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October 24, 2024
Difference between Holding and Subsidiary Company in India
This article explains the basic differences between a Holding company and Subsidiary Company. It answers questions like “What is a Holding Company?” and “What is a Subsidiary Company?” and provides other information about these types of companies in India. A holding company does not do any business or trade goods or services. Instead, it aims to own most of the shares in other businesses.
Introduction
A business owner has several options for organizational structure. One option is to have a business that owns and sells products and services independently. Another option is to form a subsidiary company for a specific brand under your main company. Alternatively, you can create a firm that invests in other companies, “Holding” enough financial interest to control them.
A holding company is a parent corporation that aims to own or control other companies. A parent company owns or controls a subsidiary company, but that parent company 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 remains uninvolved 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 owned by another company, either fully or partially. If the owning company has other business activities, it’s called a parent company. If its main job is just to own subsidiaries, it’s called a Holding Company. People start Subsidiary Companies to diversify their business, limit financial risk, and create separate brand identities.
Suggested Read: How to register company in India
Difference between holding company and subsidiary company
Holding Company |
Subsidiary Company |
A Holding Company owns more than half of another company’s stock, giving it control over that company’s operations. |
A Subsidiary Company is one where another firm owns more than 50% of the shares and thus controls its operations completely. |
A Holding Company manages and controls its subsidiaries, including appointing and removing board members, directors, and other key personnel. |
A subsidiary usually operates independently but is financially controlled by its parent company, the 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 |
A Holding Company invests in various businesses through subsidiaries to lower risk, cut losses, and save on taxes. |
When a holding company owns a subsidiary, it also owns all of that subsidiary’s own subsidiaries. |
By making a company a Subsidiary, the Holding Company can use its big capital and reduce competition for the company. |
A Subsidiary Company helps protect itself from business risks and losses. |
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.
- When one company owns all the equity of another company, the second company becomes a wholly owned subsidiary of the first company.
- A subsidiary can become a Holding Company by buying a majority stake in another company. This new company can then hold another one, creating a pyramid-like structure with the top company being the Holding Company for all the others 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 own stock in its subsidiaries, but a subsidiary cannot own stock in its own holding company. If a subsidiary receives such stock, it is invalid.
- This rule still applies if the shares of the subsidiary company are held by a nominee instead of the subsidiary itself. However, the subsidiary can be a member of its holding company in certain situations:
- 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.
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