The Functions of a Wholly Owned Subsidiary Company

Introduction

A wholly owned subsidiary is a company with 100% of its shares owned by another corporation, which is the parent company. A parent company can acquire a wholly owned subsidiary or create one through a split-off. The parent company usually owns 51% to 99% of the subsidiary, and in cases where complete or majority ownership cannot be obtained, the parent company may create a subsidiary, associate, or joint venture where it owns a minority stake. In this article, we will discuss the functions of wholly-owned subsidiaries in India.

How does a Wholly owned Indian Subsidiary work?

A wholly owned subsidiary is typically in a different country from the parent company. The subsidiary may have its own executive structure, products, and customers but works with the parent company's approval and may or may not have direct input into all the activities and management of the parent subsidiary. This could result in it being an unconsolidated subsidiary. Having a wholly owned subsidiary allows the parent company to operate in different geographic areas and markets, helping it to cope with changes in the market or geopolitical and trade practices.

Minimum criteria to start a Wholly Owned Subsidiary

The following are the minimum requirements to start a wholly-owned subsidiary company in India:

• At least 2 directors
• At least 2 shareholders
• A minimum of 1 lakh rupees capital
• Directors’ Boards: Indian Businesses’ directors can be NRIs, PIOs, Foreign Nationals, and Foreign Citizens, provided they have a Digital Signature Certificate and Director Identification Number (DIN).

Basic features of a wholly-owned Indian subsidiary

A wholly owned subsidiary is typically formed as a private, share-limited, guarantee-limited, or liability company. Establishing a private company with a wholly owned subsidiary is recommended since a private limited company can make available many exemptions under the Indian Companies Act, 2013.

Functions of a wholly-owned Indian subsidiary

The following are the functions of a wholly-owned subsidiary company in India:

1. Although the parent company has analytical and tactical control of its wholly owned subsidiaries, 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 employees to run its subsidiary, it becomes much easier to develop standard operating procedures rather than taking over an existing company and running it.

2. The parent company can apply for 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. Moreover, the use of similar financial structures, and 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.

3. Establishing a wholly owned subsidiary may cause the parent company to payoff the assets, mainly if other companies wish to bid on the same business. Building ties with all the sellers and local buyers also takes a lot of time, delaying companies’ activity. Cultural differences can become a huge problem when hiring workers from an outside affiliate.

4. The parent company always takes on all the risks of owning a subsidiary, which may increase if the local legislation is considerably different from 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.

Conclusion

In India, a wholly-owned foreign company subsidiary can only be established if it is approved for 100% Foreign Direct Investment (FDI) and no longer requires prior approval from the Reserve Bank of India. Currently, FDI is allowed through the Automatic Route, eliminating the need for prior consent from the government or the Reserve Bank of India.