Expanding into India? Multinational corporations (MNCs) often choose a Wholly Owned Subsidiary (WOS) for complete control and operational flexibility. But is it the right choice for your business?
In this post, we cover:
✅ What a WOS is
✅ Advantages & Disadvantages of WOS
✅ Minimum Shareholders requirement and legal consideration
Let’s dive in!
Understanding the Wholly Owned Subsidiary Model
When a multinational corporation (MNC) seeks to establish or expand its presence in India, one of the structures available is a Wholly Owned Subsidiary (WOS). This entity is a limited company in which 100% of the shares are held by the foreign parent company.
Unlike a liaison or branch office, a WOS operates as a separate legal entity. A WOS provides the parent company with full control while limiting liability.
Advantages of a WOS Structure for MNCs
- Complete Ownership & Control: As 100% owner of the shares of the WOS, full decision-making authority remains with the parent company.
- Limited Liability: The parent company’s liability is restricted to its investment in the subsidiary.
- Operational Independence: A WOS can enter contracts, acquire assets, and raise funds independently.
- Access to Local Markets & Benefits: A WOS is treated as an Indian company, making it easier to access government incentives, loans, and subsidies.
Disadvantages of a WOS Structure for MNCs
- Lot of Paperwork and Regulatory Compliances: Establishing and running a WOS involves extensive documentation, and ongoing compliance with Indian corporate laws.
- Higher Setup & Operational Costs: Establishing and maintaining a WOS involves legal fees, operational expenses, and administrative costs.
- Tax on Repatriation of Surplus: Even after the WOS pays corporate tax, its foreign parent company may have to pay additional tax when receiving surplus funds from its WOS.
- Exit Challenges: Winding up or divesting from a WOS in India can be time-consuming and subject to regulatory approvals.
Minimum Shareholder Requirement
Under the Indian Companies Act, 2013 (Companies Act), a private company must have at least two shareholders, while a public company requires a minimum of seven. Since a WOS is entirely owned by the parent company, meeting this requirement poses a challenge.
To comply, businesses typically appoint nominee shareholders. Section 187(1) of the Companies Act allows a company to hold shares in a subsidiary through nominee shareholders to meet the statutory minimum.
Key Legal Consideration
- The nominee shareholders act as registered owners but do not hold any beneficial interest in the shares.
- The parent company remains the actual beneficial owner.
Declaration of Beneficial Ownership
To ensure transparency and legal compliance, companies must adhere to Section 89 of the Companies Act, which mandates the disclosure of beneficial ownership:
- Form MGT-4 – The nominee shareholder must declare that they do not hold beneficial interest in the shares.
- Form MGT-5 – The parent company must confirm its beneficial ownership in the subsidiary.
- Form MGT-6 – The WOS must file this declaration with the Registrar of Companies (ROC) within 30 days of receiving MGT-4 and MGT-5.
Conclusion
A Wholly Owned Subsidiary offers MNCs an efficient and legally secure route to enter and operate in India while retaining full ownership. However, businesses must comply with minimum shareholder requirements and disclosure obligations to remain legally compliant. By structuring the subsidiary correctly and ensuring timely regulatory filings, foreign companies can establish a strong and sustainable presence in the Indian market.
This post is part of our India Entry Series, where we simplify key legal and regulatory aspects for foreign businesses entering India.
We’ll continue exploring different aspects of India entry strategies in upcoming posts. What challenges or questions do you have about setting up a business in India? E-mail us at hello@corpninjaadvisors.com, and we might cover them in our next post!
Let’s discuss!
Disclaimer: This article is for general information purpose only and does not constitute any advice. Please get in touch with your consultant before taking any step(s). We shall not be responsible for any loss incurred due to step(s) taken basis the information shared in this article.