Saturday, December 31, 2011

Definition of Holding company

                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.

Meaning of “subsidiary Company” 
                A company is a “subsidiary” of another company, its “holding company”, if that other company—
a)      holds a majority of the voting rights in it, or
b)      is a member of it and has the right to appoint or remove a majority of its board of directors, or
c)       is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company.

                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.


                Under section 212 of the Companies Act, 1956 the following must be attached to the Balance Sheet of a holding company:
1.       A copy of the Balance Sheet of the Subsidiary or Subsidiaries.
2.       A copy of the Profit & Loss Account.
3.       A copy of the Report of its Board of Directors.
4.       A copy of the Report of the Auditors.
a.       A statement of the holding company’s interest in the subsidiary.
b.      The profits of the subsidiary as far as they concern the holding company.

Consolidation of Balance Sheet & Profit & Loss Account

                In England, the holding company is required to present, in addition to its normal Balance Sheet, a Consolidated Balance Sheet covering the holding company & its subsidiaries & Consolidated Profit & Loss Account.
                In India, the law does not compel a holding company to prepare a consolidated Balance Sheet & Profit & Loss Account. It is only for convenience that these statements are prepared.
                Shareholders of a holding company are interested in knowing the affairs of the subsidiary company as part of their money given to the holding company is invested in subsidiary company. So it becomes safe for directors of the holding company to disclose to the shareholders of the holding company the extent to which they are entitled to the net assets of the subsidiary company. By way of consolidated Balance Sheet, the investments of the holding company in the subsidiary company are replaced by assets.
                Consolidation of Balance Sheet & Profit & Loss Account means the combining of the separate Balance Sheet & the separate Profit & Loss Accounts of the Holding company & its subsidiary company or companies into Single Balance Sheet & a Single Profit & Loss Account.
                The purpose of a Consolidated Balance Sheet & Profit & Loss Account is to show the financial position & Operating results of a group consisting of a holding company & one or more subsidiaries. The consolidated statements are reports of notional accounting entity which subsist on the view that the holding & subsidiary companies are to be treated as one economic unit. The Financial position & Operating results reported through the consolidated statements are portrayed from the interest of the members of the holding company.

Wholly owned subsidiary company

                When all the shares of a subsidiary company are held or owned by the holding company, the subsidiary company is known as a wholly owned subsidiary company.

Partly owned subsidiary company

                When a majority of shares, but not all the shares of a subsidiary company are owned by the holding company, the subsidiary company is known as a partly owned subsidiary company.