A company which controls another company is known as Holding company, and the company so controlled is termed as Subsidiary company.
As per section 4, a company shall be deemed to control another company in each of the following cases:
(1) If it controls the majority composition of the board of directors of another company. The composition of other company’s board of directors shall be deemed to be controlled if it can, at its direction without the consent or concurrence of any other person, appoint or remove the holders of all or a majority of the directorships. A company shall be deemed to have power to appoint the director in each of the following three cases:
(a) If a person cannot be appointed as a director without the exercise in his favour of the power of appointment held by the company.
(b) If a person’s appointment to directorship follows necessarily from his appointment as a director, or manager or to any other office or employment in that company, or
(c) If the directorship is held by an individual nominated by that company or a subsidiary thereof.
(2) If it holds majority of the shares of another company. For the purpose of control the company should hold more than half in nominal value of the equity shares of another company.
But where another company is an existing company and its preference shares issued before the commencement of the Companies Act, 1956 have the same voting rights in all respects as equity shares, a company is termed as holding company if it exercises or controls more than half the total voting power of another company.
Holding of shares or power to appoint majority of directors of the following nature shall not be taken into consideration while determination of the relationship of holding and subsidiary companies:
(a) Where the shares are held or the power is exercised by the company in a fiduciary capacity; or
(b) Where the shares are held or the power is exercisable by any person by virtue of the provisions of any debentures or a trust deed for securing any issue of such debentures;
(c) Where the shares are held or power is exercisable by a lending company by way of security and only for the purpose of a transaction entered into the ordinary course of business.
(3) A company shall be deemed to be the holding company of another company if another company is a subsidiary of the first mentioned company’s subsidiary (i.e. subsidiary of the subsidiary).
(4) In the case of a company incorporated outside India, a subsidiary or holding company of the company under the law of such country will also be treated as a subsidiary or holding company within the meaning and for the purposes of this Act also, whether the requirements of this section are met or not.
(5) A private company, being a subsidiary of a company incorporated outside India, which, if incorporated in India, would be a public company within the meaning of this Act, shall be deemed for the purposes of this Act to be a subsidiary of a public company. But this is when the entire share capital in that private company is not held by that company whether alone or together with one or more other bodies corporate incorporated outside India.
As mentioned earlier, a private company which is subsidiary of a public company is regarded as the public company.
A subsidiary company cannot be a member of its holding company and any allotment or transfer of shares in the holding company to its subsidiary will be void. This prohibition also extends to the nominees of the subsidiary company.
This prohibition, however, will not apply to the subsidiary company which was holding shares in its holding company at the commencement of the Act or before becoming a subsidiary of the holding company. The subsidiary shall have no right to vote at the meetings of the holding company or of any class of members thereof. (Sec. 42)
The provisions of section 42 do not apply to the following cases:
(i) Where the subsidiary is concerned as the legal representative of a deceased members of the holding company, or
(ii) Where the subsidiary is concerned as trustee, unless the holding company or a subsidiary thereof is beneficially interested under the trust and is not interested only by way of security for the purpose of a transaction entered into by it in ordinary course of the business which includes the lending of money.
Every holding company is required to attach to its annual accounts, copies of the Balance Sheet and Profit and Loss Account, etc., of the subsidiary companies as per the requirements of sections 212 to 214.
Government Company (Sec. 617):
Government Company means a company in which not less than 51 per cent of the paid- up share capital is held by:
a. the Central Government, or
b. any State Government or Governments, or
c. partly by the Central Government and partly by one or more State Governments.
Government Company includes a company which is a subsidiary of a Government company.
Government Company is a company in which at least 51 % of the paid-up capital is held by the Government.
Holding of shares by municipal and other local authorities or statutory corporations (which are the government bodies) is not to be taken into consideration for this purpose.
A Government company may be a private company or public company. A Government private company is not required to add the word ‘private’ as part of its name.
A Government company is not an agent of the government as it is a juristic person different from its members (the government).