Summary: A Wholly Owned Subsidiary (WOS) is a company in which a foreign parent holds 100% of the shares, allowing full control while operating as an independent legal entity. Unlike a branch or liaison office, a WOS must comply with Indian corporate laws, including the minimum shareholder requirement under the Companies Act, 2013. Since a private company must have at least two shareholders, the parent company can appoint nominee shareholders as per Section 187(1) of the Act to meet this requirement. However, nominee shareholders only hold registered ownership, while beneficial ownership remains with the parent company. Section 89 mandates declarations of beneficial interest through Form MGT-4 (by nominee shareholders), Form MGT-5 (by the parent company), and Form MGT-6 (to be filed with the Registrar of Companies). Compliance with these statutory requirements ensures legal validity while allowing foreign businesses to maintain complete operational authority over their WOS in India.
What is a Wholly Owned Subsidiary (“WOS”)?
There are multiple structures through which a foreign entity can establish a presence in India, such as a liaison office, a branch office, a WOS.
A WOS is a company in which 100% shareholding is owned by a parent company.
Unlike a branch office or a representative office, a WOS operates as an independent legal entity. However, the complete control remains with its parent company as the parent company owns the entire share capital of a WOS.
Foreign businesses often use this structure to establish a presence in India while maintaining full ownership and operational authority.
Minimum Shareholders Requirement
The Indian Companies Act, 2013 (“Companies Act”) requires a company to have a minimum number of members (shareholders). A private company must have at least two shareholders. For a public company, the requirement is to have a minimum of seven shareholders.
Since the entire shareholding of a WOS is owned by a single person (i.e., the parent company), one of the key concerns for a WOS is meeting the minimum shareholder requirement.
While the Companies Act does not explicitly provide clarity on this, the solution may be derived from section 187(1) of the Companies Act. Section 187(1) allows a company to hold the shares in a subsidiary company through nominee shareholder(s).
The relevant extract of Section 187(1) is reproduced as under:
“187. Investments of a Company to be Held in Its Own Name
(1) All investments made or held by a company in any property, security, or other asset shall be made and held by it in its own name:
Provided that the company may hold any shares in its subsidiary company in the name of any nominee or nominees of the company, if it is necessary to do so, to ensure that the number of members of the subsidiary company is not reduced below the statutory limit.”
An interpretation may be derived that the requirement to have minimum shareholders cannot be bypassed even in case of a WOS. However, the parent company may appoint nominee shareholders in a WOS to meet this requirement.
Registered Member vis-à-vis Beneficial Ownership
It is relevant to note that the nominee shareholders are only registered owners. They are not actual beneficiaries of the shares held. Beneficial ownership is held by the parent company.
Section 89 of the Companies Act requires the declaration of beneficial interest where a person’s name is entered in the register of members of a company as the holder of shares but does not hold beneficial interest in such shares.
To ensure compliance with Section 89, the following declarations need to be made:
1. Form MGT-4 – The nominee shareholder (registered owner) is required to submit this form to the company declaring that they do not hold beneficial interest in the shares.
2. Form MGT-5 – The parent company (beneficial owner) is required to submit this form to the company confirming its beneficial ownership.
3. Form MGT-6 – The WOS is required to file this form with the concerned Registrar of Companies (ROC) within 30 days of receiving MGT-4 and MGT-5.
Conclusion
A foreign entity can set up a WOS in India by using nominee shareholder(s). This ensures meeting the requirements of a minimum number of shareholders while retaining full ownership and control. However, it is important to comply with the requirement on declaration of beneficial ownership and filing the necessary statutory forms. Businesses entering India through WOS should ensure this to stay compliant with local laws.
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