ABSTRACT
Essentially, a holding company is a company when its takes over 50% of the stocks of a subsidiary company, and subsidiary companies are those companies from which the holding companies takes out the shares and stocks, holding companies has the major control in the management of the subsidiaries company and also influences the decisions of board of directors.
KEYWORDS
- HOLDING COMPANIES
- SUBSIDIARY COMPANY
- BENEFITS
- BUSINESS STRUCTURES
- ECONOMIS BENEFITS
WHAT IS HOLDING COMPANY AND WHAT IS SUBSIDIARY COMPANY AND DIFFERENCE BETWEEN THEM
INTRODUCTION
A holding and subsidiary company shares a relationship with each other in the companies Act, 2013 the holding company is a parent company of the subsidiary company, the former holds more than 50% of the shares of the latter. There are instances in which a company is independent and in some cases it is under the control of the holding company, which holds the stocks of the subsidiary company, but the parent company is not involved in the business affairs of the subsidiary company but it might influence the management or the business discretion in the crucial parts. It might be interested to note here that a holding company is essentially a parent company, but not all parent companies are holding companies.
WHAT IS HOLDING COMPANY ACCORDING TO COMPANIES ACT, 2013 UNDER SECTION 2(46)
A holding company is one in which it holds more than 50% of the shares of another company or appoints majority of the directors of that company (subsidiary company), a parent company also influences the decisions making process even if it holds 10% of the stocks of that company. If the holding company hold the shares or stocks of subsidiary company and it is 100% then it is known as the wholly owned subsidiary company.
There are two methods by which a company can become the holding company, firstly, by acquiring the voting stock or shares of another company and secondly through establishing a new corporation from ground level and thus acquires all the shares of that corporation.
TYPES OF HOLDING COMPANY
- Pure
A holding company is considered as a pure holding company when the sole purpose of establishment of it is to own shares of another companies. This holding company does not participate in any other business other than to hold the business or control that company (subsidiary Company).
- Mixed
This mixed holding company not only holds the operations of other company but also engages in one’s own private business affairs. It is also known as a holding operating company. If a Holding company takes part in an unrelated business of the subsidiary that they can be called as conglomerates.
- Immediate
A immediate holding company is one when it is controlling the shares and stock of another company in spite of the fact that the company itself is subsidiary of another company or an entity.
- Intermediate
A company becomes the intermediate holding company when it holds the stocks of the another company or it is a holding company in it itself and also a subsidiary firm of larger corporation.
BENEFITS OF AN HOLDING COMPANY
Being a holding company has its own advantages:
- BETTER QUALITY DECISION
Holding companies has the better quality decision at all levels of the company. The holding company gives emphasis on the corporate and policies strategies and operating levels in the implementation process.
- BETTER UTILIZATION OF RESOURCES
Holding companies better utilizes the financial and other resources of the firm. The pool down their profits at the group of enterprise.
- AVOIDANCE OF COMPETITION
When there is a merger of both holding and subsidiary companies in the same business line, competition between both of them can be avoided.
- RISKS AVOIDED
If the subsidiary company faced losses at any time than it can be stabilized by the holding company by selling its shares and stocks and it also won’t affect the holding company much.
- CAPITAL MERGES
The economic resources of both the subsidiary and holding company gets merged and results in large capital and company can take large scale projects and gain profits in the business.
WHAT IS SUBSIDIARY COMPANY ACCORDING TO COMPANIES ACT,2013 UNDER SECTION (87)
Subsidiary company means a company in which the holding company controls its management or Board of Directors and its composition and also have half of the total voting power. The subsidiary company belongs to its parent company or holding company. Its business is owned by another company either partially or completely and which takes more than 50% of its stocks. Subsidiary companies can be called as daughter company and holding company Is its parent company. A subsidiary company is distinct entity from its parent company, it’s obligations and liabilities are separated from the liabilities of the holding company.
ADVANTAGES
There are few advantages for subsidiary companies have over parent company such as:
- Losses are limited
- Brand recognition
- Easy in establishment
- Tax deductions benefits
- Parent company easily widens its reach and gains while reducing risks
- Ability of investment in various companies without setting up an account of each investment.
- Increased the diversification and greater operational efficiencies.
DISADVANTAGES
- There are more legal formalities while taking the subsidiaries, if the subsidiaries are outside the country or even if it is in different state, the parent company follow the rules and regulations accordingly.
- Accounting and finances becomes difficult for the parent company to organise and consolidate it if there are many subsidiaries.
- Additional legal paperwork and its management put more burden both for the establishment and filing of taxes.
EXAMPLES : Meta, Oculus VR LLC, Instagram,LLC, Whatsapp are all subsidiaries of facebook as they were acquired by it, JIO taken by reliance group , Motorola by Lenovo,etc.
CONCLUSION
In today’s development process companies plays a vital role in economic prospective. The 2013 amendment brought some important companies and this encourages the people to invest or to establish a company over other business structures, because of having various advantages and also liability protection.
THIS ARTICLE IS WRITTEN BY TANISHKA TIWARI STUDYING IN 4TH YEAR BA LLB(HONS.) , FROM SHAMBHUNATH INSTITUTE OF LAW
