Introduction:
An important development of recent times in the business world is the combining of independent business units into a group or an economic unit. A company may acquire either the whole or majority of shares of another company so as to have a controlling interest in such a company or companies. The controlling company is known as Holding or Parent Company and the company controlled is known as Subsidiary Company.
Meaning of Holding Company
Section 4 of the Companies Act, 1956 defines a holding company. According to this section, one company can become the holding company of another in any of the following three ways:
1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
Purpose
The purpose of getting the control over another company may be to gain advantages such as:
1. To eliminate of competition.
2. To enjoy the economies of large scale of production.
3. To achieve an assured market for the product of the company.
4. To ensure a smooth supply of raw materials.
Advantages of Holding Company: Following are the important advantages of holding company:
a) Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company may purchase the majority shares from stock exchange and can become holding company.
b) Large Business: A holding company can collect the capital and expand the business on large scale.
c) Foreign Capital: The holding company may also attract the foreign capital for the expansion of a business.
d) A Stable Combination: The holding company is a very stable form of business organization. Its life is not affected by the disagreement of subsidiary company.
e) Goodwill: When the goodwill of the holding company is established in the market, it also improves the goodwill of its subsidiary company before the public
f) Separate Position: The subsidiary companies can maintain their separate position under this system. They do not lose their identity.
g) Control on Production: A holding company can check the production and adjusts the supply according the demand. So over production can not take place.
h) Elimination of Competition: The holding company eliminates competition due to centralized control over the subsidiary companies, so it earns maximum profit.
Disadvantages or Defects of Holding Company: Following are the main defects of the holding company:
a) 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.
b) 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.
c) 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.
d) 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.
e) Misuse of Funds: The directors of the company enjoys unlimited powers and they take undue advantages. They misuse the funds also.
f) Over Capitalization: There is always a danger of over capitalization in the holding companies. It is very harmful for both the companies.
g) False Reports: Generally the directors of the company present false reports about the company's financial position. The true condition of the company no body knows, and due to this sometimes creditors suffer a loss.
h) Chances of Fraud: In the preparation of accounts the chances of fraud are bright in company transaction.