Wholly Owned Subsidiary (WoS) refers to an independent and separate legal entity or a corporation with 100% of its shares held by another corporation, termed as the ‘parent company’. The parent company often governs the decision-making of the WoS. A WoS can be created either through a takeover by the parent company or by splitting away from the parent company.
The Companies Act, 2013 does not define a Wholly Owned Subsidiary, but it defines a ‘subsidiary company’ as, “a company in which the holding company— (i) controls the composition of the Board of Directors; or (ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.”
A foreign company may establish a company in India under the Companies Act 2013 by incorporation of a wholly owned subsidiary, joint venture, or an associate or by setting up a liaison office, project office, or branch of the foreign company in accordance with the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Act, 2013.
Importance of incorporating a WoS in India
- Creation of Separate Legal Entity: After registration, the WoS is a separate legal entity from its parent company and also limits the liability of each shareholder or member up to the unpaid amount of shares.
- Strategic control by the parent company
- Global Goodwill: The WoS can reap the benefits of the pre-established goodwill and brand image of a foreign company.
- Expansion and diversification is made simpler for overseas companies.
- Hassle-free winding up is lucrative for companies without outstanding liabilities looking to exit the market.
The bare minimum requirement to start a WoS is the presence of a minimum of 2 directors, with a minimum of 2 shareholders. The Companies Act, 2013 allows NRIs, PIOs and foreign nationals to be directors of Indian companies, provided one of the directors is an Indian citizen and resident of India. There are no conditions for the residential status of shareholders.
1. Application for Digital Signature Certificate (DSC)
It is mandatory for all directors to procure class-3 DSC by supplying photographs, photo ID proof address proof and email ID and Indian mobile number of the proposed director(s).
2. Application for Name Approval
Further, Part A of SPICe+ form has to be filed with two different names, one of which the Ministry of Corporate Affairs (MCA) shall approve. Copies of NOC/ Board resolutions along with requisite documents [Charter-Memorandum of Association (MOA), Articles of Association, INC 9 AGILE Form, KYC documents, and copy of the trademark registration certificate, where applicable] duly notarized/apostilled need to be submitted to the MCA.
3. Incorporation of WoS
Additionally, SPICe+ form Part B and C have to be filled on the MCA website for registration of the WoS. The form also offers the following services:
-Allotment of Director Identification Number (DIN)
-Issuance of Permanent Account Number (PAN) of the Company
-Issuance of Tax Collection Account Number (TAN) of the Company
-Bank account selection
-Goods and Service Tax (GST) Registration
After incorporation of the WoS, the following compliances need to be adhered to:
1. Board meeting
First board meeting has to be held within 30 days from incorporation of the company.
2. Appointment of Auditor:
The WoS’ first auditor shall be appointed within 30 days from date of incorporation, by the board. The auditor shall hold office until the first shareholder meeting of the company concludes, which is to be held annually.
3. Declaration of business commencement:
All subscribers are required to deposit the agreed-upon subscription amount (as per MOA) after the opening of bank account but before the commencement of business operations. Once this subscription amount is deposited, the company shall file a Declaration of Commencement of business to the Registrar of Companies (RoC) in form INC-20A within 180 days of incorporation of the company.
4. Naming the board:
The name of the company, registered office address, its Corporate Identification Number (CIN), contact information, GST Number, etc. shall be affixed outside every office and place of business of the WoS.
5. Share certificates:
The company shall approve the format of the share certificates and issue the same to subscribers.
6. Maintenance of Statutory Register:
The WoS shall obtain licenses and registrations from different Governmental authorities as applicable and such shall be kept up-to-date in the register of the company.
A wholly owned subsidiary is a 100% parent company controlled company. All WoS are required to report a balance sheet, income statement and cash flow statement to the group merged with the parental financial entity according to the prescribed accounting framework. WoS are a new concept to encourage foreign funding and investment in India and boost cash flows.
Additional Resource: Advantages of Wholly Owned Subsidiary in India
Frequently asked questions :
1. Who can incorporate a WoS?
A foreign company can set up a wholly owned subsidiary in India by investing in sectors where FDI is allowed as per the provisions of RBI/FEMA and Companies Act 2013.
2. What is the capital requirement for incorporating WoS of a foreign company in India?
The MCA has notified the Companies (Amendment) Act 2015, removing the minimum capital level required to form a company. Therefore, there are no minimum capital requirements to form a company and the law stipulates that the articles of incorporation may set the minimum share capital.
3. What are the documents required for a foreign director for incorporation of the company in India?
The following documents are required:
-Identity Proof- Copy of passport
-Additional Identity Proof- Driving Licence/National ID Card
-Address Proof- Telephone bill/ Electricity bill/Bank statement/Any utility bill, not older than 2 months.