In simple terms, a holding company refers to Parent company. As per Company law, the company controlling a subsidiary company is called a holding company. The control of a holding company can be through control of management or through ownership of shares. The Holding company can control the subsidiary’s policies and oversee management decisions but doesn’t run day-to-day operations.
Holding company works in two ways i.e.
- One is by acquiring the maximum shares or stock in the other existing companies which conveys as the power to control its whole activities.
- The second way is by creating or forming a new company from the ground level.
Types of Holding companies:
- Pure holding company – A company that is purely formed for the sole purpose of owning the stocks of other companies.
- Parent holding company – A company that has a subsidiary business that is controlled by the parent company.
- Mixed or Operating holding company – A company which runs its own business and also controls the business of its subsidiaries as well.
- Intermediate holding company – A company that is both the holding company of another entity and also a subsidiary of a larger company.
- Offspring holding company – A new company started by any existing company with the objective of taking over shares from the existing company.
Relationship between a holding and subsidiary company
A relationship between a holding and subsidiary company is established when
- The holding company controls the Board of Directors of the subsidiary company.
- More than 50% of the total share capital of a subsidiary company is held by the holding company.
Why create a holding company?
- Gaining control and unity
Helps in gaining better control over the subsidiary company and also ensures unity between the companies.
- Transfer of ownership
There is ease in the transfer ownership is a holding company-subsidiary company structure.
Helps in creating global credit limits which allows better funding rates for the subsidiary company.
- Taxation benefits
The holding company gets tax exemptions when establishing a subsidiary company.
- Financial Strength
A holding company can pool vast resources and utilize them in a more economic manner.
- Protection of assets
When excess earnings, investments and other assets are separated into a holding company, they will be beyond the reach of creditors and liability claims that originated from the subsidiary company.
- Special skills
The special skills and technical knowledge in a holding company could be used to increase the value of other subsidiary companies. Customer relationships of one subsidiary could result in expanding the sales of the other companies as well.
- Preservation of Goodwill
The goodwill associated with the holding company will not be damaged due to the poor performance of the subsidiary company.
Note: All documents submitted towards the registration of a foreign subsidiary company must be translated in English.
A holding company may not have any business activities but, only hold assets. The group of subsidiary companies under the holding company provides them with advantages which they may not receive while working as a separate entity.
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