This article pens down some key differences between holding and subsidiary company. A holding company technically doesn’t engage with any business affairs or be involved with trading commodities or services. Such companies seek to hold controlling stock in other entities.
Although such companies hold the assets of other entities, if they often maintain oversight capacities, they can influence and manage the management decisions. Still, they cannot participate in the operations or day-to-day business affairs of concerned subsidiaries. A holding company is also regarded as the “umbrella” or parent company.
These companies may serve the common objectives but have distinct roles to play from the management viewpoint.
The legal definition of Holding Company cited under Company Act, 2013
As per the 2(46) of the Companies Act, 2013[1], the holding company refers to a type of company that holds a minimum of fifty per cent shares of another entity and has the control to participate in decision making, influences and administers the company’s BOD. A holding company generally comes to effect for controlling and administering subsidiary companies.
Key points to Ponder Relating to the Holding Company
- A holding company refers to a type of entity that holds a controlling interest in other entities, commonly known as subsidiaries.
- The parent corporation can control the subsidiary’s policies and administer management decisions but does not have any engagement with daily operations.
- Holding entities are safeguarded from losses triggered by the subsidiaries. Therefore, if a subsidiary goes insolvent, its creditors would have the right to confront the holding company.
What is the Subsidiary company?
Subsidiary companies, on the other hand, are a company that operates under the control of another entity, known as a holding company or the parent company. The parent company has control over half of the stocks of the subsidiary company.
In cases where a subsidiary is 100 per cent owned by another entity, the subsidiary would be regarded as a wholly-owned subsidiary. The concept of “reverse triangle mortgage” is extensively applied to such companies.
Legal Definition of the Subsidiary Company as per Company Act, 2013
A subsidiary company, in relation to any other entity, refers to a company in which the parent or holding company-
- Controls the BOD’s composition; or
- Controls more than 50 per cent of the total share capital either at its owns or collectively with one or more of its subsidiary entities:
Provided that such class of parent companies as may be advised shall not have layers of subsidiaries beyond limit as may be prescribed.
The Act further states that a company shall be considered as a subsidiary company of the parent company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary entity of the parent company;
The composition of BODs shall be considered to be administered by another entity if that other entity by the exercise of some power can appoint or remove all or a majority of the active directors;
*Subsidiary company does not have right to hold shares in the parent company except in few conditions as mentioned in the governing bylaws. This is a major point of difference between the holding and subsidiary company.
How Does a Subsidiary Operate?
A parent or a holding company generally sets up a subsidiary to get access to the following benefits;
- Diversified Risk
- Enhanced tax advantages
- Separate management
- Minimal regulatory requirements
- Asset protection
- Expansion
- Economy of scale
- Nonetheless, such companies have a distinct legal status from their holding companies, manifesting their obligations, taxes, and governance independence.
- When a holding company sets up a foreign land subsidiary, the latter must adhere to the regulation of a country in which it operates.
- Holding companies have considerable advantages over the subsidiaries regardless of their controlling interest.
- Such companies, along with other shareholders (if any), can cast their vote to choose the BODs of a subsidiary company. A board member may often overlap between a subsidiary and its holding.
Provisions Regarding the Share Acquisition for Subsidiary company
As per Company Act, 2013, no company shall secure or hold any shares in its parent entity, either by itself or via its nominees. Likewise, no parent company shall allot its shares to any of its subsidiary entities, provided that nothing in the applicable sub-section shall apply to a case.
Where the subsidiary entity owns such shares as a legal representative of a deceased member of the parent company; or
(b) Where the subsidiary entity owns such shares as a trustee; or
(c) where the subsidiary entity acting as a shareholder even before it was set up as a company of the holding company;
Provided further that the subsidiary entity referred to in the previous provisions shall have a right to cast a vote at a board meeting of the parent company only in respect of shares owned by it’s as a legal representative or as a trustee, as mentioned in clause (a) or clause (b) of the said proviso.
The reference in the said section to the shares of a parent company which is an entity limited by guarantee or an unlimited entity lacking a share capital, shall be construed as a reference to its members’ interest, whatever be the form of interest.
Conclusion
The holding and subsidiary company operates in different legal regime and thus serve different purposes. Despite lack of ownership and control, subsidiary companies take a major toll as they are responsible for dealing with day-to-day business undertakings. On the other hand, the holding company remains isolated from the operation-related tasks and focuses on controlling and taking major business decisions about its subsidiary entity. Also, it is essential to note down that holding and subsidiary companies have separate legal identity. Therefore, the subsidiary company is solely responsible for addressing events like insolvency and loans repayments.
Read our article:Procedure for Registering an Indian Subsidiary Company
