EnglishA subsidiary company is a company whose control lies with another company. The company that holds the control is termed a Parent Company or Holding Company. The Holding company owns a majority of the shares of the subsidiary company, and hence it can exercise control as the major shareholder.
The holding company holds an interest in the subsidiary company. The company in which the holding company holds 100% share capital is termed a wholly-owned subsidiary. The subsidiary company can be either established or acquired by the holding company.
Definition of a Subsidiary Company
As per Section 2 (87) of the Companies Act 2013, a subsidiary company” or “subsidiary”, about any other company (that is to say the holding company), means 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 on 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.
Explanation-
For this clause—
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;
(d) “layer” about a holding company means its subsidiary or subsidiaries.
The above definition includes all the below-mentioned types of holdings:
Company A holds more than 50% of the share capital in Company B.
Company A holds the power to appoint or remove the majority of the directors of Company B.
Company A holds more than 50 % share capital in Company B; Company B holds more than 50% share capital in Company C, then Company A is Holding company to both B and C.
Company X holds rights to modify the structure of directorship of Company Y; Company Y holds similar rights in company Z, then company X is the parent company to both Y and Z.
Disadvantages are mentioned below:-
- One of the major disadvantages is that the freedom of the Indian subsidiary companies is restricted.
- Further, the decision-making power of the Indian subsidiary is also restricted and becomes a time-consuming process since every decision has to be discussed with the parent company before concluding.
- Due to aforesaid reasons, control is also lost by the Indian subsidiary company.
- Such an arrangement is also subject to Indian tax regulations since the tax department always tries to present the Indian subsidiary as a Permanent establishment of the parent company which increases the risk of the parent company being taxed in India.
- Both establishment cost as well as regulatory compliance costs of the Indian subsidiary increase in case there is an international transaction between the Indian subsidiary and the parent company as such transactions will be subject to Transfer Pricing provisions which required mandatory transfer pricing audit as well as filing of Income tax returns of both Indian subsidiaries as well as the parent company.
Know more about Indian Subsidiary Companies.
