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Holding Companies
A holding company is the company that holds either the whole of the share capital or a majority of the shares in one or more companies so as to have a controlling interest in such companies. Such other companies are known as subsidiary companies. Unlike in amalgamation or absorption, the subsidiary companies retain their identities because they do businesses in their own names
Group of Companies
A Holding company together with its Subsidiaries can be called as the Group of companies.
Need for Group of Companies
The following are the advantages for a company to operate as a group:
1. Decentralisation of financial risk: If one entity fails, it does not affect the other companies in the group. The other companies can continue even if one or two companies in the group fail.
2. Lawful obligation: In some cases, the formation of a subsidiary company is a legal requirement.
3. Diversification possible at lower cost: One company acquires controlling interest of another company. It helps the company to diversify its business activities at least cost.
Legal Definition
Subsidiary Company– Sec 2(87) of the Companies Act 2013 defines a company. As per this section,a company shall be deemed to be a subsidiary company of another if and only if:
(a) that other company controls the composition of its board of directors ; or
(b) when the first mentioned company is another company, holds more than half in nominal value of its equity share capital; or
(c) the company is a subsidiary of any company which is that other company’s subsidiary.
A Subsidiary company may be either Wholly Owned Subsidiary or Partly Owned Subsidiary.
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FAQs on Meaning of Holding company - Holding Companies, Advanced Corporate Accounting - Advanced Corporate Accounting - B Com
| 1. What is a holding company? |  |
Ans. A holding company is a type of business organization that primarily exists to own and control other companies. It does not engage in any operational activities itself but instead holds the majority of shares or voting rights in other companies, known as subsidiaries. The purpose of a holding company is usually to manage and protect the assets of the subsidiaries, provide centralized control over their operations, and potentially enjoy tax advantages.
| 2. What are the advantages of a holding company? | |
Ans. Holding companies offer several advantages, including:
1. Risk management: By holding shares of different companies, a holding company can diversify its risk across multiple industries and geographies, reducing the impact of any single company's failure.
2. Tax benefits: Holding companies can take advantage of tax strategies such as tax consolidation, where profits of the subsidiaries can be offset against losses, resulting in reduced overall tax liability.
3. Centralized control: A holding company can exercise control over its subsidiaries by appointing directors or executives, setting strategic objectives, and coordinating activities. This allows for efficient decision-making and resource allocation.
4. Asset protection: Holding companies can shield the assets of subsidiaries from potential legal liabilities or creditors, as the subsidiaries' operations are separate legal entities.
5. Financing flexibility: Holding companies can raise capital by issuing shares or debt securities at the holding company level, which can then be used to finance the subsidiaries' growth or acquisitions.
| 3. How does a holding company operate? | |
Ans. A holding company operates by acquiring a controlling interest in other companies, known as subsidiaries. It typically does not engage in any operational activities itself but instead holds shares or voting rights in the subsidiaries. The holding company's board of directors or executives exercise control over the subsidiaries, setting strategic objectives and coordinating their activities.
The subsidiaries retain their own operational independence and management teams but are subject to the control and guidance of the holding company. The holding company may also provide support functions such as financial management, legal services, or centralized procurement to the subsidiaries.
| 4. What is the difference between a holding company and a subsidiary? | |
Ans. The main difference between a holding company and a subsidiary lies in the ownership and control structure. A holding company owns and controls other companies, known as subsidiaries, by holding a majority of their shares or voting rights. The holding company's primary purpose is to manage and protect the assets of the subsidiaries.
On the other hand, a subsidiary is a company that is controlled by another company, known as the parent company. The parent company may hold a majority or minority stake in the subsidiary, but it exercises control over its operations, either directly or indirectly.
In summary, a holding company is the parent company that owns and controls subsidiaries, while a subsidiary is a company controlled by another company.
| 5. What are the financial reporting requirements for a holding company? | |
Ans. The financial reporting requirements for a holding company depend on the applicable accounting standards and regulations in the jurisdiction where it operates. Generally, a holding company prepares consolidated financial statements that include the financial information of all its subsidiaries.
The consolidated financial statements provide a comprehensive view of the holding company's financial position, performance, and cash flows, considering the results of all subsidiaries. This allows investors, creditors, and other stakeholders to assess the overall performance and financial health of the holding company and its subsidiaries as a group.
Additionally, a holding company may be required to disclose information about its significant subsidiaries, including their names, nature of business, and financial performance, in its annual report or other regulatory filings.
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