In this blogpost, Divya Kathuria, Student of Raffles University, Neemrana, and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, what is a subsidiary company, wholly owned subsidiary, foreign company, the difference between a subsidiary and wholly owned subsidiary and the incorporation procedure.
What is a subsidiary company?
As the nomenclature of the term itself suggests, it is a company subordinate to the holding or parent company. It is a company that may be partially or completely owned by any other company known as the parent company that holds control over the subsidiary company. It is also known as Daughter Company. The voting stock of the subsidiary has to be more than 50% being controlled by the holding company.
What is a wholly owned subsidiary?
A wholly owned subsidiary, again the name itself suggests, which is completely owned by the parent company or whose common stock is 100% held by the holding company. A company becomes wholly owned subsidiary of the parent company through an acquisition by it or spin-off from the parent company. For instance, if ABC Pvt. Ltd. owns 100 per cent shares of XYZ Pvt. Ltd. Then XYZ Pvt. Ltd. becomes a wholly owned subsidiary company of ABC Pvt. Ltd.
Difference between subsidiary and wholly owned subsidiary
A subsidiary is 51% to 99% owned by another company. For liability, tax and regulatory reasons, the subsidiary and parent companies remain separate legal entities. Usually, the parent company is a large business group controlling more than one subsidiary; the holding company might not be quite active concerning all their subsidiaries though they have a control to some extent, and the amount of control it chooses to exercise depends on the managing control that it grants to the subsidiary’s managerial staff. This is quite a common arrangement in high-tech companies which aim to retain complete control and ownership of their technology.
While wholly owned subsidiary’s common stock is 100% owned by the parent company. In simple words, a Wholly Owned Subsidiary company is an entity of which 100 per cent shares are held by another company. The subsidiary can continue to operate only with the permission of the parent company. It is not necessary that the parent company would put direct input into subsidiary operations and management of the subsidiary.
A company also has the option to continue the operations of a wholly owned subsidiary rather than just merge or integrate their operations together for a variety of reasons. For example, the subsidiary may be located in a country different from that of the parent company. Having a subsidiary may for a variety of reasons related to tax and tariff. Other reasons like to preserve the brand and identity in of the wholly owned subsidiary may be important.
What is Foreign Company?
As per Section 2(42) of the Companies Act, 2013; a foreign company is any company or body corporate incorporated outside India which—
a) has a place of business in India whether by itself or through an agent, physically or through electronic mode;
b) conducts any business activity in India in any other manner.
Hence, a foreign entity to be considered as a foreign company has to fulfill both the criteria mentioned above, i.e., having a place of business in any manner specified above, and conducting any business activity in India.
Simply put, A company that is incorporated outside India or in a foreign country is called Foreign Company. For example ABC Inc. USA.
A foreign company planning to set up business operations in India may
- Incorporate a company under the Companies Act, 2013, as a Joint Venture or a Wholly Owned Subsidiary.
- Setting up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.
What is Wholly Owned Subsidiary Company in India by Foreign Company?
When a foreign company makes 100 per cent Foreign Direct Investment in India through an automatic route, the Indian company becomes the Wholly Owned Subsidiary Company of that Foreign Company. Like, ABC Inc. USA owns 100 per cent shares in XYZ Pvt. Ltd. then XYZ Pvt. Ltd. becomes the Subsidiary Company. This is possible only when 100 per cent FDI is permitted and no prior approval of Reserve Bank of India is required.
A WOS can be defined as an entity whose entire share capital is held by foreign corporate bodies. A WOS can be:-
A private company, limited by shares or guarantee, or an unlimited liability company.
Considering the various exemptions available to a private company limited by shares under India’s Companies Act, 2013, it is usually recommended that it be incorporated as a private company.
Minimum requirements to incorporate
- Minimum two directors
- Minimum two shareholders
- Minimum paid up capital of Rs1 lakh
- Two directors have to apply for Digital Signature Certificate.
- All the directors have to apply for DIN (Director’s Identification No.).
- Applicant has to apply for name of the company in Form INC-1.
- After obtaining name approval from ROC, an applicant is required to file form INC-7 (Application for Incorporation of Company), form DIR-12 (Particulars regarding appointment of directors, the key managerial personnel and any changes in them) and form INC-22 (Notice of location or change of address of the registered office of the company) along with Memorandum and Articles of Association of the Company.
- After filing of the incorporation documents, you are required to pay online ROC fees and Stamp duty as per the authorized capital of the company.
- After the payment of ROC fees and Stamp Duty, ROC verifies the filed documents. Form INC-22 and DIR-12 are approved through the Straight Through Process (STP) and verifies form INC-7 in detail. ROC may suggest some changes in the form or attachment. We will have to make changes accordingly.
- Once ROC is satisfied, Certificate of Incorporation is sent through email.
- Proof of address and latest electricity bill in case of rented accommodation.
- For Indian National
- PAN Card is mandatory
- Address proof (electricity bill, telephone bill, bank statement or passbook or rent agreement and latest electricity bill in case of rented accommodation)
- Proof of photograph ID (passport, Driving license, voter ID or Aadhar card)
- For Foreign National
- Passport is mandatory.
- Address Proof (electricity bill, telephone bill, bank statement or passbook or rent agreement and latest electricity bill in case of rented accommodation.)
- Photograph ID Proof (government license or document containing name in full, photo and date of birth.)
- Documents submitted must be certified by the Indian Consular or consulate.
Procedure in brief (Concluding)
- 2 directors are required to file the DIN.
- One of the directors has to apply for Digital Signature certificate.
- The applicant will apply for the name in eform-1A with the companies Registrar which has the jurisdiction.
- Once the approval of name is obtained from RoC, FORM 1 for incorporation of the company has to be submitted.
- Form 18 for the notice of registration of location of registered office
- Form 32 for the first directors along with MoA and AoA.
- RoC fees and Stamp duty may be paid electronically once the application is filed online.
- After such payment, documents have to be verified by the RoC. Form 18 and 32 are approved by Straight through process and Form 1 is checked thoroughly and can also suggest some changes if necessary to be made in the attachment or in the form.
- After such necessary verifications and being fully satisfied, it can sell the soft copy of the certificate of incorporation to the company via email.