign ownership.

Advantages of Establishing a Subsidiary Company

1. Market Entry: A subsidiary allows foreign companies to enter and operate within Indian markets while adhering to local laws and regulations.
2. Risk Mitigation: By establishing a separate legal entity, parent companies can limit their exposure to liabilities arising from the subsidiary’s operations.
3. Operational Flexibility: Subsidiaries can adapt their business strategies to local market conditions. That too while benefiting from the resources and expertise of their parent companies.
4. Tax Benefits: Depending on applicable tax treaties and local regulations, subsidiaries may enjoy certain tax advantages that enhance profitability.

Conclusion

A subsidiary company serves as an effective means for businesses to expand their operations while maintaining control over their investments. Understanding the provisions outlined in the subsidiary company section of the Companies Act 2013 is crucial for ensuring compliance during establishment and operation.

By following proper procedures for setting up an Indian subsidiary and adhering to FDI policies, foreign companies can successfully navigate India’s complex regulatory landscape. And do so while capitalizing on growth opportunities in one of the world’s largest markets.