The shareholder of Private Limited Company can be anyone including individual, another company, trust etc. In case shares of Private Limited Company or Limited Company are held by another Company, the Company holding shares of Private Limited Company or Limited Company is called Holding Company and relationship created in this is called Subsidiary and Holding Company.
What is Holding Company
As per provisions of The Companies Act 2013, a company controlled by another company is called a subsidiary company and the controlling company is called a holding company. Thus “control” is used as the key parameter in the Act to determine holding company status and holding company / subsidiary company relationship. The control can be through various reasons including control of management or through ownership of shares, management rights, voting rights etc. As per Companies Act, 2013 the world holding company is defined as a company in relation to one or more other companies, meaning a company of which such companies are subsidiary companies.
What is Subsidiary Company
A subsidiary company is a company in which the holding company by virtue of control – controls the composition of Board of Directors, Management rights, voting rights and/or by virtue of shareholding – exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies. The composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power by it can appoint or remove all or a majority of the Directors.
Holding Company – Subsidiary Company Relationship
As per provisions of The Companies Act 2013, a holding company – subsidiary company relationship can be proved when:
- The holding company is able to control the composition of the Board of Directors of the subsidiary company
- Holding company holds more than 50% of paid up share capital of the subsidiary company.
The holding company can hold shares of the subsidiary company directly or by one or more of its subsidiary companies. In addition, in case holding Company ABC has a subsidiary Company XYZ and subsidiary Company XYZ has a subsidiary Company MNO, then subsidiary Company MNO will automatically become a subsidiary Company of ABC.
Possible reasons for creating Holding Company / Subsidiary Company structure
A holding company – subsidiary company structure can be setup for purposes namely:
- Division of Business : In case any conglomerate has multiple business lines and want to have independent legal structure to show profit, performance and aim for listing of each and every business separately for valuation benefit.
- Tax Planning and foreign holding of shares : Any company plan to set up business in India need to have subsidiary instead of opening branch office at times create another layer based out of Mauritius, Singapore, Hongkong or Cayman Island to take tax holiday
- Regulatory reasons : At time certain businesses are required to be operated through independent company instead of as division of existing company
- Enabling Joint Ventures and alliance with technical experts
Advantages of Holding / Subsidiary Company Structure
- Flexibility in transfer of shares / transfer of business / sale of company
- Flexibility in raising long term debt in the form of equity, mezzanine and debentures / bonds
- Flexibility in raising short term debt in the form of loan, overdraft and commercial papers
- Better tax planning and possibilities straight forward tax structuring. It allows businesses to take advantage of creating independent entity and avail tax break till business make profit