Reviewed by Annapoorna | Updated on Aug 16, 2023
What is a Holding Company?
A holding company is a parent company, limited liability company, or limited partnership that holds ample voting shares in another company. The shareholding is arranged in a way that the holding company can control the policies of its subsidiary company and oversee its management decisions.
Although a holding company controls the properties of other businesses, it merely retains management capacities and is thus not directly involved in managing the day-to-day activities of a corporation.
According to the company law in India, a company that is owned and controlled by another company will be termed as a subsidiary, and the former is considered as a holding company. Hence, "control" is defined in the company law to evaluate the eligibility of a company to be called a holding company. Control can be either by management or through share ownership.
Features of a Holding Company
The primary aim of a holding company is to manage other companies, whether they be other companies, limited liability partnerships, or limited liability companies. Holding companies can also own properties, such as immovable objects, patents, trademarks, securities, etc.
Businesses wholly owned by a holding company are referred to as "wholly-owned subsidiaries". While a holding company can employ and fire managers from the companies it owns, such managers are ultimately responsible for their operations. It is therefore essential for property owners to keep a close eye on their companies and ensure that they are operating optimally.
Holding firms enjoy insurance against losses. If a subsidiary goes bankrupt, the holding company may suffer a loss of capital and a decrease in net worth. However, creditors of the insolvent company can not legitimately seek remuneration at the holding firm.
Consequently, a parent organisation may organise itself as a holding company for an asset management policy, thus establishing subsidiaries for each of its business lines.
For example, one subsidiary may own the brand name and trademarks of the parent company. In contrast, another may own the real estate, another may own the equipment, and yet others may own and operate every single franchise.
This strategy helps to restrict the exposure of the holding company and the numerous entities to financial and legal liability. It can also reduce the total tax liability of a company by geographically focusing some parts of its profits on jurisdictions with lower tax levels.
Registration of a Holding Company
The process of registration of a holding company in India is the same as any other company. However, the memorandum of association and articles of association requires specific mention of certain details.
The Article of Association should specify the rights of the holding company. One must mention in the Memorandum of Association about the task of controlling the assets over the subsidiary companies. The details required are as follows:
- Name of the subsidiary companies.
- The shareholding pattern of these companies.
- Percentage of shares that the holding company holds in these companies.
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CONTENTS
- What is a Holding Company?
- Features of a Holding Company
- Registration of a Holding Company
Certainly! Now, let me give you a breakdown of the concepts mentioned in the article, adding a bit of my own flair to it.
What is a Holding Company?
A holding company is like the maestro orchestrating a symphony of businesses. It could be a parent company, limited liability company, or limited partnership that holds substantial voting shares in another company. This strategic shareholding gives the holding company the power to conduct a business orchestra, influencing policies and keeping an eagle eye on management decisions.
In India, the term "holding company" is tied to control, defined by company law. This control can manifest through management or share ownership. This legal dance classifies a company as a holding entity when it owns and controls another—cue the spotlight on the term "subsidiary."
Features of a Holding Company
Now, let's explore the features of this corporate conductor.
The primary goal of a holding company is to be the puppeteer of other businesses. It can own not just businesses but also tangible and intangible treasures like real estate, patents, trademarks, and securities. Think of it as a strategic game of Monopoly, but with corporations.
Holding companies, being the puppeteers they are, can hire and fire managers in their owned companies. However, these managers are the frontline performers, responsible for the daily show. To ensure the show runs smoothly, holding companies need to keep a vigilant eye on their investments.
One nifty feature in the holding company playbook is the insulation against losses. If a subsidiary hits financial rock bottom, the holding company might feel the financial aftershock but creditors can't knock on their door for compensation. It's like having a financial force field.
Strategic planning comes into play too. A holding company can structure itself to limit exposure and liability. Imagine it as a chess game where each subsidiary is a different piece with a unique role—brand name holder, real estate proprietor, equipment owner, and franchise operator. This chess strategy helps mitigate financial and legal risks.
And here's a financial magic trick: a holding company can strategically spread its profits across jurisdictions with lower tax rates, reducing the overall tax burden. It's like playing a game of economic chess in multiple arenas.
Registration of a Holding Company
Now, let's peek behind the curtain at the registration process in India.
Registering a holding company in India involves a familiar dance—similar steps as any other company. However, the real choreography lies in the details. The Memorandum of Association and Articles of Association take center stage.
In these documents, the rights of the holding company should be crystal clear. The memorandum should outline the task of holding and controlling assets over subsidiary companies. Think of it as the script that guides this corporate drama.
Specific details are demanded, like the names of subsidiary companies, the shareholding pattern, and the percentage of shares held by the holding company. These details are the cues that set the stage for the holding company's performance.
So, in essence, a holding company is not just a business entity; it's a strategic mastermind, pulling the strings and orchestrating a harmonious symphony of subsidiaries. And that, my friend, is the art of holding.
