DR.

SHAKUNTALA MISRA NATIONAL REHABILITATION

UNIVERISTY

LUCKNOW

AN ASSIGNMENT ON

“Subsidiary company”

(UNDER THE SUPERVISION OF Prof.Shail Shakya)

Assignment on Subsidiary company

SUBMITTED To: SUBMITTED BY:

Prof. Mr. Shail Shakya Gaurav Shukla

Faculty of law B.com LL.B (Hons)*

DSMNRU,Lucknow 5th semester
 ACKNOWLEGEMENT

The completion of this Assignment could not have been possible without the participation
and assistance of so many people whose names may not all the be enumerated. Their
contribution are sincerely appreciated and gratefully acknowledged. However, I would like to
express my deep appreciation and indebtedness particularly to the following

Prof.Shail Shakya for her endless support, kind and understanding spirit during making of
this assignment.

To all relatives, friends and others who in one way or another shared their support, either
morally, financially and physically, thank you.

Above all, to the Great Almighty, the author of knowledge and wisdom, for his countless
love.

I thank you all.

Gaurav Shukla

3rd year Student

B.Com. LL.B(Hons.)
 Table of contents

Page.No.

1. Introduction ………………………………………………………………………4

2. Meaning of Subsidiary company……………………………………………….…4

3. Features of subsidiary ………………………………………………………….…5

 Share Capital

 Ownership

 Control& Management

4. Advantages & Disadvantages……………………………………...………………8

5. Conclusion ………………………………………………………………………...11
6. Bibliography ………………………………………………………………………….......12
1. Introduction

This assignment seeks to illuminate the subsidiary company. How subsidiaries work?
Subsidiaries have long been part of the organizational makeup of corporations. They often
serve only to create tax efficiencies or to expand businesses into broader geographic or
regulated areas. Over the years, as companies grew in size and scope, their structures became
more complex as subsidiaries quickly proliferated the corporate landscape. Often they came
as part of an acquisition, when the target company came with a number of other legal entities
hanging off its corporate chart.

2. Meaning of Subsidiary company:-

Where one company has control over another, it is known as the holding company and the
company over which control is exercised is called the subsidiary company 1. It
is one in which another, generally larger, corporation, known as the parent corporation, owns
all or at least a majority of the shares. When the (second company) parent company acquire
50 per cent of the ordinary share capital of the first company or otherwise has voting control
over it. A subsidiary company is a business entity that is controlled by another organization
through ownership of a majority of its voting stock. This separate legal structure may be used
to gain certain tax benefits, track the results of a separate business unit, segregate risk from
the rest of the organization, or prepare certain assets for sale. A larger business may own
dozens or even hundreds of subsidiary companies2.

A subsidiary corporation or company is one in which another, generally larger, corporation,

known as the parent corporation, owns all or at least a majority of the shares. As the owner of
the subsidiary, the parent corporation may control the activities of the subsidiary. This
arrangement differs from a merger, in which a corporation purchases another company and
dissolves the purchased company's organizational structure and identity.

Subsidiaries can be formed in different ways and for various reasons. A corporation can form
a subsidiary either by purchasing a controlling interest in an existing company or by creating
the company itself. When a corporation acquires an existing company, forming a subsidiary
can be preferable to a merger because the parent corporation can acquire a controlling interest

1
Avtar Singh, Company Law 601. (Eastern Book Company,Lucknow, 15thedn.,/2007).
2
http://www.accountingtools.com/definition-subsidiary-company
with a smaller investment than a merger would require. In addition, the approval of the
stockholders of the acquired firm is not required as it would be in the case of a merger.

When a company is purchased, the parent corporation may determine that the acquired
company's name recognition in the market merits making it a subsidiary rather than merging
it with the parent. A subsidiary may also produce goods or services that are completely
different from those produced by the parent corporation. In that case it would not make sense
to merge the operations. Corporations that operate in more than one country often find it
useful or necessary to create subsidiaries. For example, a multinational corporation may
create a subsidiary in a country to obtain favorable tax treatment, or a country may require
multinational corporations to establish local subsidiaries in order to do business there.

Corporations also create subsidiaries for the specific purpose of limiting their liability in
connection with a risky new business. The parent and subsidiary remain separate legal
entities, and the obligations of one are separate from those of the other. Nevertheless, if a
subsidiary becomes financially insecure, the parent corporation is often sued by creditors. In
some instances courts will hold the parent corporation liable, but generally the separation of
corporate identities immunizes the parent corporation from financial responsibility for the
subsidiary's liabilities.

One disadvantage of the parent-subsidiary relationship is the possibility of multiple taxation.

Another is the duty of the parent corporation to promote the subsidiary's corporate interests,
to act in its best interest, and to maintain a separate corporate identity. If the parent fails to
meet these requirements, the courts will perceive the subsidiary as merely a business conduit
for the parent, and the two corporations will be viewed as one entity for liability purposes3.

3. Features of subsidiary:-

Holding' and ‘subsidiary' companies are relative terms. A company is a holding company of
another if the other is its subsidiary. According to section 4 of the Act, a company shall be
deemed to be a subsidiary of another, if and only if :—

(a) that other company controls the composition of its board of directors; or

(b) the other company holds more than half in nominal value of its equity share capital
(where a company had preference shareholders, before commencement of the Act, enjoying

3
http://legal-dictionary.thefreedictionary.com/subsidiary+company
voting rights with that of equity shareholders, for the purpose of control, holding company
should enjoy more than half of the total voting power); In the event of a company
bankruptcy, preferred stock shareholders have a right to be paid company assets first.
Preference shares typically pay a fixed dividend, whereas common stocks do not. And
unlike common shareholders, preference share shareholders usually do not have voting
rights. 

 Share Capital:-

The expression 'nominal value' is used to denote the face value of the shares so as to
distinguish it from their 'market value'. The words 'holds more than half in nominal value of
its equity share capital' obviously mean 'holds more than half the face value of its equity
“share capital” and not of its authorised equity share capital. Thus, were both fully paid and
partially paid equity shares have been issued and allotted by a company, it is more than half
of the total of equity shares held that will make the company holding such shares, the
holding company of the company issuing and allotting the shares.
In determining whether one company is a subsidiary of another, following shall be
disregarded4:

(1) Any shares held or power exercisable by the other company in a fiduciary
capacity shall be treated as not held or exercisable by it.
(2) Any shares held or power exercisable in a company by any person under
provisions of its debentures of the first mentioned company or of a trust deed for
securing any issue of such debentures shall be disregarded.
(3) or power exercisable by, or by a nominee for a company, or its subsidiary, other
than as in clause (2) above, shall be treated as not held or exercisable by it if the
ordinary business of that other company is lending money and the shares are held
or power is exercisable only by way of security in the ordinary course of
business.
The position regarding holding subsidiary relationship was impressively summarised in the
case of M. Velayudhan v. Registrar of Companies5 as follows :—

Section 4 envisages the existence of subsidiary companies in different situations. It may be

that by acquiring sufficient share capital of a company, sufficient control may be obtained
4
Majumdar A.K and Dr. Kapoor. G.K, Taxmann’s Company Law, Sixteenth Edition.
5
[1980] 50 Comp. Cas. 33 (Ker.)
 over that company to enable control in the composition of board of directors. But, it is also
possible to obtain such control in regard to the composition of the board of directors
without making such an investment in equity capital of the company. Such a control may
be by reason of an agreement such as where one company may agree to advance funds to
another company and in return may, under the terms of an agreement, gain control over the
right to appoint all or a majority of the Board of directors. The first of the cases envisaged
in section 4 is the case where a control is obtained by a company in the matter of
composition of the Board of directors of another company. That would be sufficient to
constitute the former as holding company and the other as subsidiary. The second type of
cases is where more than half of the nominal value of the equity share capital is held by
another company. By virtue of such holding that other company becomes a holding
company and the one whose shares are so held becomes a subsidiary company. The third
case envisaged is where a subsidiary company of a holding company may be a holding
company in relation to another company. That other company is also a subsidiary of the
holding company of the subsidiary. Questions as to whether a company was subsidiary of
other company cannot be decided merely on basis of fact that one of directors was
common to said companies but it has to be decided in context of section 4. 6

 Ownership:-

The setup of a wholly owned subsidiary is advantageous in a number of ways. In some

countries, licensing regulations make the formation of new companies difficult or impossible.
If a parent company acquires a subsidiary that already has the necessary operational permits,
it can begin conducting business sooner and with less administrative difficulty. Another
advantage of wholly owned subsidiaries is the potential for coordination of a global corporate
strategy. A parent company usually selects companies to become wholly owned subsidiaries
that it considers vital to its overall success as a business7.

 Control and Management:-

6
Whale Stationery Products Ltd. v. UOl [2007] 75 SCL 351 (Delhi).
7
http://www.investopedia.com/ask/answers/032615/what-difference-between-subsidiary-and-wholly-owned-
subsidiary.asp
There is also the power in the Central Government as conferred by Section 8 to declare that
any establishment of a company carrying on the same or substantially the same activity as
that carried on by the head office of the company, shall not be treated as a branch office of the
company for any of the purposes of the Act. Where proceedings were initiated against a
company at the place of its branch office, it was held that notwithstanding the Explanation to
Section 20 of the Civil Procedure Code which confers jurisdiction on the courts at the place
of the company’s branch office, it is also necessary that the cause of action should have
arisen there.8 A charge of interference in management of the complainant’s business could be
alleged only against the head office of the company and not against the branch office unless it
can be shown that the branch office was used for the purpose of committing the wrong.9

4. Advantages & Disadvantages:-

 Advantages

The parent-subsidiary structure isolates risks because the two companies are separate legal
entities. The losses at a subsidiary do not automatically transfer to the parent company. The
parent can exercise control over a subsidiary if it owns a large block of its stock, but not
necessarily a majority of the shares. Even a fractional ownership of the shares of a widely
held company could result in effective control. The parent-subsidiary operating structure
allows for greater diversification and increased efficiencies, partly because senior
management at the parent company does not have to be involved in the operational details of
its subsidiary, according to "Rating Parent/Holding Companies and Their Subsidiaries," a
2010 document by the Dominion Bond Rating Service.

 Disadvantages

The parent company does not have complete access to the cash flow of the subsidiary, unless
the parent controls 100 per cent of the shares. To maintain its image and reputation, the
parent company may have to pay for the subsidiary's debts even if it has no legal obligation.
Lending institutions may require guarantees from the parent before lending to one of its

8
Singh Avtar, Company Law, Eastern Book Company, Fifteenth Edition.
9
Bhankerpur Simbhaoli Beverages (P) Ltd v Sarabhjit Singh, (1996) 86 Comp Cas 842 P&H. See also B.B.
Verma v National Projects Construction Corpn Ltd, [1999] 4 Comp LJ 274 Del, the company’s project site was
regarded as the place where the company was carrying on its business and coincidentally the company also had
its subordinate office there.
subsidiaries. The parent company could be liable for damages if an operating subsidiary
violates the law or is subject to enforcement actions, says Dominion Bond Rating Service.

 The holding company provides the subsidiary company with buying power, research
and development funds, marketing money and know-how, employees, technical and
other features which otherwise it could not afford or accomplish alone.

 The parent can provide the monetary means and capability to jump start new
companies and products.

 Ability to offset profits and losses of one part of a business with another

 Liabilities and credit claims are locked in that subsidiary and cannot be passed on to
the parent company

 Allows for joint ventures with other companies with each owning a portion of the new
business operation10.

 A major disadvantage of being a subsidiary of a large organization is the limited

freedom in management
 Decision-making can become time-consuming as issues often must go through
various chains of command within the parent bureaucracy before any action can be
taken.
 Legal paperwork involved with creating a subsidiary can be lengthy and expensive
 Control also becomes an issue when a subsidiary is partially owned by another
outside organization

6. Conclusion:-

A look at the path we have traversed indicates that what started as direct or indirect
control, be it shareholding or otherwise has inevitably resulted in having to rope in
Subsidiary Companies being increasingly set up by foreign companies. That these
companies should, no doubt, be brought within the regulatory provisions as applicable to
Indian companies but the matrix of Holding-Subsidiary Company relationship has become
more complex and complicated. This appears to be inevitable in the context of
10
http://mcaindia.co.in/advantages-and-disadvantages-of-a-subsidiary-company/
globalisation of Indian economy and increasing flow of foreign exchange into our country
through Foreign Direct Investment (FDI) in joint ventures (A business arrangement in
which two or more parties agree to pool their resources for the purpose of accomplishing a
specific task. This task can be a new project or any other business activity. In a joint
venture (JV), each of the participants is responsible for profits, losses and costs associated
with it) or Subsidiary companies.

Bibliography
Primary sources

1. Indian companies Act (18) of 2013

Books

1. Avtar Singh, Company Law, (Eastern Book Company, Lucknow, 16 th Edn, 2015)

2. Dr. G.K Kapoor & Sanjay Dhamija, Company Law,(Taxman,19 th Edn.)

Internet sources

http://mcaindia.co.in/advantages-and- disadvantages-of- a-subsidiary- company/

http://mcaindia.co.in/formation-of- subsidiary-company- in-india/

http://www.accountingtools.com/definition-subsidiary- company

http://www.investopedia.com/terms/s/subsidiary.asp1.