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April 4, 2022
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- Company law
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- Tags:
- Holding Company
- Subsidiary Company in India
This article outlines the fundamental differences between a Holding and a Subsidiary Company, ‘What is a Holding Company?’, ‘What is a Subsidiary Company?’, and other information on Holding and Subsidiary companies in India is discussed. Technically, a holding company does not engage in any business activities or trade goods or services. Such businesses aim to own a majority stake in other businesses.
Table of Content
Introduction
A business owner has a number of alternatives when it comes to organizational structure. You can have a business that owns and sells products and services without involving any other business entities. You can form a subsidiary for a certain brand under your main company, or you can construct a firm that invests in one or more other companies while “Holding” enough financial interest to be considered a controlling party.
A holding company is a parent corporation with the goal of owning or controlling other companies. A parent company owns or controls a subsidiary, however that parent firm may or may not be a holding company.
What is a Holding Company?
A Holding Company is a Parent Company, Limited Liability Company, or Limited Partnership that owns a significant number of voting shares in another business. The shareholding is structured in such a way that the Holding Company has control over the subsidiary’s policies and management decisions.
Although a Holding Company holds the assets of other companies, it solely retains management roles, and therefore it remainsuninvolved in the organization’s day-to-day activities.
According to Indian Company Law, a Subsidiary is a firm that is owned and controlled by another company, whereas the latter is referred to as a Holding Company. As a result, the term “control” is defined in Company Law to determine whether a firm qualifies to be considered a Holding Company. Management or share ownership can both be used to exert control.
What is a Subsidiary Company?
A Subsidiary Company is a business that is owned by another Company, either partially or entirely. If the Company has other commercial operations, it is referred to as a parent company or a Holding Company (if the sole purpose of the company is to own its subsidiaries). There are a variety of reasons why you might want to start a Subsidiary Company, including diversifying your business, limiting your financial liability, and distinguishing your firm’s brands.
Difference Between Holding and Subsidiary Company in India
Holding Company | Subsidiary Company |
A Holding Company is a company that owns more than half of another company’s stock and hence has the capacity to control its operations. | A Subsidiary Company is one in which another firm owns more than 50% of the shares and has complete control over the company’s operations. |
A Holding Companies in charge of the management and operations of the subsidiaries it owns, and it has the power to appoint and remove board members, directors, and other key management and personnel. | A subsidiary’s operations have little or no control over the Company’s operations. Even subsidiaries that operate independently are ultimately financially controlled by their parent firm (Holding Company). |
The Holding Company has all ownership rights and duties over its subsidiaries. | On the other hand, the Subsidiary Company is dependent on the Holding Company, and major decisions taken by the Holding Company |
To diversify its investment, minimize risk, and, in some cases, take advantage of shared loss and tax consolidation, a Holding Company may invest in subsidiaries in many businesses. | When a subsidiary becomes a subsidiary of another holding company, all of its subsidiaries become subsidiaries of the top holding company. |
By making the company a Subsidiary, the Holding Company can benefit from its enormous capital and limit market competition for the company. | Subsidiary Company, on the other hand, protects themselves from business uncertainty and provides a safeguard against business loss. |
Holding and Subsidiary Company in India under Companies Act, 2013
- A holding company’s connection with its Subsidiary Company is similar to that of a parent and child.
- There is a unique situation in which a firm’s whole equity is held by another Company. The Subsidiary Company becomes a totally owned subsidiary of the controlling company in such cases.
- It is also possible for a subsidiary business to become a Holding Company by obtaining a majority interest in another company, which then holds another company, and so on. This creates a pyramid-like structure, with the topmost firm serving as a Holding Company for all of the companies below it.
- The Subsidiary Company’s shares become assets for the holding company, which it might use to buy a controlling stake in another business.
- To avoid any shareholder claims, the assets of the Holding Company and a subsidiary firm are kept separate in a cunning accounting maneuver.
- However, in actuality, the controlling company and its subsidiaries are treated as a single economic unit.
- A holding company can and does own subsidiary stock, but a subsidiary cannot own stock in its own holding company. A shared allotment to a subsidiary is null and void.
- This prohibition applies even if the subsidiary company’s shares are held by a nominee rather than the subsidiary company itself. However, the subsidiary might be a member of its holding company in the following circ*mstances:
- When the subsidiary is the legal representative of a deceased member of the holding company.
- When a subsidiary is acting as trustee for shares.
- Investments made before the Company became a subsidiary may be maintained, but the subsidiary will no longer have voting rights in the holding company.
Conclusion
The Holding Company and subsidiary firm operate under different legal regimes and serve different goals as a result. Despite their lack of ownership and control, subsidiary firms have a significant impact because they are responsible for day-to-day business operations. The holding company, on the other hand, remains apart from operational activities and focuses on controlling and making significant business decisions regarding its subsidiary Company. It’s also worth noting that holding and subsidiary Companies have distinct legal identities. As a result, the subsidiary firm is completely responsible for dealing with issues such as bankruptcy and debt repayments.
