Definition
 

A subsidiary company is controlled by another company which is known as  a parent company.

 

Description

A subsidiary company is a separate legal entity owned and controlled by another company, the parent or holding company. Here are the critical aspects of a subsidiary company:

1. Ownership and Control: With a majority of voting stock—typically more than 50%—the parent business has substantial control over the decisions and day-to-day operations of the subsidiary. Because of this ownership position, the parent business can shape the subsidiary's strategic direction, policies, and administration, resulting in a safe and well-organised management structure.
2. Legal Entity: A subsidiary is still a separate legal business with its assets, liabilities, and financial statements, even though it is under the parent company's supervision. Although it functions independently, it aligns with the parent company's overarching aims and objectives.
3. Financial Independence: A vital aspect of a subsidiary is its financial autonomy. It maintains its own financial statements and documentation, ensuring its independence. However, its economic performance is often combined with the parent company's financial statements for reporting purposes, providing a comprehensive view of the financial situation.
4. Operations and Management: The day-to-day operations of a subsidiary are typically managed by its own board of directors and executives, though these leaders are often appointed by the parent company. The subsidiary may operate in the same industry as the parent or in a completely different sector.
5. Types of Subsidiaries: Subsidiaries can take various forms in terms of ownership. They can be wholly owned by their parent firm or partially owned, with the parent holding a majority share. Joint ventures, where two or more companies jointly own subsidiaries, are also standard. Understanding these ownership structures is crucial in comprehending the subsidiary business model.
6. Legal and Tax Considerations: The rules and legislation of the nation where a subsidiary is incorporated apply to it. In addition, they submit independent tax returns and adhere to regional tax regulations; nonetheless, their financial outcomes are frequently integrated into the parent company's combined tax submissions.
7. Strategic Advantages: Parent firms can diversify their business activities, expand into new markets, reduce liability, and improve operational efficiency by forming subsidiaries. Additionally, it offers freedom regarding funding and overseeing various business divisions.

Benefits of holding company in India

Here are five benefits of establishing a holding company in India:

1. Risk Management and Liability Limitation: By isolating the operations and responsibilities of its subsidiaries, a holding company can reduce financial risk and liability. If one subsidiary has legal or economic problems, the holding company's other companies and assets are safeguarded.
2. Tax Efficiency: Indian holding companies are eligible for several tax breaks and advantages. By using tax credits and deductions or taking advantage of reduced tax rates in particular areas, they can strategically prepare to minimize their tax responsibilities. This financial savvy can provide a sense of security and stability.
3. Better resource allocation: Gain enhanced productivity and more effective resource management through operational synergies. Holding firms can save money by centralising IT, HR, and finance administrative tasks. This will streamline operations.
4. Strategic growth: The present strategic growth potential may be realised with a holding company structure. It facilitates mergers, acquisitions, and divestitures and allows the parent company to expand into new areas and diversify its assets while enabling swift response to market fluctuations. This room for expansion can give rise to hope and optimism for the future.
5. Access to Capital and Investment: The present strategic growth potential may be realised with a holding company structure. It facilitates mergers, acquisitions, and divestitures and allows the parent company to expand into new areas and diversify its assets while enabling swift response to market fluctuations. This room for expansion can give rise to hope and optimism for the future. 
   
    

How to file for a subsidiary company?

Filing for a subsidiary company involves several steps to ensure legal and regulatory compliance. Here's a step-by-step guide:

Step 1: Conduct Initial Planning:

Develop a detailed business plan outlining the subsidiary's objectives, operations, and structure. Consult with legal and financial advisors to understand the legal requirements and implications.

Step 2: Choose a Name:

Check the availability of the proposed subsidiary name with the relevant authorities (e.g., Registrar of Companies in India). Ensure the name does not infringe on any existing trademarks.

Step 3: Draft Incorporation Documents:

Draft the MoA outlining the subsidiary's purpose and activities. Draft the AoA detailing the subsidiary's internal governance and operational rules.

Step 4: Obtain Necessary Approvals:

Obtain formal approval from the parent company's board of directors to establish the subsidiary. Secure any required approvals from relevant regulatory bodies.

Step 5: Register the Subsidiary:

Submit the incorporation documents (MoA, AoA) and necessary forms (e.g., Form SPICe in India) to the RoC. Obtain digital signatures for the directors and authorised signatories.

Step 6: Pay Fees and Stamp Duty:

Pay the requisite registration and filing fees. Then, pay any applicable stamp duty on the incorporation documents.

Step 7: Receive Certificate of Incorporation:

Upon approval, the Certificate of Incorporation from the RoC will be received, which officially recognizes the subsidiary as a legal entity.

Step 8: Post-Incorporation Compliance:

You must then apply for a subsidiary's PAN and TAN.

Then you can file for a corporate bank account in the subsidiary's name. If need be, you can register for a Goods and Services Tax (GST) certificate. Maintain statutory registers and records as required by law. Obtain additional licences or permits for the subsidiary's operations.

Step 9: Appoint Directors and Auditors:

Appoint the initial directors and hold the first board meeting. As the next part, you must appoint a statutory auditor to audit the subsidiary's financial statements.

Step 10: Ongoing Compliance:

File annual returns and financial statements with the RoC. Ensure timely filing of income tax returns and other statutory compliance documents. Adhere to corporate governance norms and regulations to ensure legal compliance.

Trends that affect subsidiary company

Some of the trends that can affect the subsidiary company include:

1. Globalisation and Market Expansion: As businesses expand globally, subsidiary companies are increasingly established in diverse markets to tap into local opportunities. This trend allows parent companies to access new customer bases, leverage local resources, and navigate regional regulations more effectively. However, subsidiaries must also adapt to different cultural, economic, and regulatory environments.
2. Technological Advancements: Advancements in technology, such as AI, are reshaping the operations and strategies of subsidiary companies. These technologies enhance efficiency, improve decision-making, and enable better coordination between parent companies and their subsidiaries. Subsidiaries must stay abreast of technological trends to remain competitive and aligned with the parent company's innovation goals.
3. Regulatory Changes and Compliance: Changes in local and international regulations, including tax laws, trade policies, and corporate governance standards, significantly impact subsidiary companies. Subsidiaries must navigate complex reporting requirements and ensure transparency in their operations, which can influence their strategic decisions and operational practices.

Example

Jio Platforms Limited is a subsidiary of Reliance Industries Limited. Jio Platforms focuses on digital services and telecommunications, offering mobile networks, broadband, and various digital apps and platforms.

FAQ

What is a subsidiary of a company?

The parent business, which normally holds more than 50% of the voting stock in a subsidiary, controls the subsidiary. Although the subsidiary is a distinct legal entity, its objectives and tactics are in line with those of the parent firm.
 

What is the difference between a holding company and subsidiary company ?

A holding company is a parent business that mostly owns shares in other businesses, overseeing their investments and operations without engaging in its own production of goods or services. A subsidiary, on the other hand, operates as a separate legal entity under the supervision of a holding or parent company and carries out commercial activities like manufacturing goods or rendering services.