Understanding Wholly Owned Subsidiary under Companies Act 2013: Advantages, Disadvantages, and Compliance Requirements

Wholly Owned Subsidiary under Companies Act 2013: A Comprehensive Guide

A wholly owned subsidiary is a subsidiary company that is entirely owned and controlled by another company, which is referred to as the parent company. The Companies Act, 2013 has introduced new provisions for the formation and functioning of wholly owned subsidiary companies in India. In this blog, we will discuss everything you need to know about wholly owned subsidiary companies under the Companies Act, 2013.

Definition of Wholly Owned Subsidiary

As per Section 2(87) of the Companies Act, 2013, a subsidiary company is a company where the holding company:

• Controls the composition of the Board of Directors; or
• Exercises or controls more than one-half of the total voting power.

Therefore, a wholly owned subsidiary is a company that is 100% owned by the holding company and is under the complete control of the holding company.

Formation of Wholly Owned Subsidiary

The process of forming a wholly owned subsidiary is similar to that of forming any other company. The parent company needs to follow the same procedure for registration and incorporation of the subsidiary company. The parent company can also choose to merge or acquire an existing company to make it a wholly owned subsidiary.

Advantages of Wholly Owned Subsidiary

1. Complete control: The parent company has complete control over the subsidiary, which helps in better management and decision-making.
2. Asset protection: The subsidiary company is a separate legal entity, which means that the liabilities and debts of the subsidiary do not affect the assets of the parent company.
3. Risk diversification: The parent company can diversify its risks by investing in different subsidiaries operating in different sectors.
4. Tax benefits: The subsidiary company can avail tax benefits and incentives that are available to companies in that sector.

Compliance Requirements for Wholly Owned Subsidiary

1. Board of Directors: The parent company needs to appoint directors on the board of the subsidiary company, and the number of directors should be in compliance with the Companies Act, 2013.
2. Annual General Meeting (AGM): The subsidiary company is required to hold an AGM every year, and the parent company needs to ensure compliance with the provisions of the Companies Act, 2013.
3. Audit: The subsidiary company needs to get its accounts audited by a qualified auditor and file the audited financial statements with the Registrar of Companies.
4. Related Party Transactions: The parent company needs to disclose any related party transactions with the subsidiary company in its financial statements.

Disadvantages of Wholly Owned Subsidiary

While there are several advantages of having a wholly owned subsidiary, there are also some potential disadvantages that companies should consider before going ahead with this structure:

1. Cost: Establishing a wholly owned subsidiary can be expensive due to the costs associated with registering and incorporating the new company. There may also be ongoing expenses related to compliance and governance.
2. Risk concentration: Investing too much in one subsidiary can expose the parent company to significant risks if the subsidiary does not perform as expected.
3. Cultural differences: If the subsidiary is located in a foreign country, there may be cultural differences that can affect the operations and management of the company.
4. Lack of independence: Because the subsidiary is 100% owned and controlled by the parent company, it may not have the same level of independence as other companies, which can affect decision-making and operations.

Compliance requirements for wholly owned subsidiary companies under Companies Act 2013

As mentioned earlier, wholly owned subsidiary companies need to comply with the provisions of the Companies Act, 2013, and other applicable laws and regulations. Here are some key compliance requirements for wholly owned subsidiary companies:

1. Board of Directors: The parent company needs to appoint directors on the board of the subsidiary company, and the number of directors should be in compliance with the Companies Act, 2013.
2. Annual General Meeting (AGM): The subsidiary company is required to hold an AGM every year, and the parent company needs to ensure compliance with the provisions of the Companies Act, 2013.
3. Audit: The subsidiary company needs to get its accounts audited by a qualified auditor and file the audited financial statements with the Registrar of Companies.
4. Related Party Transactions: The parent company needs to disclose any related party transactions with the subsidiary company in its financial statements.
5. Governance: The subsidiary company needs to comply with the governance provisions of the Companies Act, 2013, including the appointment of independent directors and the establishment of various committees.

Conclusion

In conclusion, a wholly owned subsidiary can be an effective way to expand a business and diversify risks. However, companies need to carefully consider the advantages and disadvantages of this structure and ensure compliance with the applicable laws and regulations. Proper management, effective governance, and regular compliance checks can help companies make the most of this structure while minimizing potential risks.

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