Wholly Owned Subsidiary: Features and Functions

Introduction

An entity whose entire share capital is held by foreign companies may be defined as a wholly-owned subsidiary company. A wholly-owned subsidiary company may be formed as a private, share-limited, guarantee-limited, or liability company. Considering the numerous exemptions that a private limited company can make available under the Indian Companies Act, 2013, establishing a private company with a wholly-owned subsidiary is recommended.

Also Read: When is Corporate restructuring required? Its Characteristics and Types

Key Features

1. The wholly-owned business is controlled by Indian law, i.e. Companies Act 2013.

2. All kinds of business practices, such as the production, marketing, and service industries, are allowed.

3. Where 100% (FDI) is permitted, no prior approval is needed or appropriate for RBI (Reserve Bank of India).

4. It is considered a domestic company under tax law and is entitled, as applicable to all other Indian companies, to all deductions, allowances from the deduction.

5. Funding in pooled capital and loans could be issued.

Minimum Requirement to start Wholly Owned Subsidiary

1. 2 Directors at least.

2. The shareholders should be at least 2.

3. Minimum paid-up 1 lakh rupees capital.

4. Directors’ Boards: Companies Act, 2013 permits the directors of the Indian Business to be NRIs, PIOs, Foreign Nationals and Foreign Citizens. To be an Indian company’s director, the person must first receive a Digital Signature Certificate and Director Identification Number (DIN).

The functioning of Wholly Owned Subsidiary

Although a parent corporation has tactical and analytical control of its wholly-owned subsidiaries, the real power of a subsidiary that has a long operational background abroad is usually less. When a company uses its employees to run its subsidiary, it is much less difficult to develop standard operating procedures than to take over an existing company.

The parent company may also apply its access to data and protection guidelines for the subsidiary to reduce the risk that other companies may lose their intellectual property. Similarly, the use of similar financial structures, the sharing of administrative and similar marketing programs leads to lower costs for all businesses, and a parent corporation guides a wholly-owned subsidiary’s invested assets.

However, establishing a wholly-owned subsidiary may cause the parent company to pay too much for assets, mainly if other companies bid on the same business. It also takes time to build ties with sellers and local buyers, impeding companies’ activity; cultural discrepancies can become a problem when recruiting workers from an outside affiliate.

Also Read: Understanding FDI in a Private Limited Company

The parent company takes on all the risk of owning a subsidiary. It may increase if local legislation is considerably different from the laws in the parent company’s country.

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, are typical examples of a wholly-owned subsidiary system.

Moreover, Marvel Entertainment and EDL Holding Company LLC are wholly owned by the Walt Disney Company subsidiaries. Coffee giant Starbucks Japan is Starbucks Corp wholly-owned subsidiary.

Conclusion

Well, a wholly-owned foreign company subsidiary in India can only be formed if 100 % FDI is approved and the Reserve Bank of India is no longer registered for prior approval.

Under the Automatic Route, FDI is permitted without Govt’s prior consent and the Indian Reserve Bank.