A subsidiary company is a business entity that is controlled by another, usually larger, company referred to as the parent or holding company. The parent company typically owns a majority of the subsidiary’s shares, granting it significant influence over the subsidiary’s operations and decision-making processes. Subsidiaries operate as separate legal entities, distinct from their parent companies, allowing for independent management and financial reporting. They are often established to diversify the parent company’s business interests, enter new markets, or manage specific aspects of the parent company’s operations. Subsidiaries may engage in various activities, including manufacturing, marketing, sales, or research and development. From a legal standpoint, subsidiaries are liable for their own debts and obligations, providing a degree of financial protection to the parent company. This structure facilitates risk management and enables the parent company to expand its reach while maintaining operational flexibility and control.
Definition of Subsidiary Company
Section – 2(87)
“subsidiary company” or “subsidiary”, in relation to 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 at 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 the purposes of 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‖ in relation to a holding company means its subsidiary or subsidiaries;
( Source: Company Act, 2013 )
Explanation
According to the Companies Act of 2013, a subsidiary company is defined as a company in which the holding company controls the composition of the Board of Directors, or exercises control over more than half of the total voting power, or holds more than half of the equity share capital. In simpler terms, a subsidiary is a company that is controlled by another company, known as the parent company. This control typically involves ownership of more than 50% of the subsidiary’s shares, allowing the parent company to influence strategic decisions and operations. Subsidiaries operate as separate legal entities, conducting business independently while remaining under the overall control and supervision of the parent company. The concept of subsidiary companies plays a crucial role in corporate structures, facilitating diversification, risk management, and expansion strategies for larger corporations.
Example of a Subsidiary Company
- Sheba Properties Ltd.
- Concorde Motors (India) Ltd.
- TML Drivelines Ltd.
- PT Tata Motors Indonesia
- TAL Manufacturing Solutions Ltd.
- Tata Motors Insurance Broking and Advisory Services Ltd.
- Tata Daewoo Commercial Vehicle Co. Ltd.
- Tata Motors European Technical Centre Plc.
- Tata Technologies Ltd.
Features of Subsidiary Company
Legal Autonomy: A subsidiary company operates as a legally independent entity from its parent company, enjoying distinct rights and responsibilities under the law.
Ownership Structure: The parent company typically holds a controlling interest in the subsidiary, exerting influence over its management and strategic decisions.
Financial Independence: Subsidiaries maintain separate financial records, ensuring transparency and accountability in financial reporting and management.
Risk Mitigation: Subsidiaries offer a buffer against risks, as losses or liabilities incurred by the subsidiary generally do not impact the financial stability of the parent company.
Market Diversification: Subsidiaries facilitate market expansion by catering to different geographic regions or niche markets, diversifying the parent company’s revenue streams and reducing dependency on a single market.
Advantages of Subsidiary Company
Risk Isolation: Subsidiary companies provide a shield against risks, as any financial or legal issues typically remain contained within the subsidiary, safeguarding the parent company’s assets and reputation.
Local Expertise: Subsidiaries leverage local knowledge and cultural understanding, enabling effective market penetration and adaptation to specific customer needs and preferences.
Operational Flexibility: Subsidiaries have autonomy in day-to-day operations, allowing them to respond swiftly to local market dynamics and opportunities without hindrance from the parent company’s bureaucracy.
Tax Optimization: Subsidiaries may benefit from tax incentives or favorable tax regimes in their operating jurisdictions, optimizing the overall tax burden for the parent company group.
Strategic Expansion: Subsidiaries facilitate strategic expansion into new markets or industries, diversifying the parent company’s business portfolio and enhancing long-term growth prospects while minimizing risk exposure.
Disadvantages of Subsidiary Company
Complex Governance: Managing multiple subsidiaries adds complexity to corporate governance, requiring significant resources and oversight to ensure compliance and coordination.
Financial Issue: Financial troubles or legal issues in one subsidiary can potentially spread to the parent company, affecting its reputation and financial stability.
Communication Challenges: Maintaining effective communication and alignment of goals across diverse subsidiaries can be challenging, leading to misinterpretation or conflicting strategies.
Resource Drain: Establishing and operating subsidiaries entails substantial financial investment and managerial effort, diverting resources away from core operations or other strategic initiatives.
Regulatory Compliance: Each subsidiary must comply with local regulations and legal requirements, leading to increased administrative burden and potential risks of non-compliance penalties.
