Establishing a Wholly Owned Subsidiary or Subsidiary in India: A Strategic Guide for International Businesses

What is the Key Difference Between a Subsidiary and a Wholly-Owned Subsidiary?

A subsidiary and a wholly-owned subsidiary are two distinct corporate structures in India that are occasionally confused. A parent or holding company owns and controls a subsidiary company with at least 51% of the shares. The holding firm owns a majority stake in its subsidiary but not entirely. It can have an impact on the operations and finances of a subsidiary. 

According to the Companies Act, 2013, “a company will be referred to as a Wholly-Owned Subsidiary when the parent company owns all the shares.” A wholly-owned subsidiary is one in which another parent corporation controls the entire share capital. This other company could be a well-established Indian firm or a foreign firm. In India, a wholly-owned subsidiary might register as a private or public limited company.

What is a subsidiary company?

A subsidiary is a company that is controlled or owned by another company. The controlling firm is referred to as the parent organization, whilst the subsidiary is called the daughter enterprise. It could doubtlessly be owned with the aid of the federal authorities or the country. Subsidiaries are taxed and regulated as independent legal entities. They differ from divisions inside a firm in this sense. 

The parent firm often owns the majority of the shares in the subsidiary company. 

A corporation may also have several tiers of subsidiaries. That is, a subsidiary can have more subsidiaries beneath it. When a company has many layers of subsidiaries, the parent company has direct control over the first-tier subsidiaries and indirect authority over the companies in later levels. 

The Advantages of Establishing an India Subsidiary

    The following are the advantages of establishing a subsidiary in India:

•  The parent company will offer significant financial and human resources to the subsidiary. As a result, the subsidiary will gain access to technological know-how, training, consultation, personnel, subscription funds, and other resources.
•   By regularly subscribing to new shares of the subsidiary, the parent business might open a new channel of cash.
•  The subsidiary’s profits can be used to offset the parent company’s losses.
•  Various companies can work together to form a joint venture as a subsidiary, resulting in increased revenues and market penetration. 

The Drawbacks of an Indian Subsidiary

• In spite of having its personal management, the Indian subsidiary’s freedom is limited due to the fact it is a subsidiary of a bigger organization.
• Relying on the parent company’s management structure and level of affect over the subsidiary, the parent company may not have comprehensive access to the subsidiary’s cash flows.
•  The parent company may be obliged to guarantee its subsidiaries’ debts, exposing itself directly to its subsidiaries’ liabilities.

What is a wholly-owned Owned Subsidiary?

The parent company owns 100% of the equity in a wholly-owned subsidiary. A wholly-owned subsidiary can be established through a parent company buying or by having been spun out from the parent company, whereas a typical subsidiary is 51% to 99% owned by the parent company.

The Benefits of a Wholly Owned Subsidiary

The wholly-owned firm is governed by Indian law, specifically the Companies Act 2013. The following are the advantages of a Wholly Owned Subsidiary:

• Organizations or Companies can rely on suppliers and service providers who use wholly-owned subsidiaries to administer their supply chain.
• Companies can manage any kind of risk through Wholly Owned Subsidiaries as well.
• A new firm might increase its market dominance by establishing wholly-owned subsidiaries.
• Establishing a Wholly Owned Subsidiary out of the country may also be advantageous because it may acquire favorable tax income from the foreign country.

The Disadvantage of a Wholly Owned Subsidiary

 Along with the numerous benefits of a Wholly Owned Subsidiary, there are a few drawbacks. The following are the same:

• The usage of separate corporate entities may result in additional taxes.
• Diversification and the formation of wholly owned subsidiaries may cause the parent to company to lose focus on its core competencies.
• The parent company has a legal obligation to promote the corporate interests of its subsidiaries.

Compliance for a Wholly-Owned Subsidiary in India

Following the successful registration of a wholly-owned subsidiary in India, it is responsible for specific commercial and financial compliances such as: 

• Board Meetings: The company’s first board meeting must be held within 30 days after its formation. Every year, four board meetings should be held, with no more than 120 days between two consecutive meetings. There should be an annual shareholder meeting.
• Obtain licenses: Depending on the nature of the task, a company should obtain the essential licenses for conducting business in India. This includes any applicable Goods and Services Tax (GST), Professional Tax, Importer Exporter Code, or other licenses. 
• Keeping Accounts: Keep a record of all financial transactions in accordance with the country’s accounting regulations. Submit the reports to the Securities and Exchange Board of India’s regulatory agencies.  
• Statutory Audits: Your financial accounts should be audited on a regular basis by a professional accountant. An annual statutory audit is required. 
• Others: A wholly-owned subsidiary in India is the first step in several other company compliance needs. Filling out documents, managing a bank account, GST registration, auditor appointment, maintaining annual general meeting minutes, foreign remittance notification, and so on.

Conclusion

In summary, entering the dynamic Indian market offers many opportunities for international companies. Deciding whether to create a wholly owned subsidiary or a subsidiary is a crucial choice, each with its own pros and cons. A wholly-owned subsidiary gives you more control and profit, but it requires significant investment and compliance efforts. On the other hand, a subsidiary lets you share risks and benefit from local expertise, but it may mean sharing decisions and profits. To succeed, you need thorough market research, strong financial planning, and a clear market entry strategy. Ultimately, your choice should match your business goals and resources for a successful and lasting presence in India’s growing economy.