HOLDING & SUBSIDARYCOMPANY

BEENA EDWARD BCOM ( REG)

HOLDING COMPANY

A “Holding company” is a corporation that owns enough voting stock in one or more other companies to exercise control over them. A corporation that exists solely for this purpose is called a pure holding company.

Holding companies that control 80% or more of the subsidiary's voting stock gain the benefits of tax consolidation, which include tax-free dividends for the parent company .

In the United States, Berkshire Hathaway is the largest publicly traded holding company

The company wholly owns GEICO, BNSF, Lubrizol, Dairy Queen, Fruit of the Loom, Helzberg Diamonds and Net Jets, owns half of Heinz, owns an undisclosed percentage of Mars, Incorporated and has significant minority holdings in American Express, The Coca-Cola Company, Wells Fargo, and IBM.

History

• The first holding company was organized by John D. Rockefeller as a trust in Ohio, the Standard Oil Trust. The term trust was the immediate predecessor of the term holding company although its aims were the same

• Ordinarily, holding companies are organized as acquisition vehicles so that other companies may be brought under the same control.

• They began to grow after World War I as many companies began to expand.

History

• In certain industries, holding companies have been regulated-The PUBLIC UTILITY HOLDING COMPANY ACT (1935) and the BANK HOLDING COMPANY ACT (1956)

• By the 1960s, the holding company was the predominant form of industrial organization used by large companies, since many were multinational, and the holding company was used to establish foreign subsidiaries and other international operations.

Advantages

Holding companies can take risks through subsidiaries, and limit this risk to the subsidiary alone rather than placing the parent company on the line

The holding company also benefits from the subsidiary's goodwill and reputation, while being sheltered from risks faced by the subsidiary in the case of legal issues, tax liabilities and lawsuits.

When raising capital a larger holding company has more diversity of assets than an individual company, which makes raising capital easier.

Advantages The holding company generally produces no products or

services and is simply a vehicle for owning shares of other companies. If the holding company owns 80 percent of the voting stock of another company (the subsidiary), the holding company can qualify for tax-free dividends.

Foreign Capital: The holding company may also attract the foreign capital for the expansion of a business.

The holding company eliminates competition due to centralized control over the subsidiary companies, so it earns maximum profit.

Disadvantages

Problem of Monopoly: A holding company tries to create

monopoly over the market. Monopoly is always against the public

interest. It fixes higher prices and consumer suffers a loss.

Unequal Distribution of Wealth: Due to holding companies

wealth goes in few hands and society is divided into two classes,

rich and poor. Rich class enjoys all the amenities of life while poor

class faces poverty and hunger.

Costly Management: A holding company spends a lot of money on

the officers and offices. All the units are managed by the central

authority. So it is costly to maintain the proper control on large

number subsidiary companies.

Disadvantages Minority Interest Ignored: The interest of the minority

shareholders is ignored and the members of the holding company dispose of every resolution for their own interest.

Misuse of Funds: The directors of the company enjoys

unlimited powers and they take undue advantages.

Top Holding companies - GLOBAL

Holding companies in INDIA

What is subsidiary company?

If company A holds more than 50% Shares of company B then;

Company A is a holding company

Company B is a subsidiary company

Example: Coal India is a holding company.

Bharat Coking ltd, Mahanadi Coal Fields ltd are its

subsidiary companies.

Subsidiary company

A subsidiary company, subsidiary, or sister company is a company that is completely or partly owned and partly or wholly controlled by another company that owns more than half of the subsidiary's stock . The subsidiary can be a company, corporation or limited liability company

Advantages The holding company provides the subsidiary company

with buying power, research and development funds, marketing money and know-how, employees, technical expertise and other features which otherwise it could not afford or accomplish alone.

The parent can provide the monetary means and capability to jump start new companies and products.

Ability to offset profits and losses of one part of a business with another

Advantages

Liabilities and credit claims are locked in that subsidiary and cannot be passed on to the parent company

Allows for joint ventures with other companies with each owning a portion of the new business operation.

Disadvantages

A major disadvantage of being a subsidiary of a large organization is the limited freedom in management

Decision making can become time consuming as issues often must go through various chains of command within the parent bureaucracy before any action can be taken

Legal paperwork involved with creating a subsidiary can be lengthy and expensive

Control also becomes an issue when a subsidiary is partially owned by another outside organization

Holding Vs. Subsidiary

When a company acquires majority shares in another company, it becomes a holding company and the company whose share it acquires becomes a subsidiary company.

The relationship between the holding and subsidiary company is that of a parent and child.

Many companies are formed with the sole intent of becoming holding companies.

Companies bearing the TATA label

Subsidiaries without the TATA Label