The wholly-owned subsidiaries have become one of the most efficient methods to penetrate a whole new market in a foreign country. It is a kind of company that is fully owned by any other company referred to as a parent company. There are a number of advantages of establishing a wholly-owned subsidiary. Browse through the below article to develop deeper insight into a wholly-owned subsidiary along with its advantages and disadvantages in India.
In this fast-paced corporate world, wholly-owned subsidiaries have come up as one of the most effective tools.
A wholly-owned subsidiary is a type of company that is completely owned by another company, often known as the ‘Parent Company’. Since the wholly-owned subsidiary is 100% owned by the Parent Company, it has full control over the subsidiary including its operations, finances, and also management.
Businesses often use wholly-owned subsidiaries as a way to foray into new markets or expand their business operations to a different location i.e. a region or country. Though they offer several advantages, they also come with their own set of challenges. We’ll discuss the fundamentals along with the advantages and disadvantages of a wholly owned subsidiary in India.
What is a Wholly Owned Subsidiary?
A wholly-owned subsidiary is a company whose 100% of the stocks are owned by another company, typically through an acquisition. These companies serve as a major move for multinational corporations looking to widen their reach to target new markets or diversify their business portfolio.
Advantages of Wholly-Owned Subsidiary
Setting up a wholly-owned subsidiary has its own benefits that can be reaped over a period of time. Some of the key advantages of a wholly owned subsidiary in India are described below;
1. Full Control and Autonomy
Among numerous advantages of a wholly owned subsidiary, the primary benefit is that it offers 100% control and thus autonomy to the parent company. There are several aspects of this control which are as;
Decision-Making Power: In this type of subsidiary, the parent company holds the final right to take all decisions ranging from strategic choices to day-to-day operations. This control ensures smooth and clash-free decision-making without requiring any form of consensus among stakeholders, which often can be seen in joint ventures or partnerships. Consequently, it enables smoother and faster adoption to changing market conditions and also implementing strategies accordingly.
Strategic Alignment: Due to its full control characteristic, the patent company can ensure that the operations of its subsidiary best align with the strategies it has made for fulfilling its business objectives. This alignment is highly required in order to make the most out of expansion and achieve organizational synergy. It allows a subsidiary company to get combined easily with the parent company’s current operations, thereby increasing overall efficiency.
2. Intellectual Property Protection
A wholly owned subsidiary offers another significant advantage which is its ability to protect Intellectual Property (IP) effectively;
Protecting Proprietary Technology: Several companies encompass unique technology, processes, or knowledge giving them a competitive edge in a market.
Alleviating Risk of IP Theft: Companies that are being operated independently are more likely to face a serious risk of their IP theft especially in areas having flexible IP protection regulations. However, the parent company can utilize strong security safeguards and legal protections with wholly-owned subsidiaries to reduce the risk of IP theft. It ensures that its valuable intellectual property is safe and effective.
3. Brand Consistency and Image Control
As an old saying goes, ‘Consistency is the key to success’, the same applies to brand building. Maintaining a consistent brand image and a uniform customer experience is essential for businesses looking to establish a strong presence in the markets. In this context, the wholly owned subsidiaries offer distinct benefits.
Maintaining Integrity of a Brand: When a parent company owns a subsidiary completely, it has full control over most of the aspects of the subsidiary including branding, messaging, and marketing. Due to this control, the parent company has complete rights & access to maintain the integrity of its brand, thereby ensuring that it is represented consistently across all targeted markets and locations.
Reduced Tax Obligation: With various advantages, limited tax obligation is one of the key financial advantages of wholly-owned subsidiaries. Companies having several subsidiaries might lessen their tax obligations by settling the profits of one or a couple of subsidiaries with the losses made by other subsidiaries.
4. Efficient Resource Allocation
The wholly-owned subsidiaries offer better and more efficient allocation of resources allocation that consist of;
Resource Allocation: Having full ownership rights, the parent company can distribute its resources flexibly depending upon its strategic priorities. Simply put, the subsidiaries can take benefits of the parent company’s financial status and resources, unlocking the access to necessary capital required for their growth and development.
Better Use of Capital: Wholly owned subsidiaries often benefit from economies of scale. The parent company can utilize its purchasing power and crack better deals for supplies and services and eventually reduce operational costs for the subsidiary.
Disadvantages of Wholly-Owned Subsidiary
The wholly-owned subsidiaries have multiple aforementioned advantages, but they also have some disadvantages or limitations. Before owning a subsidiary, companies must be well aware of the disadvantages of wholly-owned subsidiaries;
1. Lot of Paperwork
Owning a wholly-owned subsidiary involves a lot of paperwork and legal requirements which will eventually increase the cost base of the parent company.
2. Risk of Losing Sensitive Information
In cases where a parent company and its wholly-owned subsidiary come into any collaboration closely, they may need to share sensitive data and corporate secrets. Sharing of such information and technologies with a local company in a foreign country could lead to the leakage of highly confidential information to any third party or person outside the subsidiary company.
3. Initially Higher Investment Required
When a parent company seeks full ownership, it must initially provide the necessary capital to the subsidiary to ensure its smooth operations, settlement of debts, and growth initiatives. This initial financial investment in the subsidiary company may take a toll on the parent company’s financial status and resources thus, putting a halt on its growth prospects.
4. Regulatory Challenges
Different countries have their own set of laws and compliance requirements. Confirming that the wholly-owned subsidiary fully complies with the local laws can be intimidating. In case of non-compliance with those laws, the subsidiary might have to face legal issues, fines, or even the closure of the subsidiary. Another major concern is the taxation part. It is always advisable to be aware of the complex rules and laws governing taxes in that foreign company. In order to ensure smooth compliance with taxation regulations, tax experts or consultants’ assistance may be needed to manage the taxation part of the wholly-owned subsidiary company.
5. More time Consuming
If you compare other expansion strategies (like Joint Ventures or Partnerships) with wholly-owned subsidiaries, you will get to know that wholly-owned subsidiaries often need relatively more time for market entry which mainly includes setup & establishment followed by building relationships.
For establishing a wholly-owned subsidiary, several steps need to be followed including legal registrations, seeking multiple permits, and setting up infrastructure. Due to the involvement of various steps, the setup process can be time-consuming and thus may lead to delayed market entry. Moreover, establishing relationships with local stakeholders, customers and suppliers can also be time-consuming. More efforts and investment are required to build trust and thus goodwill in the market and therefore generating revenue may take a longer time.
6. Rise of Conflicts
Since a wholly owned company is often located in a foreign country, conflicts may arise between the parent and subsidiary over a number of points including strategic decisions, allocation of finance & other resources, or differences in the way of practicing businesses.
In conclusion, the advantages and disadvantages of a wholly-owned subsidiary need to be carefully weighed. Whether it's the financial, operational, or strategic benefits, these must be assessed against the potential challenges. Ultimately, the decision should align with the company's overall goals, risk tolerance, and strategic vision.
The decision to establish a wholly-owned subsidiary involves carefully balancing the potential advantages against the potential disadvantages. It necessitates an understanding of not just the immediate financial, operational, and strategic implications but also an appreciation of the broader impact on the company's overall risk profile, compliance requirements, and long-term strategic objectives.
The importance of considering the unique characteristics and circumstances of each company cannot be overstated when exploring the establishment of a wholly-owned subsidiary. This ensures alignment with the company's strategic vision, its ability to manage potential challenges, and its capacity to exploit the potential advantages.
FAQs
Q1: What differentiates a subsidiary from a wholly-owned firm?
When it comes to subsidiaries, the concept of both wholly-owned and partially-owned subsidiaries exist. In a regular subsidiary, the parent firm owns more than 50% of the company’s stake. While in a wholly-owned subsidiary, as the name suggests the parent company owns 100% of the stake of the wholly-owned companies.
Q2: What are the advantages of wholly owned subsidiaries?
There are numerous benefits of wholly-owned subsidiaries including full control & autonomy, intellectual property alignment, better resource allocation, and many more. A foreign company can avail of these advantages by owning a wholly-owned subsidiary in India.
Q3: How many investors can be there in a wholly owned subsidiary?
In a wholly-owned subsidiary, there is no role of minority shareholders and it is entirely owned by the parent company/corporation.
Q4: Can a wholly-owned subsidiary issue share?
The Companies Act 2013 restricts subsidiary companies from owning shares in parent companies.
Q5: What tax benefits does a wholly-owned subsidiary offer?
A corporation having multiple subsidiaries can use the loss of one company to balance with the profits of other subsidiaries. As a result, it is eventually helpful in reducing the overall taxes. It is one of the key benefits of a wholly owned subsidiary in India.