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.
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.
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.
Given below are some of the important features of wholly owned subsidiaries.
Here are the requirements to set up a wholly-owned subsidiary in India:
Here are a few precise steps to set up a wholly owned subsidiary.
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.
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:
You must attest the documents mentioned above by the Notary public of the country you stay in.
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.
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.
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.
A wholly owned subsidiary comes with the following advantages:
Along with the above advantages, there are certain disadvantages of having a wholly owned subsidiary.
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.
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.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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