Question

Distinguish between holding company and a subsdiary company in a tabular form

Answer 1

Understanding what a subsidiary and holding company is

Essentially, if one company holds more than 50% of the shares of another or appoints a majority of the other company’s directors, the second company is a subsidiary of the first. The first company is called the holding company.

If the holding company owns 100% of the shares of the subsidiary, the subsidiary is known as a wholly owned subsidiary (WOS).

A private company requires a minimum of two shareholders, so 100% shareholding is technically impossible. The company may give one share to another shareholder (who is friendly or aligned to the holding company). Typically, it is a relative of the promoters who run the company.

5 Commercial reasons for creation of a holding subsidiary structure

To segregate the business structure and to create the distinct entities with separate management. For example, FMCG products can be housed under one vertical and consumer durables and electronics can be in another. This enables the value of different businesses to be captured separately. It facilitates buying and selling of an individual business. An investor can directly acquire shares of the company it is interested in. If an investor wants exposure (i.e. stake or benefit) in both segments then it can invest at the parent company level.

Holding-subsidiary structure can also be used by companies to create different brands and brand categories for different kinds of products. For example, Vivanta is the budget brand of the Taj Group of Hotels. Companies may prefer to house different brands under different verticals. It enables them to bundle a brand and its intellectual property together in the event of a sale. This planning is typically done beforehand or when the company’s operations expand and they need to be ‘organized’ or ‘restructured’ in a new way.

Companies use subsidiary structures to when they do business internationally, where they incorporate a separate subsidiary company in each country. This enables a company to enter and exit from business with respect to a particular country.

Sometimes, this form of structuring enables companies to take advantage of lower tax rates in other jurisdictions. For example, many international venture capital funds have structured investments into India through a Mauritius entity to take advantage tax exemptions under India and Mauritius Double Taxation Avoidance Agreements (DTAAs).

The structure can be expanded and extrapolated further by adding more layers of subsidiaries. For example, a global company may have a South Asia Holding company which has a parent India subsidiary, and further subsidiaries for different industry segments that the company sells products/ services in.

Subsidiary and holding company under Companies Act

Holding company and subsidiary company is defined under the Companies Act, 2013 (herein referred as Act).

Holding Company

Section 2(46) of the Companies Act, 2013 defines Holding Company. The company is said to be the holding company if that particular company holds/owns at least 50% of the other companies and has the authority to make management decisions, influences and controls the company’s board of directors. A holding company may exist for the sole purpose of controlling and managing subsidiary companies.

Subsidiary Company

Section 2(87) of the Companies Act, 2013 defines the Subsidiary Company. The subsidiary company is the company that is controlled by the holding or parent company. It is defined as a company/body corporate where the holding company controls the composition of the Board of Directors. As per the Companies Amendment Act, 2017, Section 2(87)(ii), if the holding company have control over more than one-half of the voting power of another company, that particular company will be identified as the subsidiary company.

Note: If a holding company owns 100% of the stock of other company, then the other company would be known as whole owned subsidiary of the holding company


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Answer 2

Ownership
A holding company buys, absorbs or otherwise obtains a majority
percentage of stock in another company, which becomes known as its subsidiary.
Typically, a holding company must control 50 percent or more of a company’s
stock before it's considered a subsidiary. Holding companies may also own other
holding companies — in this case, they're known as top holding companies. The
holding company has all rights and responsibilities of ownership for its
subsidiaries. The subsidiaries, while not independently owned, often continue
to operate as individual entities, though major corporate decisions are made by
the holding company.

Management
A holding company directs the management and operations of the
subsidiaries it owns and maintains the authority to add or remove board
members, directors and other key management and personnel. A holding company
may have strict managerial control or may allow subsidiaries to act with some
level of autonomy for day-to-day business operations, including lower- and
midlevel hiring and certain budgeting decisions.

Financial Control
A subsidiary has little to no financial
control over its operations. Even independently acting subsidiaries are
ultimately financially controlled by their holding company. This includes
financial activities such as investment decisions, sales projections and
budgeting. If a subsidiary was itself a holding company prior to becoming a
subsidiary of another holding company, all of its subsidiaries also become
subsidiaries of the top holding company.

Legal Responsibility
A holding company may invest in
subsidiaries in a variety of industries to diversify its investment, lower its
risk potential and, in some instances, take advantage of shared loss and tax
consolidation. Although a holding company may enjoy the profits of its
subsidiaries, it also has a fiduciary responsibility to the subsidiaries it
controls. A subsidiary that regains a majority of its shares also regains its
autonomy from its holding company.

 
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