A holding company (broadly known as a parent company) refers to an entity that has one or more subsidiary companies. Such companies have a controlling interest in other entities through share acquisition. Section 2 (46) of the Companies Act 2013 talks about the concept of a holding company in India.
An Overview of the concept of a holding entity in India
The primary goal of the holding company is to undertake investments in other entities known as operating companies. In general, a holding entity may engage with the following undertakings;
- Taking decisions relating to investment policies of its operating companies.
It’s noteworthy that a holding company does not have the authority to engage with commercial-related undertakings. Risk diversification and tax reduction are the two main reasons such companies come into existence. A holding entity can hold intangible assets such as IP rights among all other assets.
Types of holding companies
Holding companies are broadly classified into two fundamental categories, as shown below:
- Operational holding company
- Financial Holding company
Holdings above can further be classified into the following;
- Pure holding: the pure company is primarily established for owing stock in its subsidiaries;
- Mixed holding: such companies own stocks in one or multiple subsidiaries.
- Immediate holding: such companies hold stocks or voting rights in another subsidiary entity of its own;
- Intermediate holding: the intermediate company serves dual purposes. At one end, it acts as a subsidiary to a parent company; meanwhile, on another, it serves as a holding entity. This form of structure is quite popular in the Indian publishing sector. Their asset-holding nature differs in accordance with the purpose they serve.
Key considerations for establishing the holding company in India
Unlike other companies, a holding company formation in India attracts various complicated legalities. It can be registered as LLP, OPC, Private limited company, or Public limited company based on its objectives and scope of operation.
In certain cases, the company can only hold controlling interest in the subsidiaries via shareholding. This prevents them from engaging in trading or management activities. The holding entity has limited liability, and therefore it is not liable to address liabilities incurred by the subsidiary. The holding or parent company has the authority to administer the management affairs of its subsidiary.
Pure holding company in India
The pure holding company is a fundamental type of holding entity, and it is easy to create, unlike other business structures. Apart from the Indian Territory, such companies can own subsidiaries abroad. Foreign investors must take local regulations into account to establish a pure holding entity in India.
The financial holding company
India, banking and insurance institutions can operate as a financial holding company in India. Needless to mention, the compliance requirement for forming such a company is quite complicated and stringent.
The following entities are eligible to operate as a financial holding entity in India;
- Non-Banking Finance companies,
- Trust and Societies
- Micro Finance Companies,
- Nidhi Companies,
RBI regulates the Non-Banking Finance Companies in India and handles their licensing and management affairs. One hundred million rupees is the minimum share capital requirement for forming such companies in India.
NBFCs are more transparent due to ever-tightening regulations, which make them an ideal venture for foreign participation.
Holding companies can also be formed as local licensed entities where RBI’s authorization is also required. Indian holding companies can also function as insurance entities to cater to the needs of the local market. Globalization of such a company is relatively easily through subsidiaries’ formation.
The concept of a holding company in India only comes to life when an entity is intended to form a subsidiary to attain far-reaching goals or any other objectives.
The Indian holding entity will:
- Run the affairs of the subsidiary by having a direct influence on the BODs;
- Administer the subsidiary by virtue of its investment under the form of capital;
- Hold 50 per cent + of the share capital and shares in one or more subsidiaries;
- The BODs of the subsidiary shall also remain under the control of the holding company.
Also, subsidiary to run the management of other companies, a case in which these entities shall automatically become subsidiaries of the holding entity.
Interplay between the Indian parent companies and their subsidiaries
Subsidiary companies operate under the control of their parent companies. BODs appointed by the parent company shall be liable for running the managerial affairs of the subsidiary.
Also, to be a holding company of a Subsidiary, the former must have a hold over at least 50 per cent of the share of the latter. This is a fundamental legal requirement for bringing the concept of a holding entity to life.
The parent company can acquire controlling shares through a direct mode or via other subsidiaries if any. The subsidiary of a subsidiary shall act as a subsidiary for the holding company.
Process of registering the holding company/parent company in India
A general understanding of the relevant business structure is vital for founding the parent company in India. Ideally, the following business structure are considered as viable for holding companies in India.
- Private Limited Company
- Public Limited Company
The above business structures fall under the Companies Act, 2013 and adhere to the different registration processes and paperwork. During the incorporation process, the authority concerned seeks the applicant to provide various key information, including the following;
- the company’s trading name;
- the name of the company’s representatives;
The company’s statutory documents.
Opening a separate account is a vital requisite for entities seeking to establish a subsidiary and want to get registered under the Companies Act, 2013.
Holding company registration documents
The following documents should be arranged by the entity concerned seeking to incorporate as a holding entity in India:
- Digital Signature Certificate (DSC) issued by the MCA-recommended agencies
- Director Identification Number (DIN)
- Memorandum and Articles of Association drafted as per the provisions of the Companies Act, 2013;
Mandatory inclusions of the MOA and AOA
Since MOA acts as a charter document of the company, it must highlight the following particular as it is a mandate as per the Companies Act, 2013.
- Assets held by the parent company in the subsidiary
- Subsidiary’s name
- Shareholding patterns of the proposed subsidiary
- The share capital and shareholding status of the parent company.
On the other hand, the Articles of Association deal with the company’s internal affairs. As per the Companies Act, 2013, AOA should reflect the following particular about the company:
- Right of the holding company in its subsidiary
The obligation of the management overseeing the subsidiary’s operations
- The Articles of Association must also contain the holding rights in its subsidiaries.
- Duties to be discharged by the director(s) concerned both in holding and subsidiary company
Since the drafting of these documents can be tricky affairs for the new company, it is advisable to hand over such a task to the experienced personnel.
Benefits of setting up holding companies in India
The legally viable holding company in India can render following benefits to the company:
The subsidiary’s liability is limited to the extent of the investment threshold that exists in its parent business. Also, it has an independent legal structure. In case of a financial mishap, the creditor cannot make the holding entity accountable for financial woes created by its subsidiary.
Seamless and tax-free profit transaction
Since the profit transaction between the holding and subsidiary company usually occurs in the form of a dividend, it is less likely to attract stringent taxes. However, this condition does exist in all jurisdictions.
Easier Credit allocation
The holding company is allowed to credit some fund in favour of its subsidiary, provided such fund is earned as a profit. Such credits can be transacted in the form of a secured loan. Both such entities can draw an agreement to serve such a purpose. The said agreement may authorize the parent company to seize the subsidiary’s assets in case of a default.
In many states, the US government has exempted holding companies from various tax obligations. Therefore, entities tend to register holding establishments in such regions where there is a relaxed tax structure.
In some scenarios, MNCs prefer to register their holding entities in offshore locations like the British Virgin Islands and Bahamas due to the tax-free environment. Companies usually leverage such a strategy to mobilize their maximum revenue to the parent company. Since the parent company attracts minimal taxes, the structure turns out highly tax efficient.
Giants like Amazon are known for utilizing the parent company structure to access the benefits like of sustained low-income tax payments, which in turn increased the ROI.
Ease of business expansion
It is quite common for holding companies to commence operations in other nations if they are dealing with multiple operations.
The parent entity can hold a major interest in various independent entities, and via their activities, each business line is explicitly defined with the objective of earning increased profits. Besides, the shares in some subsidiaries can find their way to the Stock Exchange in India or abroad in the case where the profit of the respective companies must be evidenced independently.
The holding company structure allows entities to enter a joint venture with other companies operating in different domains. This underpins the possibility for businesses to explore the potential of a new business regime.
Holding companies tax implications
When registered in India, a parent company shall be taxed on its overall income, but specific tax deductions are accessible to these companies. The Indian holding companies should consider the following matters relating to the tax affairs.
The corporate tax slab rate for Indian holding entities is 30 per cent, while for non-national ones, it is capped at 40 per cent.
The dividends paid by the Indian holding entity shall attract a 15% withholding tax;
Dividends routed by a foreign subsidiary towards the Indian holding shall attract the tax rate of 15 per cent, provided the latter owns at least 26% of the equity shares of the former. Any gains generated by the listed shares and securities shall be subjected to the rate of 10%. India’s double taxation agreements can help such companies to enjoy reduced Withholding taxes.
The holding company structure is best suited to bigger corporations who seek to distribute risk or reduce liability or higher ROI. It is also suitable for entities which are about to extent the scope of operation in domestic as well as international market.