Holding Company Definition
Holding Company is defined as the controlling company that may acquire either the whole or the majority of the shares of another company so as to have a controlling interest in such a company or companies. The controlling company is considered as Holding Company whereas the controlled company or the company whose shares have been acquired is known as Subsidiary Company. Holding Company holds the power to nominate the majority of the directors of the subsidiary company. Holding company only gets such right if it purchases more than 50% shares of another company.
If any company becomes subsidiary company of any other company, the former company shall also be a subsidiary company of the holding company controlling the latter company. A holding company may control its subsidiary company by holding direct or indirect control over the formation of the board of directors and also by holding majority shares of the company.
Advantages of Holding Company
Elimination of competition: As both the companies are managed by the same group therefore, competition between them is automatically eliminated.
Separate accounts and results: Both companies are maintained their account separately, the profitability and financial positions of each company is known separately.
Advantages of self-goodwill: Both the companies maintain their separate identity and as such they maintain their goodwill separately.
Less investment: The people controlling the holding company need investment as comparatively small amount in order to control the subsidiaries.
Carry forward the losses: Both companies are maintained their identity separately, in such a case, it would be possible to avail income tax benefit by carrying forward the losses and set off from future profits.
Smooth supply of raw materials: If a holding company holds different subsidiary companies, each of which performs functions at the different stages of production, the companies, as a whole, will not have to depend upon other companies in their activities from procurement of raw materials.
Disadvantages of Holding Company
Forced appointment of directors: The subsidiary companies may be forced to appoint persons of the choosing of holding companies as the directors or other officers at unduly high remuneration.
Speculation in shares: By manipulation of accounts, directors may speculate in the shares of the subsidiary companies if such shares are listed in the stock exchange.
Creation of secret reserves: Secret reserves may be created by the dishonest directors to the detriment of the minority interest.
Oppression of the minority shareholders: Subsidiary company is managed in such a manner as suit the interest of holding company. All the financial and manual resources are used for the benefit of holding company. In such a case there is a danger of the oppression of minority shareholders.
Difficulties in valuation of stock: Difficulties may be faced for valuing stock when it consists of huge quantities of inter-company goods.
Fear of mismanagement: When a group has a good number of subsidiary companies and managerial ability is limited, there may be mismanagement resulting into damage of then group as a whole.
Fraud in inter-company transactions: Inter-company transactions are often entered at fanciful and unduly high or low prices in order to suit the holding companies.
Holding Company Examples
- Alphabet Inc.
- Sony Corporation
- JPMorgan Chase & Co.
- Johnson & Johnson