Shareholding rights of a subsidiary company in its parent company

Introduction

A subsidiary company is an entity that is owned and controlled by its parent company in the business world. The parent businesses control the activities of a subsidiary company and own more than 50% of the stock. When another firm owns all of the shares of an Indian subsidiary, the company is referred to as a totally owned subsidiary. A subsidiary business has no right to own or own the shares of its holding company, according to the Companies Act of 2013. Section 19 will be discussed in this blog about a subsidiary firm’s shareholding rights in its parent company.

What exactly is a subsidiary company?

A subsidiary company is one that is controlled and managed by another company, which can be either a parent company or a holding company. It is a distinct legal entity governed by the Companies Act of 2013. It can, however, acquire, alienate, and buy property in its name, and the death or removal of any members has no effect on the company’s existence.

Key characteristics of a subsidiary company:

• Ownership: The parent firm owns more than 50% of the subsidiary’s voting shares, allowing it to direct the subsidiary’s operations.
• Separate Legal Entity: Although the subsidiary is governed by the parent firm, it is treated as a separate legal entity. The subsidiary can have its own assets, obligations, and legal responsibilities as a result of this separation.
• Financial Independence: While the parent firm retains control, the subsidiary frequently maintains its financial independence. It keeps its own books, reports its own financial performance, and may have its own board of directors.
• Strategic Reasons: Companies frequently establish subsidiaries for a variety of strategic objectives, such as expanding into new markets, isolating risks related to specific business activity, or effectively managing legal and tax issues.
• Liability Protection: Typically, the parent company’s responsibility is restricted to the amount invested in the subsidiary. This arrangement can help protect the parent firm from excessive risk linked with the activities of the subsidiary.
• Branding and Market Presence: Subsidiaries can operate under their own brand names, allowing the parent firm to have a more diverse market presence and appeal to distinct consumer categories.

What exactly is a parent company?

A Parent Company is one that controls more than half of an Indian Subsidiary and hence has control over its activities. A holding company that owns a considerable number of voting shares in another company is known as a parent company.

The parent firm normally possesses a majority position in its subsidiaries, which means it controls more than 50% of each subsidiary’s voting stock. As a result, the parent firm wields considerable power over its subsidiary companies’ strategic decisions, operations, and management.

A subsidiary company’s shareholding rights in its parent company

Section 19 of the Companies Act of 2013 prohibits a subsidiary company from holding any shares in its parent company, either directly or through its nominees. In other words, an Indian subsidiary has no shareholding rights in its owning company. A holding corporation is likewise prohibited by the Act from undertaking any share issuance in its Indian subsidiary.

However, in some situations, the subsidiary company may own stock in its parent corporation. The following are the cases:

• As the legal representative of a deceased member of the holding company, the subsidiary firm can possess shares in its parent business.
• As a trustee, the Indian subsidiary may own shares in the parent firm.
• When an Indian subsidiary acts as a shareholder in its holding company prior to the formation of that holding company.
• The Indian subsidiary may vote at the holding company’s meeting only in connection to the shares owned by such a company as a legal representation or trustee, as specified in (a) and (b).

What effect will it have if the subsidiary company could own shares in its parent company?

• The members of the holding company and the subsidiary company would have overlapping interests.
• The parent company’s grip over its Indian subsidiary will be jeopardized.
• The aim of resolving significant issues and risk diversification will no longer exist for the parent corporation.
• The holding company will not be able to take advantage of numerous tax breaks.
• Dividend distribution will become a source of contention between parent and subsidiary firms.

Conclusion

Section 19 provides that a subsidiary firm has no shareholding rights in its parent company. Companies Law forbids such allotment or transfer of shares. However, there are only a few legal circumstances under which the subsidiary firm can own a stake in the holding company. If the holding company is limited by guarantee or an unlimited company without a share capital, the shares will be converted in the interest of the members, and such company will be determined to be the holding company of the Indian Subsidiary.