Today we several companies are formed as large conglomerate companies, with multiple subsidiaries under them. Several popular conglomerates include Volkswagen, Walt Disney, etc.
Holding companies are recognized under the Companies Act, 2013, as the controlling company that exerts a certain amount of control over subsidiary companies.
The ‘control’ factor is an important factor in determining the status of a holding company and the relationship with its subsidiaries. In most case, the control of the holding company is exerted through shares, where the controlling company holds at least 51% of the total holdings. A company becomes its associate when the holdings over 20% (but not beyond 51%).
When the holding company holds 100% of the common stock of the subsidiary company, then the subsidiary is called a wholly-owned subsidiary.
The holding company can also exert additional control by virtue of the composition of the board of directors and the management. So, the holding company will have majority powers to appoint and remove the majority of the directors of the company.
The holding company can either hold the shares of the subsidiary directly or through one or more of its other subsidiaries. Also, a subsidiary company that’s held by another subsidiary company will automatically become the subsidiary of the parent company. For instance, if ABC is the holding company of MNO, and XYZ is the subsidiary of MNO, the XYZ automatically becomes the subsidiary of ABC.
Holding companies structures are most appropriate large companies which have diverse business operations, investment, and assets in multiple industries. The main purpose of the holding company is to hold the assets and valuable holdings and not actually engage in any business operations. Here is a breakdown of the various structure of the holding company.
The holding company can group its subsidiaries into various sub-groups such as Chemical products, consumer products, Energy, engineering, etc. However, each of the subsidiaries operates with separate employees, separate office spaces and facilities. Only the control and management remains of these assets with the holding company.
The holding company on its part maintains the capital of all these subsidiaries since it holds the majority ownership. So, the holding company’s board is hired to make decisions about the subsidiary company. Further, the holding company can lend its support to its subsidiaries, in the form of low rate bonds, lending money and lowering capital costs.
The structure of a holding company can be classified as follows. The Companies Act does not separately recognize these structures. These structures are more for understanding the working of holding companies. The internal structure of an organization defines the roles of the employees as well as the various departments that function independently, yet cohesively.
Divisional: These are companies, where the holding company is located in one country and the subsidiary offices are located in several parts of the in the world, having their own independent operations. For instance, Microsoft India (R&D) Pvt Ltd is the overseas subsidiary of Microsoft Corporation.
Based on the structure and the workings of a holding company, it can generate income in various ways. The bank accounts of the holding company and its subsidiary companies are separate, and they have to also independently adhere to regulatory and statutory requirements.
Most holding companies don’t have their own operations and conduct their operations through their operating companies. They don’t directly engage in revenue-generating ventures.
This separation is following by companies like Tata and Reliance so that the Corporate Veil is not affected, and the limited liability of the company is maintained.
However, in most recent times we don’t always see this differentiation, as mentioned above Facebook is a holding company that has its own operations.
The holding- subsidiary structure can be beneficial in a number of ways. The main reason is to retain the control. Here are a few more beneficial reasons to set up a holding company: