Reviewed by Aug 27, 2020| Updated on
What is a Holding Company?
A holding company is a parent company, limited liability company, or limited partnership that holds ample voting shares in another company. The shareholding is arranged in a way that the holding company can control the policies of its subsidiary company and oversee its management decisions.
Although a holding company controls the properties of other businesses, it merely retains management capacities and is thus not directly involved in managing the day-to-day activities of a corporation.
According to the company law in India, a company that is owned and controlled by another company will be termed as a subsidiary, and the former is considered as a holding company. Hence, "control" is defined in the company law to evaluate the eligibility of a company to be called a holding company. Control can be either by management or through share ownership.
Features of a Holding Company
The primary aim of a holding company is to manage other companies, whether they be other companies, limited liability partnerships, or limited liability companies. Holding companies can also own properties, such as immovable objects, patents, trademarks, securities, etc.
Businesses wholly owned by a holding company are referred to as "wholly-owned subsidiaries". While a holding company can employ and fire managers from the companies it owns, such managers are ultimately responsible for their operations. It is therefore essential for property owners to keep a close eye on their companies and ensure that they are operating optimally.
Holding firms enjoy insurance against losses. If a subsidiary goes bankrupt, the holding company may suffer a loss of capital and a decrease in net worth. However, creditors of the insolvent company can not legitimately seek remuneration at the holding firm.
Consequently, a parent organisation may organise itself as a holding company for an asset management policy, thus establishing subsidiaries for each of its business lines.
For example, one subsidiary may own the brand name and trademarks of the parent company. In contrast, another may own the real estate, another may own the equipment, and yet others may own and operate every single franchise.
This strategy helps to restrict the exposure of the holding company and the numerous entities to financial and legal liability. It can also reduce the total tax liability of a company by geographically focusing some parts of its profits on jurisdictions with lower tax levels.
Registration of a Holding Company
The process of registration of a holding company in India is the same as any other company. However, the memorandum of association and articles of association requires specific mention of certain details.
The Article of Association should specify the rights of the holding company. One must mention in the Memorandum of Association about the task of controlling the assets over the subsidiary companies. The details required are as follows:
- Name of the subsidiary companies.
- The shareholding pattern of these companies.
- Percentage of shares that the holding company holds in these companies.