Can a company own 100% shares of another company in India?

In the race to becoming the leading company in their sector, companies have been tediously working hard to perfect their products, solutions and services. However, at times, the best method to gain an edge in the market is by acquiring and setting up subsidiaries around the globe.

A subsidiary is basically a company working under a parent or holding company, which holds the majority shares of the subsidiary. The parent company needs to acquire the majority shares, be it a minimum of 50% or the entire 100% of another company to deem it as its subsidiary. However, if a company owns all 100% shares of another company, the latter shall be deemed to be a ‘wholly owned subsidiary’.

So, when the question arises – can a company own 100% shares of another company in India, the answer is: Yes, they can.

Definition as per Indian Laws

While the term ‘wholly owned subsidiary’ is not specifically defined under the Companies Act, 2013, the term ‘subsidiary’ has been defined under Section 2(87) of the Companies Act, 2013.

As per the Act, a ‘subsidiary company’ or ‘subsidiary’, with respect to any other company, refers to a company in which the holding company:

• Controls the composition of the Board of Directors.
• Controls more than half of the total voting power either alone or together with its subsidiary companies.
• In accordance with the explanation of Section 2(87) of the Companies Act, 2013:
• An organization shall be considered a subsidiary of the holding company even if the control (mentioned above) lies with another subsidiary of the holding company.
• The composition of the company’s Board of Directors is considered to be handled by another company if the other company uses some of its exercisable power at its discretion to make changes in the Board of Directors.
• The term ‘company’ refers to any corporate entity.

As per the above-mentioned definition, ‘subsidiary company’ refers to any company in which another company, i.e., the holding company, has control over the composition of Board of Directors or holds more than 50% of the total voting power of the first-mentioned company.

Any company where all the shares/voting power of company are held by another company/corporate body shall be deemed as wholly owned subsidiary of the latter.

Nominee & Shareholders in Wholly Owned Subsidiary

In wholly owned subsidiaries, incorporated as a ‘private company’, one holding company shall act as the Shareholder while another shall be the Nominee shareholder. This is to fulfill the minimum requirement of a shareholder of Section 3(1)(b) of the Companies Act, 2013 along with the minimum requirement of two Directors.

Note: In a wholly owned subsidiary, if 100% of the assets are held by a single company, they shall appoint a nominee shareholder to fulfill these minimum requirements of Section 3(1)(b) of the Companies Act, 2013.

Registered Owner & Beneficial Owner

Registered Owner: A Registered Owner is an individual registered in the Register of Members as the holder of shares of a company but who does not have any beneficial interest in these shares.

Beneficial Owner: The term ‘Beneficial Owner’ refers to an individual who is not registered in the Register of Members as the holder of any shares of a company but who has beneficial interest in the shares.

Intimation to Registrars of Companies (ROC)

Section 89 read with Rule 9 of the Companies (Management and Administration) Rules, 2014 addresses the declaration of beneficial interest in the shares held. It involves the three steps mentioned below:

• The person or company, who holds the beneficial interest in any share, shall submit Form MGT 4 and the covering or request letter to the company in which they state the beneficial interest within 30 days from the date of acquisition or change in beneficial interest to the company.
• The person or company, whose name has to be added to the Register of Members shall submit the declaration in Form MGT 5 within 30 days from the date of acquisition or change in beneficial interest to the company.
• After the company receives the declaration in Form MGT 4 & 5, the same shall be placed before the Board for approval. The company shall also notify the ROC in e-Form MGT 6 within 30 days of receiving the declaration in Form MGT 4 & 5.

Importance of Wholly Owned Subsidiaries

• Separate Legal Entity: Post registration, the wholly owned subsidiary shall become a separate legal entity from its parent company. This also reduces and limits the liability of each shareholder or member towards the unpaid amount of shares.
• The parent company holds strategic control.
• Global Goodwill: The wholly owned subsidiary can enjoy the perks of the pre-established goodwill and reputation of a foreign company.
• Development and diversification are simplified with respect to overseas companies.
• Companies without any outstanding liabilities can exit the market easily using the hassle-free winding up process.

Conclusion

When planning to transform a company into a wholly owned subsidiary, parent companies must conduct due diligence and go through all the relevant legal procedures to ensure there are no complications in the future. Considering the wide range of benefits you may avail from such acquisitions, you must ensure you aptly go through the entire process while complying with all the necessary legal provisions and guidelines.