To set up an entity in any country, it is very important to know about all the options which are available and most importantly the most beneficial mode of business available in the country suitable for the parent entity. We have already discussed about the following options in our previous blogs:
Another type of entity which is suitable for those who have done enough research on the market and want to set up a permanent establishment in India is “Wholly Owned Subsidiary” or “Subsidiary of a Foreign Company” in India. Under the Companies Act, foreign investors can establish wholly owned subsidiary companies (WOS) in the form of Private Limited Companies if they operate in sectors that permit 100 percent foreign direct investment (FDI). In that case, no prior RBI approval is needed.
Wholly-owned subsidiaries are fully owned by the parent company i.e. 100% of the subsidiary’s shares. 100% control over the subsidiary’s shares allows the Parent Company to appoint the subsidiary’s board of directors, which controls the subsidiary. Wholly owned subsidiaries may be part of the same industry as the parent company or part of an entirely different industry. A company operating in more than one country may choose to operate a business through a wholly owned subsidiary.
A Subsidiary company can be incorporated either by acquiring majority of the shares (more than 50%) of the company or by controlling the composition of board of directors of the company. Both holding and subsidiary companies are separate legal entities and they are related to each other by virtue of subsidiary –holding company relationship.
Both Wholly-Owned Subsidiary and Subsidiary Company can be incorporated as a Private Limited Company in India
A WOS or a Subsidiary is treated as Indian Company under the Income Tax Act and is eligible for all exemptions, deductions benefits as applicable to any Indian Company.
Let’s understand the concept of a Private Limited Company
Section 2 Sub section (68) of the Companies Act, 2013 defines the Private Company. “Private Company” means a company:
1. having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,
2. restricts the right to transfer its shares;
3. Prohibits any invitation to the public to subscribe for any securities of the company;
4. limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:
Provided further that—
1. persons who are in the employment of the company; and
2. persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members
1. A minimum share capital of INR 100,000 (1 Lakh) is required to be introduced within one month of incorporation of the Company.
2. Minimum two shareholders are required to incorporate a Private Limited Company in India.
3. Minimum of two directors are required out of whom one should be a resident in India. (Directors must be appointed and registered through India’s e-filing system for Director Identification Numbers (DIN)).
4. The Directors must acquire Digital Signatures Certificates (DSC)
1. Operation and Strategic Control : The most important advantage of setting up a Wholly Owned Subsidiary is the operational and strategic control that a parent company can exercise over its subsidiary. There is less risk of losing intellectual property to the competition because the parent can implement common data access and security protocols. Cost synergies are possible because a parent and its subsidiaries could use common financial systems, share administrative services and develop joint marketing programs.
2. Retaining Name Brand : The overall advantage for both parties however, in forming a wholly owned subsidiary; are that the subsidiary can retain its name brand while the parent company is afforded the opportunity to branch out into new markets.
3. Safeguarding Trade Secrets : Setting up a WOS or a Subsidiary offers security and good protection for the proprietary information, company’s trade secrets, expertise and technical knowledge, apart from offering a high degree of control over the operations.
4. Limited Liability – If a subsidiary company suffers any liability, then the liabilities and credit claims won’t be passed on to the parent company, ensuring that the assets of the parent company suffer no harm in case the subsidiary is in losses.
Taking the benefits into consideration, a Foreign Company can opt to incorporate a Wholly Owned Subsidiary in India provided the Foreign Company is fully aware of the market conditions of the host country’s economy and has done enough research on the pros and cons of the area in which they want to work in the host country.