Wholly-owned Subsidiary

The concept of the wholly-owned subsidiary is best understood by layman than a young student of law – particularly of corporate law. The concept practically understood by professional dealing with a wholly-owned subsidiary. A student called me to understand this: “how possible?” I replied, “No, It is not possible in true sense.” Unless one understands it clearly that it is not possible in a true legal sense, only then,  you can understand it. Once understood, you will never believe that a wholly-owned subsidiary is not possible in a true legal sense.

Before reading further, Please note: one person company is not possible to be a wholly-owned subsidiary, at least presently. The reason is simple – a One Person Company is actually a “One Human Company” as of now. Unless there is an evolution of law to allow a legal person to be a member of a One Person Company, it is not possible to be a wholly-owned company. Now,  come again to the topic.

To be a company there must be at least two members and in case of a public company, the minimum membership requirement is presently seven. So, in the register of members of the company (assume a private company), there will be at least two members recorded. So legally, the holding company may have maximum have nearly up to a hundred but not hundred per cent shares. In any case, one share will be with any other person – human or a legal person.

The first thing is very clear, a Wholly Owned Company always have more than one shareholders mentioned in its register of members and all reports and returns showing details of members. One will have majority shareholding with the second one or others having negligible and minority shareholding. But the story is not complete here.

Now, it is a game of practice and evolution of law. what if the holder of minority shareholding assigns all or most or few rights underlying in his share to the majority shareholder.  What if the minority shareholder declares and represents before the company that the beneficial owner of his shareholding is the majority shareholder. This is possible under the law.

There may be a deed of assignment of such assignment or just a simple declaration to this effect. This is no transfer of a share, mortgage, pledge or transfers other conventional rights including dividend or voting rights. This may just be a declaration that the holding company has beneficial ownership of the shares. The beneficial owner may have voting or dividend rights fully or in a controlled manner depending upon their private agreement.

What makes a subsidiary company wholly owned by its holding company is the declaration of beneficial interests.

Someone asked me Who to incorporate a Wholly Owned Subsidiary Company? Practically you cannot incorporate. Only after incorporation of a company, you can make it Wholly Owned Subsidiary Company.

As you understand, a wholly-owned subsidiary is not technically fully owned by its holding company, rather it is a legal notion.

One may read the concept of beneficial interests here.

Aishwarya Mohan Gahrana

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