Holding Company | Meaning, Classification, Advantages & Disadvantages

What is a Holding Company?

What is a Holding Company

What is a Holding Company?

The holding company is a separate company which controls the policies of other companies through ownership of their key shares. In other words, holding company is a business organization, which holds either the whole of the share capital or a sufficient number of shares in one or more companies, which are known as subsidiary companies.

Holding company is another product of modern advancement in the field of industrial combination to remove the various difficulties experienced in the previous forms of combinations. Hence, it is a more integrated and powerful form of combination. Holding company was first devised in the United States towards the end of the nineteenth century when the Anti Trust Laws were passed to give a prompt burial to the trust form of combinations.

Definition of Holding Company

In the words of A.D. Cloud,

holding companies, strictly speaking are those which are formed to hold stock of their corporations while undertaking no operations themselves .

The concept of holding company is also recognized by the law in India and in most other countries.

According to Sec. 4 of the Indian Companies Act,  a holding company is any company which holds

  1. More than half of the equity share capital of the other companies, or
  2. Controls the composition of the board of directors of other companies

The following points may be noted in this connection:

1. The company, which holds majority shares of another company, is known as the holding company. While the company whose stock is held is known as the subsidiary company.

2. Both subsidiary and holding companies must be incorporated companies. But in America the holding company need not be an incorporated company. It may be a simple business trust or a joint stock company.

3. Both holding and subsidiary companies continue their separate existence in the contemplation of law and retain their original names.

4. The shares of the subsidiary companies may be purchased either directly in the open market or by direct subscription or in any other way

5. According to the Indian Law, a subsidiary of another subsidiary company will also be a subsidiary of that holding company, For instance, H Ltd. is the holding company of A Ltd., and A Ltd., is the holding company of B Ltd., then B Ltd., also be considered as subsidiary of H Ltd.

Kinds of Holding Companies

Kinds of Holding Companies

Kinds of Holding Companies

Holding companies can be classified in many ways. The usual method of classification is to classify them:

  1. According to the nature of the activities.
  2. According to subinfeudation..
  3. According to the sequence of organization.

Classification of Holding companies according to the Nature of the Activities

According to the nature of activities, holding company can be classified into two kinds as follows:

1. Parent Holding Company

It simply holds the shares of other companies through the investment of its entire resources and does not undertake any business of its own except holding the share of the subsidiary companies.

2. Operating or Mixed Holding Company

It is both an operating company and a holding company. It engages business activities on its own account over and above the function of holding control over the subsidiary companies.

Classification of Holding company according to Subinfeudation

According to the subinfeudation, holding company can be classified into two kinds as follows:

1. Primary Holding Company

A holding company, which is not a subsidiary of any other company, is known as a primary holding company. There may be several grades of holding companies in the holding company set up. The Apex company standing at the top of the structure is known as the primary holding company.

2. Intermediate Holding Company

A holding company, which is subsidiary of another company is known as intermediate holding company. Since it is in between the primary holding company and the subsidiary companies at the bottom, it is called as such. It is also known as sub-holding company.

Classification of Holding company according to the Sequence of Organization

According to the sequence of organization, holding company can be classified into two kinds as follows:

1. Parent Holding Company

When an existing company promotes a new company with a view to transfer some branches of its business or of getting an investment outlet and acquires controlling amount of shares in that companies, the holding company becomes the parent company. That is it gives birth to one of its subsidiaries.

2. Consolidated Holding Company

If several companies are consolidated under a new holding company specifically promoted for this purpose, it is known as a consolidated holding company. In the order of existence, the holding company comes into being after the establishment of the subsidiaries.

Advantages of Holding Companies

Advantages of Holding Companies

Advantages of Holding Companies

The various advantages, which the holding companies enjoy, are given below:

1. Easy Formation

Formation of a holding company is comparatively easier than any other form of combination.

2. Economy in Operation

Because of its large size and centralized control, holding company can effect many operational and administrative economies in respect of finance, management and marketing.

3. Secrecy of Control

Since effective control is exercised by the holding company over the affairs of the subsidiary companies, it can be saved from the antagonism of the public and the competitors and even that of the employees.

4. Preservation of Goodwill

The goodwill associated with the holding company will not be damaged due to the poor performance of the subsidiary company or due to the fall in the quality of the goods produced by the subsidiary companies.

5. Financial Strength

The holding company can pool vast resources and utilize them in a more economical manner. Even with a relatively smaller amount, it can gain control over a number of companies. Hence, it is considered as the most economical means of forming an effective combination.

6. Financial Guardianship

The subsidiary companies due to the effective care and control of their holding companies, can get easy access to the financial markets. They can get timely financial assistance.

Disadvantages of Holding Companies

Disadvantages of Holding Companies

Disadvantages of Holding Companies

Holding companies suffer from the following disadvantages:

1. Power without Responsibility

Most of the holding companies by making small investments acquire complete control over the subsidiary companies. Hence, the financial liability of the holding companies is much less than their power and control over the subsidiary.

2. Expensive Structure

Formation of such companies requires elaborate legal formalities and involves huge expenditure.

3. Exploitation of Subsidiaries

The holding company may waste the assets and destroy the earning capacity of the subsidiaries in several ways, as its financial liability is less than its control.

4. Misuse of Inside Information

It offers endless opportunities for inside manipulation. The top executives of the holding companies are aware of the affairs of subsidiary companies. Therefore, they may find a scope for making big fortunes overnight at the expense of the investors.

5. Concentration of Wealth

It enjoys greater financial powers, which may ultimately gives rise to monopolistic tendencies. In fact, a holding company brings a secret monopoly and results in undue concentration of wealth in the hand of a few.

6. Remoteness of Control

When the number of subsidiaries is large, control shall become ineffective. Particularly when the subsidiary units are situated at distant places, it shall become completely inefficient and incompatible with local conditions.

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