Difference between Holding and Subsidiary Company in India

Introduction

A business owner can structure their company in different ways. They can run it independently, create a subsidiary under a main company, or set up a holding company that owns and controls other businesses. A holding company is a parent company that doesn’t trade goods or services but owns shares in other companies. This article explains the difference between a holding company and a subsidiary, focusing on how they work in India.

What is a Holding Company?

A holding company is a business that owns and controls other companies but does not run any operations or make products itself. Its main job is to manage investments, own shares in other businesses, and oversee how they are run. A company is considered a holding company if it either decides who is on the board of directors or owns more than 50% of another company’s shares.

What is a Subsidiary Company?

A subsidiary company is a business owned fully or partly by another company. If the owner also runs other businesses, it’s called a parent company, and if it only owns subsidiaries, it’s a holding company. Subsidiaries help businesses expand, reduce risk, and create separate brands. A company is a subsidiary if another company owns more than 50% of its shares or controls its board.

Control Holding and Subsidiary Company

• Holding Company : Has control over the subsidiary’s policies and decision making.
• Subsidiary Company : Operates under the direction or significant influence of the holding company.

Ownership Holding and Subsidiary Company

• Holding Company : Owns majority shares (more than 50%) in the subsidiary.
• Subsidiary Company : Owned and controlled (majorly) by the holding company.

Financial Statements for Holding and Subsidiary Company

• Holding Company : Needs to consolidate the financial statements of its subsidiaries.
• Subsidiary Company : Its financial statements are incorporated into the holding company’s consolidated accounts.

Difference between holding company and subsidiary company

Example:

If Company A holds 60% shares in Company B, then:

• Company A is the Holding Company.
• Company B is the Subsidiary Company

Relationship Between a Holding Company and Its Subsidiary

• A holding company’s relationship with its subsidiary is similar to that of a parent and child.

• When one company owns all the equity of another company, the latter becomes a wholly owned subsidiary of the first company.

• A subsidiary can become a holding company by acquiring a majority stake in another company.

  • This creates a pyramid like structure, where the top company serves as the holding company for all subsidiaries below it.

• The subsidiary company’s shares become assets for the holding company.

  • The holding company may use these assets to acquire a controlling stake in another business.

• To prevent shareholder claims, the assets of the holding company and the subsidiary are kept separate through strategic accounting maneuvers.

• The holding company and its subsidiaries are treated as a single economic unit.

Stock Ownership Rules

• A holding company can own stock in its subsidiaries, but a subsidiary cannot own stock in its holding company.

  • If a subsidiary receives such stock, it is considered invalid.

• This rule also applies if the shares are held by a nominee on behalf of the subsidiary.

• However, a subsidiary can be a member of its holding company in certain cases:

  • When acting as the legal representative of a deceased member of the holding company.
  • When acting as a trustee for shares.

• Investments made before a company became a subsidiary may be retained, but the subsidiary will lose its voting rights in the holding company.

Conclusion

The holding company and its subsidiary operate under different legal rules and serve different purposes. The subsidiary handles daily business operations, while the holding company focuses on control and major decisions. They have separate legal identities, meaning the subsidiary is responsible for its own debts and financial issues.

Suggested Read :

Shareholding rights of a subsidiary company

Roles of a Foreign Subsidiary company

Branch Office vs Indian Subsidiary

Features & Functions of Indian Subsidiary

Foreign Subsidiary Company Compliance in India