The word subsidiary in terms of companies means “an enterprise that is controlled by another by owning more than 50% of voting stock”. In simpler words, a subsidiary company is one which is controlled by another company.
Companies Act, 2013 defines subsidiary company as a company in which the holding company:
- Controls the composition of the Board of Directors;
- 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 shall not have layers of subsidiaries beyond such numbers as may be prescribed.
WHAT IS A HOLDING COMPANY?
A holding company is one which holds controlling ownership interests in other companies. It is a parent corporation. One of the most famous example of a holding company and its subsidiary is “Alphabet Inc.” If you are unaware of this company, it would be interesting for you to know that Alphabet Inc. is the parent company of “Google”. It has no business operations of its own and can be said as a collection of companies.
TYPES OF SUBSIDIARY COMPANY IN INDIA
A subsidiary company in India can be of two types:
- Wholly owned
In these type of subsidiaries 99.99% of shares are held by the holding company and 0.1% of shares are held by the nominee of the holding company
- Subsidiary company
In these type of subsidiaries more than 50% of shares are held by the holding company and rest are held by other shareholder which can be either individuals or companies
DOCUMENTS REQUIRED FOR REGISTRATION OF A SUBSIDIARY COMPANY
- In Case of Indian Nationals:
- Permanent Account Number (PAN Card). This is a mandatory document
- Address Proof (electricity bill, telephone bill, rent agreement, etc)
- Photo Id Proof (Aadhar card, voter id, driving license, etc)
- In Case of Foreign Nationals:
- Passport (just like PAN for Indian Nationals, passport for Foreign Nationals is a mandatory document)
- Address Proof (this must be certified by the Indian Consulate)
- Photo Id Proof (this must be certified by the Indian Consulate as well)
FORMATION PROCEDURE FOR SUBSIDIARY IN INDIA
A subsidiary in India can be a Public Limited Company, a Private Limited Company, or any other company. As it comes under the Companies Act, 2013, formation of an Indian Subsidiary is similar to that of incorporation of a private limited company. Thus following are the requirements for setting up a wholly owned subsidiary in India:
- Applying for Company Name
A proposed name is to be reserved for the purpose of forming a subsidiary company through the web portal of the Ministry of Corporate Affairs along with a fee of INR 1,000. Further, SPICe Form can be used for the integrated process of name reservation and formation of a company
- DINs and DSCs of Directors
Director Identification Number (DIN) and Digital Signature Certificate (DSC) is a mandatory requirement when it comes to formation of any kind of company. All the matters after the incorporation requires DIN and DSC as most of it is done online
- Memorandum of Association (MOA) and Articles of Association (AOA)
The Memorandum and Articles of Association of the subsidiary which must be duly signed should be filed along with the registration fee and stamp duties
- Details of Registered Office and Directors and Key Managerial Personnel
Form INC-22 and Form DIR-12 is to be filed as well. While INC 22 deals with furnishing details of the registered office to the Registrar; DIR 12 contains details of the Directors and the key managerial personnel of the company. This should be filed within the prescribed time limit and the fees as provided in the Companies (Registration Offices and Fees) Rules, 2014
- Minimum Number of Members
In case of subsidiary for:
- Public company: 7
- Private Company: 2
- Minimum Number of Directors
In case of subsidiary for:
- Public company: 3
- Private Company: 2
There should be at least one (1) Resident Director in both the cases.
- Subscription of Shares
For formation of subsidiary in India, if the company is private, public subscription is not allowed. It is allowed only in the cases of public company
- Declaration by Directors
Form INC 9 is another form that needs to be submitted while formation of a subsidiary company. This form is related to declaration by the director(s) that they have not been convicted of any offence in connection with the promotion, formation or management of any company during the preceding 5 years; they have not been found guilty of any fraud or misfeasance or of any breach of duty to any company under the Companies Act, 2013 or any previous company law during the preceding 5 years; and that all documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of their knowledge and belief.
- Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN)
After getting the incorporation certificate, getting these two documents is mandatory for receiving subscription money and for issue of share certificate to subscribers.
SOME IMPORTANT POINTS TO NOTE ABOUT SUBSIDIARIES
- A subsidiary cannot give financial assistance in cases of shares of its holding company
- The books of account of a subsidiary of any holding company is inspected by the authorized personnel of the Board of Directors
- The balance sheet of the subsidiary company must disclose the shares held by the holding company
- In case a person is a relative or partner in the holding company, he cannot be appointed as an auditor for the subsidiary and vice versa
- A Liaison Office or Branch Office in India needs to be set up in case the holding company is a Foreign Company
- Where 100% Foreign Direct Investment is permitted, no prior approval of Reserve Bank of India is need, in the remaining cases
- In case of Foreign Subsidiary, funding can be made in the form of share capital as well as loan
- A board resolution must be passed by the holding company (in case of foreign company) for incorporation of subsidiary in India
CERTIFICATE OF INCORPORATION
After incorporation of subsidiary company, the Registrar of Companies issues the Certificate of incorporation which establishes that the company has been incorporated under the Companies Act, 2013 and the rules there under. It is like a license to run a company in India.
With the initiative of the Ministry of Corporate Affairs towards ease of doing business in India, opening a subsidiary company has been easier, especially for foreign companies. This in turn works as a major monetary source for economic development in India through the investments done by foreign companies knows as Foreign Direct Investments. India has seen a major growth in the registration of subsidiary and because of the simpler online process, there is no stopping of corporate sector of India.