A holding company is better defined in the context of the definition of a subsidiary company. Section 4 of the Companies Act, 1956 defines a subsidiary company. According to this section, (1) a company shall be deemed to be a subsidiary company of another if and only if :
(a) that other company (i.e., holding company) controls the composition of its (i.e., subsidiary) Board of Directors ; or
(b) that other :
- When the first mentioned company is an existing company in respect of which the holders of preference shares issued before the commencement of this Act have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company :
- When the first mentioned company is another company, holds more than half in nominal value of its equity share capital ; or
(c) the company is a subsidiary of any company which is that other company’s subsidiary”.
For example, company S is a subsidiary of company H and company R is a subsidiary of company S. Company R becomes a subsidiary of company H, by virtue of clause (c) above. Further, if company W is a subsidiary of company R, company W will also be a subsidiary of company S and consequently also of company H.
Subsidiary Company. From section 4 (as reproduced on previous page) it is clear that a company is a subsidiary of a holding company in any of the following three cases :
- When the holding company controls the composition of the Board of Directors of the subsidiary i.e., the holding company is able to appoint or dismiss the majority of directors of the subsidiary company,
- Where the holding company holds more than 50% in nominal value of the equity share capital of the subsidiary company i.e., the holding company holds the majority of voting power in the subsidiary company.
- When a subsidiary company is a holding company of another subsidiary company, the original holding company is also a holding company of that other subsidiary company.
It may be remembered that private companies subsidiary to a public company, do not enjoy the privileges given to private companies.
Rationale for Holding Companies
Rationale of Holding Companies is that :
- It allows better quality decisions to be taken at all levels. In case of public enterprises the Government to concentrate on macro policy, the holding company on corporate policies and strategies and the operating levels on implementation within the framework of established strategies.
- It leads to a better utilization of financial and other reserves by pooling the reserves of group of enterprises like finance, R & D, marketing and human resources. The holding company is well suited to the task of rationalization of public sector through mergers, vertical integration, inter-group transfers and allocation of social costs.
- The management of holding company could promote commercial and managerial culture rather than bureaucratic systems,
- By grouping of enterprises into holding companies a large number could be reduced to manageable levels from the point of co-ordination and span of control. It provides enterprises scope to share and undertake relevant R & D work to update technology in order to become more competitive. It could be a strategy to turn around the sick public enterprises.
- The holding company is able to concentrate on corporate planning, acquisition and update technology and building of corporate culture on sound business principles.