Functioning of Wholly Owned Indian Subsidiary

A wholly-owned subsidiary is basically a corporation with 100% shares held by another corporation, i.e. the parent company. A corporation can become a wholly-owned subsidiary through take over by the parent company or through split off from the parent company. The parent company normally holds a subsidiary from 51% to 99%. If lower costs and risks are desirable, the parent company may create a subsidiary, associate or joint venture in which it should own a minority stake. This may also apply in the case if complete or majority ownership can not be obtained to the parent company. In this article find the features and functions of Indian subsidiary.

How does Wholly owned Indian Subsidiary work?

The parent company generally owns all the shares of a wholly-owned subsidiary which means there are no minority shareholders present in the company. The subsidiary mostly works with the parent company’s approval and may or may not have direct input to all the activities and management of the parent subsidiary. That could also result it into an unconsolidated subsidiary.

A wholly-owned subsidiary is basically for instance, maybe in a country different than that of the parent company. The subsidiary is most likely to have its own executive structure, products, and customers. Having a wholly-owned subsidiary allows the parent company to sustain and run operations in different geographic areas and markets. These factors thus help to cope up with the changes in the market or geopolitical and trade practices.

Basic features of a wholly owned Indian subsidiary

A wholly-owned subsidiary company is generally formed as a private, share-limited, guarantee-limited, or a liability company. Considering the large number of exemptions that a private limited company can make are available under the Indian Companies Act, 2013, thus establishing a private company with a wholly-owned subsidiary is recommended.

Key features of wholly owned Indian Subsidiary

• A wholly-owned business is totally controlled by the Indian law, i.e. the Companies Act 2013.
• Under this all kinds of business practices, which includes the production, marketing, and service industries, are permitted.
• Where 100% (FDI) is permitted, no prior approval is required or necessary for the RBI (Reserve Bank of India).
• It is also considered a domestic company under the tax law and is also permitted, as applicable to all the other Indian companies, to all deductions and allowances from the deduction.
• Here funding in generally pooled capital and loans could also be issued.

Functioning of a wholly owned subsidiary

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

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

Nevertheless, establishing a wholly-owned subsidiary may also cause the parent company to pay too much for the assets, mainly if other companies wish to bid on the same business. It also takes a lot of time to build ties with all the sellers and local buyers, delaying companies’ activity. Cultural differences can become a huge problem when recruiting workers from an outside affiliate.

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

For instance, 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 basic 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 India is Starbucks Corp wholly-owned subsidiary by Tata Private Limited.

Suggested Read: Why would it be a good move to start a business in India?

Minimum criteria to start Wholly Owned Subsidiary

• A minimum of 2 Directors.
• The shareholders should also be at least 2.
• Paid-up 1 lakh rupees capital at least.
• 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 basic requirements the person should have are the: first receive a Digital Signature Certificate and Director Identification Number (DIN).

Conclusion

A wholly-owned foreign company subsidiary in India can only be formed if it is 100 % FDI(Foreign Direct Investment) is approved and the Reserve Bank of India is no longer registered for prior approval.

Nowadays, under the Automatic Route, FDI is permitted without Government’s prior consent and the Reserve Bank of India.