There are multiple ways for a company to gain access to an Indian market, such as setting up various entities. These can be subsidiaries, project offices, branches, or liaison offices. The preference for your type of business rests entirely on the end purpose to be achieved by the industry and the corporate structure you desire, irrespective of your intent—global or domestic expansion.
Here, our focus lies on the two popular choices- the wholly-owned subsidiary company and the branch office for expanding an existing company.
Definition of a Wholly Owned Subsidiary
In business, a subsidiary denotes an entity that can be wholly or partially owned, indicating that the parent company holds the entire voting share. The parent company’s holding of 100% of the shares of the subsidiary company in a wholly-owned subsidiary equips it with complete Finance, operations and policies of the subsidiary controlled by it.
This type of company structure can be registered as a public or private limited company within India.
Wholly-owned subsidiaries are instituted to widen their base and operations in newer locations or to begin a new business segment. They are wholly owned and administered by a separate company called the parent company. A corporation can transform into a wholly-owned subsidiary either through an acquisition or break-up from the parent or holding company. The parent company holds almost 50% but below 100% stake in a subsidiary and an absolute 100% in a wholly-owned subsidiary.
Businesses initiate wholly-owned subsidiaries for several purposes including vertical integration, broadening of service or product offerings, or retaining absolute dominance over specific operations.
An illustration of a wholly-owned subsidiary is Tata Motors Insurance Broking and Advisory Services Limited (TMIBASE), an insurance consultancy and broking Services Company, and Concorde Motors India Ltd (CMIL), subsidiaries of the largest automobile company, Tata Motors Ltd.
How it Operates
The parent company holds all the shares of the wholly-owned subsidiary, so there is no scope for minority shareholders.
A wholly-owned Indian subsidiary can exist in a nation different from that of the parent company. It can maintain its individual executive structure, services, items, and customer base. Having a wholly-owned subsidiary may grant the parent company the authority to sustain its operations across diverse geographical locations and markets or different sectors. These aspects assist in withstanding the market fluctuations or geopolitical and industry practices.
Definition of a Branch Office
A branch office is an extension of the parent company and reports to the head office. It is limited only to carrying out the same business as the parent company. It is not a different legal entity, and every liability that may arise is the responsibility of the parent company.
The State Bank of India is a business that functions using the branch model. Although its headquarters are in Mumbai, it serves its customers from across its 22,405 branches.
How it Operates
A branch office represents the standard mode of expanding business by using several entities under a single jurisdiction. They are delegated the task of conducting routine work, but higher and broader activities require channelling forward to the “head office.”
A branch office performs the same work as the parent company. A branch manager manages it and informs and communicates directly to the head office. The structure of the administrative departments in the branch is like that of the umbrella company, even though these are smaller, such as accounting, human resources, and marketing.
These branch offices are extensions of the head office. They can accumulate income but do not have a distinct legal entity.
Companies established overseas that carry out manufacturing or business transactions can form branch offices within India after getting specific authorization from the Reserve Bank of India (RBI).
Main Differentiators: Wholly Owned Indian Subsidiary Vs Branch Office
A close look at the chief differentiators of these two corporate structures brings out the following contrasts.
1. Legal Autonomy
The wholly-owned subsidiary usually keeps its legal personality as an individual entity. It can retain its separate board of directors and executive team. This business framework leaves the prerogative to the parent or holding company to exercise their influence and operational efficiency. At the same time, there exists a clear demarcation between certain business activities and the legal obligations that may arise.
There are no legal ramifications attached to a branch office as the parent company is held accountable for any liabilities. The 100% share ownership within the branch office allows the parent organization to manage the liabilities.
2. Tax Benefits
Wholly-owned subsidiaries offer tax benefits and safeguard the parent corporation from liabilities that may arise. Owning a subsidiary through stock acquisition helps the parent companies leverage losses from the subsidiary and diminish their overall tax liability or counterbalance taxes on profit from a different subsidiary.
Branches create a lower establishment cost but share the parent company’s tax liabilities, whereas subsidiaries need to perform separate tax obligations. The earnings of branches are normally reported on the holding company’s tax return, which can either streamline or complicate the tax issues.
3. Financial Integration
The parent organization and its wholly owned subsidiary consolidate their balance sheet and financial position to meet reporting objectives. The wholly owned subsidiary maintains its financial records and monitors its assets and financial obligations. However, the parent or umbrella company integrates its financial statements with the subsidiary.
If a “branch office” incurs losses, it can wind up without any impact on other branches. But if a subsidiary suffers a financial loss, the parent enterprise can sell it to a different company.
4. Hierarchy for Reporting
In the case of a branch office, the parent organization normally delegates the control and responsibility to the “branch manager.” This executive is supposed to apprise the “head office” about the current functioning of a specific branch. On the contrary, a subsidiary responds as a body to the holding or parent organization.
5. Power of Control
The parent enterprise controls the business functioning, strategic management, work ethos, and policies for recruiting chief officers and managers of the wholly-owned subsidiary. Though subsidiaries are specific entities, they can receive few executives or directors of the parent organization.
Closing a branch office is relatively simpler as the workers can be transferred, resources and funds can be redistributed, and any outstanding debts are easy to handle by the parent company.
6. Accounting Responsibilities
A wholly owned subsidiary must inform the parent company of its financial and income statements, as well as its cash flow details. The branch office must produce its yearly activity certificates and financial statements about its work.
7. Regulations
A wholly-owned subsidiary is subject to regulations and guidelines under separate provisions of the Companies Act 2013 and must fulfil certain compliance requirements regarding governance, dissolution, and incorporation, whereas a branch office is exempt from such conditions.
Conclusion
Structurally, though wholly-owned subsidiary and branch may look alike they are unique corporate forms. A heads up there are several entities for multiple footprints the business can spin-off based on purpose & awareness. They can open a branch office for smoother administration, enable greater product and service distribution for their clientele, or opt for a subsidiary for purely business expansion purposes.
It is of prime importance for stakeholders to arrive at the proper decision about choosing the right entity for their business expansion while minimizing risks. To obtain the best solutions on legal compliance requirements while making forays into a new market or jurisdiction, you can reach out at Kanakkupillai.com.
