Difference Between Holding Company and Subsidiary Company
What holding and subsidiary companies under the Companies Act, 2013 say is that entrepreneurs need to be able to choose or register any of their business entities. As per Indian law, various kinds of business entities like one-person companies, private limited companies, public limited companies, etc. can be registered under the country's company law. Holding company and subsidiary company also comes under the company law. For a fresh entrepreneur, it is difficult to differentiate between the two companies. If you are new to the business arena, then this blog post is for you. This article will help you learn the difference between the two types of companies. Let’s dive into the blog further.
What is a Holding Company?
- A holding company, also known as a Limited Liability Company, can also be called a parent company to another company. Because it possesses a sizable portion of the voting shares in another company, it is referred to as a holding company and hence it holds an authority over the management choices and policies of the subsidiary.
- Though it owns the assets of other businesses, it only keeps managerial responsibilities and is thus not involved in the daily operations of the company.
What is a Subsidiary Company?
If a company’s whole or partial sections are owned by another company then it is called a subsidiary company. If the firm's main function is to own its subsidiaries, it is referred to as a holding company or parent company if it engages in other economic activities. You may wish to establish a subsidiary company for several reasons, such as diversifying your company's revenue streams, lowering your financial risk, and setting your company's branding apart.
Difference Between Holding and Subsidiary Company
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Holding Company |
Subsidiary Company |
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The term holding company refers to a corporation that owns more than half of another company's stock. Thus, the holding company can control the operations of the other company. |
The term subsidiary company refers to a corporation whose stocks and shares are controlled by its parent company. |
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Since a holding company manages and operates the majority of the functions of the subsidiary, it can nominate and withdraw board members, directors, and other personnel. |
A subsidiary company cannot operate or manage the company’s functions. Even an independent subsidiary is financially controlled by a holding company which is its parent company. |
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All ownership and duties regarding subsidiaries are vested in the Holding Company. |
While the Holding Company takes major decisions on behalf of the Subsidiary Company, that company is dependent on the Holding Company. |
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A Holding Company may invest in subsidiaries across numerous industries to alter its investments, reduce risk, and, in some situations, benefit from shared loss and tax consolidation. |
Every subsidiary that joins another holding company as a subsidiary also joins the top holding company as a subsidiary. |
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The Holding Company can make use of its vast wealth and reduce market competition for the company by converting it to a subsidiary. |
Conversely, the subsidiary company offers a buffer against business loss and protects itself from business unpredictability. |
Important Aspects of Holding and Subsidiary Company Under Companies Act 2013
- Holding and subsidiary companies are related to each other as a parent and child respectively.
- A special circumstance exists wherein another company owns all of the equity in a company. In such circumstances, the Subsidiary Company becomes a fully owned subsidiary of the Controlling Company.
- Alternatively, a subsidiary company can become a holding company by purchasing the majority of another company, which in turn owns still another company, and so on. This forms a structure that resembles a pyramid, with the firm at the top acting as a holding company for all the companies that are positioned below it.
- The holding company gains assets from the shares of the subsidiary company, which it may utilize to acquire a majority position in another enterprise.
- In a clever accounting move, the Holding Company's and a subsidiary company's assets are kept apart to prevent shareholder claims.
- In reality, nevertheless, the controlling corporation is regarded as a single economic entity along with its subsidiaries.
- A subsidiary cannot possess stock in its own holding company, but a holding company can and does own stock in subsidiaries. A subsidiary receives a shared allocation that is void.
- Even in cases where a nominee holds the subsidiary company's shares instead of the subsidiary company itself, this prohibition still stands. Nonetheless, under the following conditions, the subsidiary may be a part of its parent company:
1. when a subsidiary holds the legal authority over a holding company member who has passed away
2. when a subsidiary has shares in trusteeship.
3. Although the subsidiary will no longer have voting rights in the holding company, investments made before the Company became a subsidiary may still be kept.
How Does Subsidiary and Holding Company Work Together?
In India, transactions between the two companies are restricted as per the Companies Act, 2013. These restrictions are applied to avoid any conflicts and to shield the rights and interestes of creditors and shareholders. Let us know about these restrictions:
- Section 188: This section states that some particular type of transactions (related) such as selling or buying of goods & services, property leasing, etc. will be approved by the board of directors, while in some particular cases, it will be done by the shareholders using a special resolution.
- Section 185: This clause forbids a business from lending money to any of its directors or to anybody else the director has a stake in, or from offering any guarantee or security in connection with a loan.
- Secion 186: A company's ability to lend money, invest, offer guarantees, or act as security for other businesses is restricted by this clause. This could involve a holding company lending money to a subsidiary or offering guarantees. According to the legislation, the corporation cannot guarantee or lend more than 100% of its free reserves and securities premium account, or more than 60% of its paid-up share capital, free reserves, and securities premium account, whichever is greater. A special resolution adopted at a general meeting must first be approved before any loan or guarantee that exceeds this cap can be made.
Many people find the idea of holding and subsidiary corporations to be confusing. The holding and subsidiary company difference has been thoroughly covered in the current blog post to ensure clarity. It's crucial to read up on the ideas in detail for a deeper comprehension of the two. The controlling authority is the primary distinction between a holding company and a subsidiary firm. Under the ownership of a parent corporation, subsidiaries function with greater autonomy. Holding corporations oversee and distribute risk, whilst subsidiaries run their own businesses and preserve their own identities.
FAQ's:
1. Distinguish between holding company and subsidiary company.
A subsidiary company is a child company of its parent company known as a holding company. The holding company controls more than half of the stocks of the subsidiary.
2. Difference between subsidiary and holding company.
Under section 2(46), a Holding company is a financial organization that controls interests in other companies and controls their policies and management decisions but is not involved in their day-to-day operations.
On the other hand, as per section 2(87), a Subsidiary company is a financial organization whose at least 50% shares are controlled and managed by its parent company.
3. How can you define a holding company and a subsidiary company?
The holding company is a limited liability company (LLC) that may or may not manufacture or sell any products or services. In some cases, it does not even perform any business operations except having investment (controlling stake) in subsidiary company.
The subsidiary company can either be an LLC or a corporation. Its parent company decides its structure. They operate on their own and follow their structure.
