Wholly-Owned Subsidiary – Definition and Features Explained
You must have heard about larger companies acquiring smaller companies for business expansion. When a larger company acquires and owns 100% stock of another company, the acquired company becomes the wholly-owned subsidiary of the parent or the larger company.
This blog explains how the wholly-owned subsidiary mechanism works and its importance in business growth.
What is a Wholly Owned Subsidiary?
When a larger company owns all the shares of another company, the second company is called a wholly-owned subsidiary. The company that wields rights over the common stocks is the parent company.
After acquisition by a larger company, the smaller company/firm can become a wholly owned subsidiary. A large company can have several wholly owned subsidiaries across different industries. With the help of these subsidiaries, a company can diversify its business and lower its risk.
For example, Marvel Entertainment is a wholly-owned subsidiary of Walt Disney. Another prime example of a wholly-owned subsidiary is KFC, which is a wholly owned subsidiary of PepsiCo Inc.
How Does a Wholly Owned Subsidiary Work?
A majority-owned subsidiary is a company whose 51%-99% of the common stock is owned by the parent company. However, in the case of a wholly-owned subsidiary, 100% of shares of the acquired company belongs to the parent company.
The parent company makes all the business-related decisions for the subsidiary. They may choose to have direct involvement in a smaller company’s workflow or not. This might further result in an unconsolidated subsidiary.
What are the Features of a Wholly Owned Subsidiary?
Given below are some of the important features of wholly owned subsidiaries.
- Companies Act 2013 controls the working of majorly owned businesses.
- A wholly owned subsidiary can be in a different state, country or continent from the parent company.
- The subsidiary company can have a management team.
- A parent company can have a subsidiary business in any field, such as marketing or production.
- Both parent and subsidiary companies share risks and rewards they stand to lose or gain.
- The subsidiary company must have a separate legal identity.
- No prior approval is required from RBI in the case the company is allowed to have 100% FDI.
Requirements to Set Up a Wholly Owned Subsidiary
Here are the requirements to set up a wholly-owned subsidiary in India:
- One of the directors must be an Indian resident or have lived here for 182 days during the previous year.
- There must be at least two directors.
- After the formation of the subsidiary, it must introduce a paid-up share capital of at least Rs.1 lakh.
- Every director involved here must have a Director Identification Number (DIN). They must also own a Digital Signature Certificate.
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How to Set Up a Wholly Owned Subsidiary?
Here are a few precise steps to set up a wholly owned subsidiary.
Step 1: Choosing a Brand Name
The first step to launching your subsidiary to the market is to choose a unique brand name. You must be very sure to research that your new company or brand name is not already in use. The right name will be one of the key essences for your company to attract customers.
Step 2: Get your DIN Numbers
A Director’s Identification Number (DIN) is a unique identification credential every existing or potential director should have.
You must carry these documents to get your DIN number ready:
- Identity proof: PAN card (Indian resident) or passport (foreign national)
- Residence proof: driving licence, one-month-old utility bill and identity card
- Two passport-size colour photos. One of them should be in jpeg format, while the other must be a hard copy to paste into paper.
- Verification or declaration in a Rs. 10 stamp paper duly notarised by the Notary. You must follow the prescribed format for this declaration.
You must attest the documents mentioned above by the Notary public of the country you stay in.
Step 3: Application for Digital Signature Certificate (DIN)
After getting your DIN, you should need to get your DSC. A Digital Signature Certificate is an authentic and trusted mode for document verifications today.
After getting your DIN and DSC, you must fill up and submit Form 10 (A) . This online and mandatory application procedure allows businesses to set up a wholly-owned subsidiary.
Here, you need to provide at least six unique names for your company in order of preference. As company owners, you must remember that these names reflect your brand image and objectives properly. Also, the name of your private company must contain “private limited’’ towards the end.
Step 4: Opting for a Business Bank Account
After completing these legal works, you must prepare a business bank account for your firm. This will allow you to organise your firm’s overwhelming finances as the expenditure and savings grow.
It will also make loan applications easy for your new business to sustain.
Step 5: Drafting and Stamping of Memorandum and the Article of Association (MOA and AOA)
You must draft the MOA and AOA, keeping the provisions mentioned in the Company’s Act (2013). These must contain the company’s objectives and policies to attain its goals. In addition, you need to pay an adequate stamp duty based on your company’s authorised capital.
You must submit the stamp duty for MOA & AOA and the filing fee for incorporation-related documents.
What are the Advantages of Wholly Owned Subsidiaries?
A wholly owned subsidiary comes with the following advantages:
- Parents’ companies can use loss incurred by one subsidiary to counterbalance profit from other companies.
- The Parent company inherits the already existing company’s clients and customers. Rebuilding a clientele for a new customer base takes much more time and effort.
- Decision-making becomes quick and easy as commands only move from parent to subsidiary company.
- The larger company gets to diversify its business and penetrate new markets. This allows them to cushion against losses from one subsidiary.
- The large firm can function from different geographical locations with the same brand name.
- Having a wholly owned subsidiary allows a parent company to separate liability or weakness from the assets of the parent company.
- The parent company can easily confide their confidential data, like business secrets and expertise easily.
- Parent and subsidiary companies have a common financial system. This allows them to share costs and administrative expenses. Thus, maintaining a cost synergy between the parent and subsidiary company.
What are the Limitations of Wholly-Owned Subsidiaries?
Along with the above advantages, there are certain disadvantages of having a wholly owned subsidiary.
- There can be an increase in taxation on the parent company as more taxes are levied against the subsidiaries.
- If multiple businesses are bidding for subsidiaries’ assets, the parent company might have to pay more than usual. This might lead to the overvaluation of assets.
- When a parent company hosts several subsidiaries, consolidating and organising finances can get difficult.
- Sustaining in a foreign market without proper research can get tricky if the parent company does not give time to proper ground-level research.
- It can be tough to organise mergers, and acquisitions can be a difficult job.
- Establishing relations with grassroots-level staff can get difficult and time taking.
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Final Word
Large organisations and enterprises acquire smaller companies and make them wholly-owned subsidiaries to their benefit. This helps the parent company expand their business without having to worry about investing in setting up a new ecosystem from scratch.
The manpower, business process and revenue model already existing, it becomes much easier for the parent company to go ahead with their business expansion. The wholly-owned subsidiary benefits from being associated under the banner of a well-established group/company.
FAQs
Ans: The holding company only holds the stocks that some other company controls. However, the parent company owns all the stocks and operations of its subsidiaries. For example, the parent company Pepsi has various subsidiaries across the globe.
Ans: When a company has multiple subsidiaries, it can use the loss of one company to balance with the profits of others. This helps them reduce the overall taxes.
Ans: Jio Saavn, TV18, Reliance Retail, Reliance Industrial Infrastructure, and Embibe are a few subsidiaries of Reliance.
Ans: Subsidiaries related to one another on the grounds of a common parent company are sister companies.
Ans: The Companies Act 2013 prohibits subsidiary companies from owning shares in parent companies.
Ans: Once a company becomes a large organisation’s subsidiary, they have less freedom to make decisions. Also, when a subsidiary company raises an issue, it must go through several steps before the parent company takes action.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
