With the E-mobility sector gaining ground, all major automakers are busy creating subsidiaries. But what exactly is a subsidiary and what are the benefits of creating one? Today, we will try and find the answer to these questions.
It was just a few weeks back that Tata announced its intentions of having a separate EV arm to manage the affairs concerning its EV portfolios. Bajaj Auto had started their efforts to do the same as early as July 2021 and as per latest reports, TVS is also looking forward to joining the bandwagon. Why exactly do companies create subsidiaries? What are the benefits of having subsidiaries?
Before we get into the benefits, we’ll see what a subsidiary is. In the simplest of terms, a subsidiary could be defined as a company which operates under the control of another company. The company which exercises control is termed as the parent company and owns a majority of shares in the subsidiary. If the parent company holds 100% of the share capital, the subsidiary is called a wholly owned subsidiary.
Creating a separate subsidiary offers certain advantages to the parent company. And here are a few possible reasons why we might be seeing the EV subsidiary trend.
Subsidiaries are a great way to form partnerships and run joint ventures. Today’s corporations, often than not, focus on multiple sectors. And two companies which want to strictly limit co-operations to a single sector could easily do so with joint ventures constituting subsidiaries.
An example of the trend is Tata’s EV subsidiary, which was declared in the wake of its joint venture in association with TPG Rise Climate. Although only a strategic partnership, TVS’s EV subsidiary was also announced shortly after the decision to join hands with Tata Power.
Companies often have to take financial and non-financial risks. And not all risks would end up returning a favourable result. By creating subsidiaries, losses and liabilities can be limited to the subsidiary upto an extent. Hence, any resolution would have less impact on the parent company and its other subsidiaries. In short, a subsidiary helps to localise liabilities. And in India, where a subsidiary does enjoy separate legal identity, this is indeed an advantage.
The EV sector in India is still nascent and hence it allows considerable experimentation at the cost of risks. And an EV subsidiary could very well be of immense use in this particular context.
Tailor made management, work culture:
Subsidiaries being separate companies, will have a seperate management which could be constituted in such a way that it could favor the needs of the subsidiary. The work culture could also be altered and developed to suit the ethos of the subsidiary and these factors could greatly influence the success of the company. At the end of the day, flexibility and freedom goes a long way in deciding success. Flexibility and freedom was also cited by TVS as the primary reason for creating a subsidiary.
To create a separate brand:
Brand names and the value they carry are undeniable. By having a separate EV arm in the form of a subsidiary, a new and standalone brand could be built from scratch. And this indeed would be the right time to do that rather than double guessing halfway through. Even though having a traditional and already built up name could have its own set of advantages, a separate brand could be beneficial in the long run.
If you look at some of the famous brands like Jaguar and Land Rover, both are subsidiaries of Tata motors and retain their own brand name to thrive.
To raise capital:
Since the subsidiaries are separate legal entities, it ends up as a good way to raise money with minimal impact on the parent company. The subsidiary could offer stocks and woo investment without affecting the stock value of parent companies beyond an extent.
Subsidiaries have well defined advantages in case of foreign entities which want to set up roots in other countries. In the case of India, it's always advantageous to start a subsidiary rather than open a branch, due to multiple reasons.
The tax rate is higher for branch offices compared to subsidiaries, actions are restricted for branches, the branch offices require approval of the RBI and it takes more money and time.
Since we have discussed a lot of pros, it would be unfair not to discuss the cons.
Limited freedom of management:
Even though subsidiaries have a separate management, it cannot always take fully independent decisions. The parent company’s aspirations and missions will always hover around subsidiaries and it can only act within the circle drawn by the parent company.
Paper works and legalities:
Subsidiaries will require managing their own paperwork, their own records, will be required to keep track of their stocks and will have to do very much everything any non-subsidiary will have to do. And with multiple subsidiaries, keeping good track of everything might become a bit hefty over time.
In case of joint ventures and partnerships, maintaining control of subsidiaries could become a walk on the line depending upon the percentage of shares.
The benefit of limiting liability is only applicable if exercised in the right manner. If the parent company indulges too much into the subsidiary, especially by providing guarantee to the loans acquired by subsidiaries, the protection from liability could become haywire.
Since we have discussed the pros and cons of subsidiaries, it’s time we start thinking of a conclusion. The Indian market has always been somewhat astray from global trends. The smartphone mania took over India only a few years after the same had happened in erstwhile markets. But when it did, it was widespread and somewhat different. Traditional powerhouses had an uphill battle and relatively new brands from China dethroned them over time.
Even with ICEVs, many trends never quite caught on as expected. Tata Nano being the most apt example. Hence, in a nascent, volatile and highly competitive market, it is indeed good to have a buffer of protection. Even though this could be factored in as a reason for the subsidiary boom, the primary reason would still have more to do with flexibility and freedom, to focus fully on one sector rather than club everything together and make a mess.
The Indian E-mobility sector is being caught on fairly recently and a rapid shift might not be the best case scenario. We are years behind the global market in terms of penetration and the conversion of automakers to all electric might take a little bit of time. Till then, we might see different versions of the same automakers in the IC and EV sectors. If you are interested in finding out some of those automakers and their stock market stats, we have got you covered. In any case, subsidiaries have several benefits and as long as it boosts the scope of E-mobility in India, everything should work just fine.